UPL could give 30-40% returns over 12-18 months: Sandip Sabharwal

There will be stress on financials’balance sheet for the next two-three quarters, says the analyst, asksandipsabharwal.com.

We are now going to have one very significant player when it comes to the retail space post the RIL-Future deal. What are the implications on the retail landscape?
I was listening to the discussion which happened previously and I guess, most of the aspects have got covered. My points on the deal will be that the deal was expected and to that extent it does not come as a surprise and from a short-term perspective from Reliance point of view, it would not add too much to the stock because market sentiments are buoyant plus minus a few rupees here or there would be seen.

The key point for Reliance will be to restructure and make these assets profitable because the issue with the Future Group was a lot of expansion without focussing on profitability. Reliance will have to take a hard look at all the stores which have been acquired and decide which need to continue and which need to shut down. But obviously it gets a lot of cost benefit synergies. Interest costs obviously for the overall business was very high for the Future Group because they were not able to service. That aspect gets removed.


On the acquisition cost, it is cheaper than the value at which the Reliance Retail trades in. It is not a listed company and the value at which what is ascribed it is at a cheaper valuation and so to that extent, it is value accretive. Overall net net, from Reliance perspective, it is a positive since it is a all cash acquisition and if it had involved some stock, we could have been better but I guess because of the debt repayment obligations, it had to be all cash because the valuation at which the Reliance stock trades, some some equities perhaps could have been better for Reliance but then overall, it is a positive for them.

The midcap NBFCs including the likes of Shriram Transport are seeing a lot of stock price action. The fundamental picture perhaps still not clear across the board for most NBFCs. Where does Shriram Transport fit on your radar?
Shriram Transport would not fit in very high on the entire NBFCs space. In fact, all people have to look at tier two NBFCs and want to invest. They could have better picks in terms of Mahindra Financial which could be a rural revival play or a Manappuram Finance which is obviously doing well although there are some hiccups on the microfinance front or such NBFCs rather than go into Shriram Transport Finance where the market in which they operate is clearly very stressed. It is going to remain stressed for a long period.

We were also discussing Ashok Leyland last week or a week before that. My view is that the CV cycle is under deep stress and it is not going to recover so fast. The trucks are idling, new truck buying will take a long time to come back and to that extent, a lot of these plays will have issues involved with them and could also have a greater NPA accretion then the other NBFCs.

If I look at the relative performance of other specialty chemical stocks versus that of UPL, the latter has been a rank underperformer, why is that?
The main reason for UPL underperforming in the short run has been the debt profile. Many investors have been concerned about the debt levels of UPL and the sustainability of the debt and that is the reason why it has not got the valuation it deserves, given its dominance globally, in fact across the board in terms of the entire agrochemical space and the fact that it is among the top few companies on the agri chemical space.

My guess is that people will slowly realise that given the interest rate outlook, the repayment of the Arysta debt or the way their debt profile or the debt cost will remain subdued for a long period of time, those concerns will go away slowly.

Operationally, some issues have been there because of the way the Latin American currencies depreciated suddenly and as such on translation, they had issues. Those issues are also getting settled with the depreciation of the US dollar. The US dollar index has been falling. I believe it is one of the cheaper stocks not only in the entire large cap space but in the agro chemical space also. Most companies with much lesser business profiles are trading at much higher valuations than UPL. A catch-up will happen in this stock which has got intrinsic value and could easily give returns of 30-40% over the next 12 to 18 months.

We have been tracking select names -- be it IndusInd or RBL, in terms of stock price movement. The spate of fundraising news continues to come in. How would you stack them up?
On the financials front, the picture is still hazy. As the moratorium ends today, we will see at the end of the period, how many of the customers actually started paying and how many were not paying even at the end of the moratorium. That will give an idea of the NPA stress or restructuring stress which will come through going forward.

There is stress in financials. There will be stress on their balance sheet for the next two-three quarters. When we watched the stock price movements, we would think that things are not of concern on the ground but actually they are. Somewhere there has to be a balance. I would think there should be little upside in financials from here on till we get more clarity on the way the balance sheet hits are going to happen. Right now, we see momentum but let us see how long that can last. Financials are still the biggest link for the economy and the overall market. Let us see how that plays out.

What about SBI because upgrades are pouring in for this one. Last week, we had one from Goldman, this week from Macquarie, raising its target by about 12% and a good strong move on the counter.
is typical of which bank has not moved. So, all the brokerages are now jumping on to upgrade because that became extremely cheap given the way the other banks had moved. Obviously on the catch-up thing that is one part, then there is going to be some equity raising. All the investment bankers want to be involved in that. So, that is something which should happen.

I would think that SBI will need to raise equity going forward like all the other banks have been doing because they have been at the forefront of pushing the government’s agenda. That is how I would put it. SBI was very cheap. It has seen 20-25% move. I would think that it will face serious issues on its balance sheet and that is something which investors need to keep in mind.

Last week we saw that some of the bombed out large cap names have made a comeback. Are markets taking a constructive view on the economy now?
It is not a constructive view on the economy per se. It is reading into what the managements have said and when the markets are in a buoyant mood, those things get cashed on very fast. Zee has talked about better corporate governance and a comeback in ad revenues and that has led to the rally. The Tata Motors stock rose on the chairman’s statement that they want to be debt-free in three years -- which I think is an extremely tough task. If they can do it, this stock could be Rs 500-600-700.

There are no real moves in IndusInd Bank except for the fact that like Axis and IndusInd, both are fallen angels and are making a comeback. Beyond that there is no real news.

What does the Reliance-Future deal mean for players like DMart?
It really does not do much to DMart because there is still a big market which is there to be captured by the players. From DMart’s perspective, I do not think it impacts them. The valuations as it is are stretched and that has been a reality for a long period. That still remains.