Would you be willing to buy Eicher at Rs 20,000 or a little below that?
Numbers still are at about 25 times earnings for Eicher. You are getting other two-wheeler manufacturers at a much lower price. I do not think the Royal Enfield brand is carrying them above that crucial Rs 75,000 month kind of number. They are not being able to pass that for about a year now and actually they have a problem, they do not have enough capacity. It is only a minor expansion that they have done. They do not have substantial capacity.
When you are paying this much for a company, I would assume that growth would have to follow right now but the growth is not there. There is not enough room right now for that kind of growth considering capacity. So unless something new comes from the stable, I am not a buyer in this stock. The Hero and the Bajaj organisations and their stock price itself lands themselves to be more attractive in two-wheeler space than Royal Enfield or Eicher in this case.
What is your overall view of the auto sector?
So we have been long auto. The sector has been beaten up black and blue. If you look at it, it is almost like the end of auto, but I do not think so. From a macro perspective, longer term there is still very large structural growth potential for all three — be it two-wheelers, passenger cars or commercial vehicles.
I believe commercials have been hit a bit because of the kind of economy that has had two issues, largely financing related issues because a lot of NBFCs were not able to finance commercial vehicles and there was also a fallout from the axle load rules.
A lot of OEMs and the primary manufacturers themselves would have suffered because there will be a lag effect in terms of demand coming back up. So take this stake also, the auto passenger car in two wheelers where insurance cost is priced quite substantially and input price is increased from raw material perspective.
We have had a hiatus. It is not really structural slowdown but some of these factors have led to primarily increase in financing cost and reduction in availability of finance and also the regulatory changes have played some part in the reduction of demand in the last six months.
However, from Feb and March onwards, I expect a pick up. We have seen some positive commentary coming from some of the two-wheeler manufacturers saying that things seem to be picking up from the mid of January onwards. I still do not see that really reflecting until end of February or Maybe even March.
From then on, numbers should stabilise and start looking better. With BS-VI coming in from April 1, 2020, I believe some of the demand will start getting front loaded toward the end of this year. So if you look at it from perspective of population versus the amount of transportation needed in general, we are a very small fraction of the total market. There is no way we are even close to saturation. So, I believe, longer term it is a great story. Short term we are going to get beaten up.
If you are a holder of this stock, assume 5% or 10% falls will be standard. If you are in it only for the long term, you want to be in these auto names and I think pick the leaders in the packs whether it is two wheelers, four wheelers or commercial vehicles here.
Do aviation companies make for an investment case? Now that crude prices have cooled off, they are not like what they used to be in Q3?
It turns out really that most airlines seemed to be one-way bets on the crude price itself. They do not seem to be able to either hedge or be able to kind of offset any of that in their cost structure at all. If you look at SpiceJet also, there has been a 50% increase in fuel costs, whereas revenues were up only about 15%. So obviously profits are going to be down.
The single largest item on their expense list — about 30-35% of expenses is fuel. You do not have any strategy to kind of hedge or even if you have pre-booked tickets, you do not hedge the cost of fuel which is remarkable.
At this point, it is just disappointing because if I want to bet on crude. I will just buy crude why would I buy an airline. At this point, I do not see any operational efficiency-led investment thesis. It just seems to be crude all the way. I would avoid the sector overall.
What is your overall outlook on the space and an ONGC in particular?
ONGC has had a couple of challenges. One was the whole debt cycle that they had to take to buy out HPCL. Probably by the June quarter, that probably will be wiped off the books. So, that is a positive. I think it depends on whether HPCL will pay a dividend to do a buyback which should augment ONGC’s buffers and allow them to do their large buyback in dividend.
Having said that right now, discount because of government ownership, is quite high and if you were to ask me I would take a play on OMC rather than on ONGC right now because ONGC will be used by the government for its ability to generate cash in many ways, going forward. The general theory is that it is too much of cash cow for the government which is starved of funds and can’t let it live in peace.
I am cynical about its medium term ability to deliver returns.
Sun TV showed some healthy subscription revenue growth, which drove the top line for them. SL Narayanan says that OTT platforms are going to continue to grow very smartly, and ad revenue growth is going to be driven by the Bengali, Marathi channels as well.What one should do with the Sun TV?
I have not seen Sun’s results. We have stopped following most of the stocks in that sector but I think this quarter onwards we are going to see some pretty interesting changes in revenue because of the new TRAI regulation.
So, at this point, I will wait. It is going to be positive for content providers and for channels because a substantial increase in revenue, especially with the popularity of Sun TV coming in. This is a positive for near term but I would like to see how the TRAI regulations impact results that is only going to be available in the March results. So I would wait till then to make a call.
We have not gone through financial details and so I do not have anything specific to say about them. But it is a game changer in terms of the regulation.