Vodafone could be a multibagger if it resolves its AGR problems in 2-3 years: Dipan Mehta

‘It may not be the right time for telcos to increases ARPUs’

Companies which have 100% presence in rural may still have some more way to go.
When markets cool off, that may be a good entry point for Reliance Industries, says Founder & Director, Elixir Equities.

Telecom is losing its sheen. This is one of those go to pockets for institutional investors and traders. Vodafone is nowhere close to the recent highs it touched. Bharti also has declined; not sharply, but is off quite a bit even though markets are strong. Why is that?
There are cycles and we saw a nice upcycle in telecom. Now, of course, it is taking a breather at this point of time. It may come back as well. What is missing in the telecom is trigger points for further rally and the trigger point is to come in the form of increases in tariffs, which I think will have to wait until we return to normalcy and this lockdown is more or less completely lifted. Increasing tariffs at a time like this would not go down well with the consumers. So I think telecom companies are in a bit of a flux where although they want to have price discipline, it may not be the right timing to increase their ARPUs.

But it is a great long-term story and both the large telecom players are trying to get into synergistic businesses where they can create value; be it digital businesses as entertainment or retail and I think Bharti especially with some of these digital ventures is not completely valued and discounted. We saw that happening where they sold that data centre. It was at a significantly higher value than what the Street had expected. So there is some value in Bharti’s digital businesses which may start getting unlocked as we go forward. For investors who want a pure play telecom company, Bharti is the only choice and I always maintain that Vodafone is like a bit of an option. So you buy Vodafone shares and if it is still around for the next two-three years and all its AGR problems are solved, then the stock could turn out to be a multibagger. Otherwise if it has to stop its operations and go under bankruptcy, then investors will lose the entire capital they have invested at this stock price.

So that is a bit of a binary game depending upon how the next few months and weeks turn out for Vodafone. But Bharti Airtel is still going to be around for many-many years and the two or three large players market will offer a lot of scope for increasing tariffs going ahead when the timing is right.

Let us talk about Reliance. Reliance today accounts for 14% weightage on the Nifty. Purely going by averages, Reliance now is nearing its peak in terms of weightage on the Nifty. What is your take?
I think we live in unusual times and there is a premium to be paid for businesses which are number one or number two and have got very high entry barriers. This phenomenon of very high weightage is not only specific to India. Even in the US market, the likes of Apple and Google have significantly higher weightages and those are much larger and more developed economies. So just because the stock has reached 15% weightage is not a reason to sell Reliance. If more and more value gets created because of some of its digital initiatives and if it is able to get this entire farm to house strategy going, what they are attempting at this point of time or if the partnership with Facebook really takes off in terms of retail sales through online, then the stock price can go up even more.

Right now Reliance equals to Reliance Jio and whatever value is getting added over there is getting compounded and multiplied in the stock price of Reliance Industries since it is a combined organisation and then there is always the expectation that some value unlocking may take place as far as minority shareholders are concerned because right now what has happened is the stake has been sold in a subsidiary company and as such there has been no direct benefit to minority shareholder. That could come when they actually split their company if at all that is the plan. So these are the aspects which investors in Reliance look forward to.

Also, you need to keep in mind that with such a high weightage, it becomes a natural buy in every portfolio. I think if you are benchmarking yourself against the Sensex and Nifty, there is no way you cannot have Reliance in your portfolio among the top core holdings. That also attracts its own share of investors who may not be completely liking the Reliance story but because it is such a large portion of the index, you have to have a position over there. So a lot of factors play in favour of their company and the best strategy would be to wait and watch and buy only perhaps at corrections because the run has been quite severe over the past few days or few weeks since the announcements have started about the minority stake sale. But at some point of time, the stock price may cool off and markets may cool off and that may be a good entry point for Reliance Industries.

The kind of sales data that one is seeing in tractors or FMCG manufacturers, even if they might not sustain, are there investment opportunities here?
I think whatever these companies are gaining on the rural side, they are losing out on the urban side. So it is like they are status quo and static as far as their earnings are concerned. Yesterday at the AGM of Hindustan Unilever, the management did speak about a very patchy recovery where there was certainly growth taking place in some of the essential products or the hygiene products but the brands which were premium brands and were discretionary in nature were hardly showing any growth. So perhaps with the exception of say an Escorts or two three others like Coromandel or fertiliser companies, which are purely rural in nature.

If you talk about FMCG, you talk about the auto industry and we talk about some of the other businesses that have a large urban presence as well; which is still in a bit of tailspin because of the lockdown. So while you may celebrate that rural is picking up, we still do not have a handle as far as urban consumption patterns are concerned. And this particular rural theme and rural pickup in volumes has largely got discounted in those stock prices as well so at these levels. I do not think it makes sense to chase those companies which have got a reasonable presence in the rural sector.

Of course, companies which have 100% presence in rural may still have some more way to go; the likes of Escorts or Coromandal International but where companies have to have presence in the rural as well as urban, the rural benefit got priced in. So one needs to be a bit cautious over there. And really, the key aspect as far as the companies are concerned and the stock market is concerned is how this lockdown is going to play out on the urban side and in the cities where it seems to be not improving at this point of time. Maybe somewhere investors may lose hope and you could see them throwing in the towel as far as this recovery in stock prices is concerned. We are seeing no abatement of new cases at least in India; so that is really a point of concern at this point of time.




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