Airtel, HDFC, SBI Life top stocks that will grow out of this crisis: Anand Tandon

You had earlier said, the move was pretty much similar to any sort of bear market cycle. But having seen the volatility, which remains rather acute, a lot of the bluechips continue to see a hefty selloff. What is your assessment now? Any retake on how investors should be approaching front-liners?
We are looking at something like 2008 being repeated. When I say 2008, we are not talking about causes for it. Nor are we talking about various valuation parameters. Every 8-10 years, we tend to have a cycle where the market drops off a cliff and we are seeing a similar sight now. If that is indeed the case, I do not think we are done yet because we are only 40% down from the top whereas every previous bull cycle has actually fallen off 60% or more on the Nifty before it actually stabilised.

If you also take into account that the virus numbers are still increasing and they have not yet shown signs of tapering off; so there is no reason to assume that the worst is over. For any investor, one should be looking at treading extremely cautiously and buying only those stocks you can live with if there is a further drawdown on the market from here. More importantly, stagger the investment if you have to but be prepared for the long haul. I do not think this is going to get over in a hurry.

Since you are talking about nibbling into select stocks or select spaces, where is it that you are finding opportunity? Could you walk us through the kind of business models that you like or specific sectors that you would be betting on at a time like this?
There will be stocks which will look cheaper than perhaps what the market is. To my mind, telecom is one sector where there is no chance of a slowdown. In fact, all telecom will benefit from the work from home kind of business. More importantly, it is now sure that consumers will be paying more and more going forward over the next 24 months. We should be prepared to pay almost two times or three times what we are paying currently, which means the revenues of the telecom players has a potential to actually increase rather dramatically at least for the Indian business. That will obviously mean those companies which have the way to capture the market will be showing dramatic increases in EBITDA margins.

So despite the kind of pressure they are in because of the debt issues and the requirements that they have to pay the government, the fact remains that the EBITDA growth will be fairly phenomenal in the sector. Unfortunately, there is only one clear winner and that is Bharti; so a stock like Bharti should be looked at at every fall. As you can see, it has not fallen too much compared to the rest of the market. So every time there is a weakness there, it should be a time to get in.

My other favourite would be something like HDFC. HDFC has seen the most horrendous haircut; it is a business that itself grows 15-16-17% year-on-year. So this is the time to actually look at these kinds of businesses, which should deliver growth despite the kind of problems we are having.

Many believe that in the post-COVID world, people would want to have health insurance and you will see a mass uptick in volumes come by. Where within the insurance pocket do you find value?
The value is still not very evident despite the fact that it has fallen because this was already a sector which was very expensive. Though it has fallen off fairly sharply, if you are looking at pure value, it is not there. But if you are looking for companies which can continue to deliver growth, I would tend to agree that insurance can continue to deliver growth. My favourite is actually life insurance. In the life insurance space, almost all of them have become relatively cheaper but the one which has probably been the biggest runaway because of the sheer distribution power is SBI Life; that’s something that one should continue looking at.

How soon do you think autos will be able to come out of this situation? Autos was already an industry which was grappling with all the BS-VI transition and other issues.
Absolutely. If you look at every segment barring tractors, which had shown some uptick, the heavy commercial vehicles have been for the longish time. I do not see that going away. Perhaps there is some uptick in terms of demand for HCVs and LCVs because as the market returns to normality, there might be some increase. In my book again, both cars and two wheelers are not something that anybody is going to be rushing by. The basic question really is what is the scenario you are looking for in the post COVID world.

In my view, the lockdown will continue till you see a sustainable decrease in the number of new infections. Like you have seen in the recent past, both Japan and Korea had numbers falling off and then they started to pick again; so that kind of risk will always remain. Till the time you get a vaccine, most of the businesses will remain uncertain, especially those which require large amounts of capital expenditure; so one can probably take a long silence for some time.

On the oil marketing companies, we had a report from Morgan Stanley saying that BPCL and HPCL continue to remain favorites. They are seeing the refining and retail fuel marketing margins remaining steady. What is the sense that you are getting with not just the OMCs but even some of the oil and gas or energy plays with respect to the COVID outlook?
There is no drop in the marketing margin but the problem is, where are the sales? At the end of the day, on the retail side, there is almost zero sales. There is no business, no movement of goods and traffic. Therefore, there cannot be any kind of marketing at all.

If you look at the entire value chain, the kind of price that we are looking at, cannot be making any serious money. The marketing margins itself will see the drop. So if you look at only the city gas distributors, that could be a decent play where you could get recovery pretty soon. Electricity is clearly an area where there is reason to assume that as soon as the business was to come back to normal, you would get normalcy.

That said, the problem is that most of the generating companies will now find it difficult to recover their revenues due to the fact that the government has told the distributors that they can defer the payments. If you have to look at energy overall, I would argue that something like NTPC is probably best positioned given the fact that it has kind of eventually recovered its money and the valuations have fallen off a cliff.