Wednesday, December 6, 2023

nykaa: After Zomato, Paytm, it may be time to look at Nykaa: Andrew Holland

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Andrew Holland, CEO, Avendus Capital Alternate Strategies, says “we have been dipping our toes in the power financier space. I think everyone is shifting a little bit away towards this type of financing companies and just away from NBFCs in the short term. There is a lot more to go because it is the renewables sector and it is something important to governments globally and it is going to see a lot of investment. So, the likes of REC will continue to do well and gain market share.” Would you be a buyer of some of these stocks which took it on the chin on Friday – L&T, RBL, some other PSU banks as well?
You know it has been interesting. We have kind of been scratching our heads over the past few months about the whole financial sector and particularly the banks with their stellar results. Yes, not great commentary about NIMs, but there was something that was just holding the sector back. And maybe now with what the RBI has done, we know what the concerns were. To my mind, it is kind of fairly well priced, given the underperformance.

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Once we are through this and throughout the day, I am sure you have identified the winners and mainly the losers from this move. But thereafter, if the narrative changes more towards lower interest rates – which it is doing – commodity prices helping, then we will see the banks recover and be one of the leading sectors going forward towards the back end of the year.Where within autos are you comfortable adding fresh positions?
Across the board, there has been a lot of reports or negativity around Eicher in terms of the competition. That has not played out and we have seen a good run in that stock. We have seen some news from TVS recently, which is again, positive. It is more stock specific rather than the whole sector. But of course, you are getting the other kinds of companies benefiting from some of the positivity around the sector.

But I would also say that when you are trying to find sectors within the Nifty, and I am talking about that in particular, if your banking sector is under pressure, then you have to put money somewhere. At least with the auto sector, you know that the festival season has been good and the outlook remains robust. Therefore you have to look at which of those – two-wheelers or four- wheelers – are going to do well with the fact that they have got new products or new cars coming out or new bikes and the kind of margin pressure, which they have been seeing is being alleviated.

Obviously with commodity prices coming down, that is another tailwind for the sector. Overall, it is a good sector to be in in the short term. I still think the banking sector is the one where you are going to have to make money if the market is going to go up further from here.

Have you looked at the power financier space closely? REC, PFC and the likes and the way they have doubled in their book values in the last 6-8 months. In fact, one of their peer groups, though not the legacy power, but renewable power financier, IREDA IPO, which is getting lined up, is also witnessing good response. Do you like this space?
Yes, we have been dipping our toes into this space in the past month or so as some of these companies are moving into renewable financing as well. The market likes that part of the story. One of the companies does not speak as much as the other in terms of what they are trying to do. But what we are hearing is that some of the problem loans, again, are going away. So, you are getting a stronger balance sheet. This is a huge sector for the government and they want to get it right. The cash flows and the payments to these companies are fine. I think everyone is shifting a little bit away towards this type of financing companies and just away from NBFCs in the short term. There is a lot more to go because it is the renewables sector and it is something important to governments globally and it is going to see a lot of investment. So, the likes of REC will continue to do well and gain market share.

The IPO market has been quite active of late. Talking about IPOs, the IREDA (Indian Renewable Energy Development Agency) IPO is coming. Have you taken a look at any of the other IPOs which have been hitting the primary markets of late?
No, we have participated in a number of the IPOs over the past three to four months but are being very selective. There are four coming out next week. I am not sure we will be going for all of them, but Tata is obviously looking at something that is going to be interesting. We have met the management, I like the story. These are the kind of companies that we think will do very well, not just in the very short term but longer term as well.

Then there are a whole bunch of other companies whose prospectuses are coming out. The next two to three weeks are going to see a lot of IPOs. What is interesting is that the premiums are coming down a little bit, even though they are hugely oversubscribed, which I do not think is a bad thing either. We are not just playing for hype, we are playing for the fundamental story.

Since we have talked about PSUs and the power financiers, a word on the railway stocks. They seem to have gone out of favour at least in the last few weeks. But they perked up on Friday/ Whether it is a Titagarh, whether it is RailTel, whether it is a RITES, IRFC etc. all of them are hiring, even Railway Vikas Nigam. Is it time again to dip into these names?
I am not an expert on those kinds of railway stocks. I have been looking at this industry through some of the players like Siemens, ABB. Apart from playing in infrastructure, play with those two companies, you get the railways there as well. That is the way we have been looking at it.

If you look at the embedded value of assets in TVS Motors, their EV business is already clocking numbers close to two-thirds of Ola Electric. Ola Electric is heading for an IPO in two-three months. It is being valued at around $5 billion. The entire company legacy and EV business in TVS Motors, which is a close peer, is way less than that. Do you see value unlocking possibility by the time Ola Electric IPO hits the street at TVS?
It is a great analysis. And yes, I am sure that that is what the market will be looking at if you are valuing something. That is the whole story around a lot of these companies. But we are seeing that whether it is globally, valuations are higher or the expectation that those valuations could be placed upon some of the subsidiaries or other companies within the group, really move prices in the shorter term as well.

So yes, I would have thought everyone is going to look at those valuations and say, we should apply the same. And why should you not, unless there is something different about the way the company is operating that business, which I do not think is the case. I think you will get some of it played through in that revaluation of the business that the market has been ignoring, until you get a new listing.

If you have looked at Nykaa, we have seen the kind of turnaround as far as Zomato is concerned. Other names like Paytm etc. also made that bottom earlier and moved ahead from there; but Nykaa was languishing. Is it time now to look at this one as well?
I think it is. We have seen the kind of strong share price rises of Zomato and Paytm as they move towards breakeven or profitability. Paytm might be suffering a little bit today because of what has happened with the RBI. Therefore, the other stock you would look at if your expectations of the profitability is going to be there soon, is going to be the other kind of company which is Nykaa. That is what the market is looking at and getting excited about.

All those three stocks have been doing nothing for a little bit as the market was just waiting for confirmation that things are moving back on track. Once that confirmation was there, we have seen all three stocks move up quite significantly.

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