Why Chakri Lokapriya is ready to buy Tata Global Beverages

Tata Global will see a margin uotick in the coming years as consumer business is transferred into the company from various Tata Group companies. That will translate into stronger earnings growth and stronger valuations will emerge, says Chakri Lokapriya, CIO & MD, TCG AMC. Excerpts from an interview with ETNOW.

Last Friday afternoon if I had taken you in a corner and whispered Chakri FPI, FDI, RBI dividend and then guess the Nifty level, what would you have guessed? Tell me the number?
Yes you have all the right words. That should have taken the market up but it did not, I guess partly because now some of the FDI announcements etc. are more long-dated. What the market today needs is some immediate stimulus measures which can revive the earnings.

To be fair, announcements have been made that the depreciation would be allowed, the government would be buying new cars but somehow markets do not want to react. What is your view?
If you take autos, this month they are going to again report very soft numbers. Going into the festive season, there is this huge expectation that festival demand will revive but the rate at which it is going, with high levels of inventory, it is actually not going to do that well. So there are likely to be further earnings cuts for the auto sector.

But is not all that bad news already in the price?
Indeed, the markets look forward. Now the question is where is the trough valuation? Where is the growth expectations? So many stocks are actually trading close to their trough valuations which is 2008 lows. Against that perspective, the only question that remains confusing is what is the right answer? In FY20, you expected 20% growth and now that it has been revised to mid teens, it will likely probably settle down to 11-12%. From that perspective, there is not much upside but the valuations are close to 2008 lows.

Given the fact that for Sun Pharma in particular, a major overhang is now gone, what is your outlook?
The earnings are reviving for Sun Pharma. So, with this overhang out of the way, for the valuation, it will provide support for the stock. Clearly the earnings are set to accelerate for Sun Pharma and with 20-25% growth for FY21, the stock looks good at current levels.

Would you buy RBL Bank?
RBL Bank is trading at the same valuation that it IPOed at. At that time we did not have the overhang of all the current cases of potential cases. So from that perspective, it is not necessarily a cheap enough stock from a valuation perspective.

Growth has been brought down from 30% to 20%?
Absolutely.

What is the right price for RBL Bank -- two times book, three times book, three and a half times book?
If you take Yes Bank as an example it is now trading at 0.78 times book with growth having coming down for RBL. Of course, it does not have as much SME as Yes Bank and it is probably about that 0.81 times book for RBL which indicates it is more less there pretty much. RBL is slightly over 1.1-1.2 times book.

If you are a general long-term investor, the time has come to start doing some cherry-picking in mid and smallcap stocks. Keep a two-three year time frame, stocks go down 10-15% even 25% who knows but some good businesses in aviation, consumer, consumer durable, private banks would definitely flourish from these levels, purely because of the margin of the safety is looking on the side of a long-term investor.
If you look at the valuations across sectors, there are many stocks trading at close to their 2008 lows and clearly India is far stronger placed than it was in 2008. The company’s balance sheets are stronger, growth outlook is now the only question which is determining the valuations. From that perspective, all the frontline banks are looking attractive because they are trading at about 1.8-2 times book the private banks.

Which ones?
ICICI and Axis Bank are only trading at about 1.8 times. SBI is trading at about 0.8 times book.

If you buy ICICI Bank it is not 1.8, it is the ICICI franchise which includes insurance and everything else which is at about 2.5 times actually.
True okay the core banking franchise itself is there. The only concern there is if growth is around the corner, then you have an earnings uptick. A lack of earnings uptick is holding back the markets but at company like Voltas or even a government company like Engineers India are all trading at very low valuations and there is this huge government push to make consumer more to go out and buy thinking of various measures. Engineers India will benefit from an infrastructure push so therefore from that perspective yes there are number of stocks which look attractive.

Is it Café Coffee Day was it Tata Global? Tata Global has been an underperforming franchise. Their margins are nowhere close to other FMCG companies’ return on equity. The return on capital is not even in late teens. Why is the stock sitting at Rs 277?
Tata Global Beverages has had that kind of profile but now with the company at the group level transferring some of the businesses to Tata Beverages, the margin profile will improve for the company and also the earnings growth trajectory.

In anticipation of that, as consumer businesses are moved into the Tata Global Company fold, I think it will do good to the franchise. I still think that stock would see a good amount of margin increase in the coming years as businesses are transferred and that is partly being reflected in the stock.

Which is that one stock where you could be a lonely buyer today but you definitely want to be a buyer.
Well Tata Beverages is one.

ET Now: You will buy Tata Global Beverages ?
Chakri Lokapriya: While the company might look expensive, the margin uptick that will come about in the coming years as business is transferred into the company from various Tata Group companies, will translate into stronger earnings growth and stronger valuations will emerge.