Two themes MOSL is bullish on right now

M&M is one of the best rural proxy plays with two of the three core businesses being on the strong footing, says Siddharth Khemka, Head, Retail Research.

What are you making of the overall market trend?
We have seen the market rallying sharply for the last two weeks, which was supported by the liquidity. In June, we have already seen the FII inflows nearing about Rs 15,000 crore. Obviously some part of this has been into some of the blocks that were offered but this amount is almost equal to what they had put in together in the month of May and we have seen markets rallying by almost 12% to 13% over the last two weeks.

The global markets too are moving up. You have the US markets near its highs. S&P 500 index’s entire loss of 2020 is gone and it is in green territory for 2020. Nasdaq has been hitting new highs. So despite the sharp outperformance movement in the last two weeks, the Indian markets are still underperforming the global peers.

Coming to the near term view, valuations and results that are coming in are for the March quarter. We are looking at a much weaker quarter results for June, which the market had already discounted. If you look at FY21 valuations, there does not seem to be any growth being built right now. So whether we look at a trailing PE or a one-year forward PE, it would be the same because the earnings would more or less be flattish where we stand at around 20-21 times which does not give much comfort in room for further upside. So what we are expecting is that the market could take some kind of a breather or fall before the next leg of rally that could begin. The overall trend and the mood continues to remain beat. The slow unlocking of the economy and the resumption of business worldwide is helping sentiment and apart from that you are having the second round of stimulus packages globally which is driving the liquidity. So as I said, some falls before we can see the next leg of resumption in the rally.

What is the one theme that you would look at moving forward? What would be the one theme that you would be bullish on?
While financials do figure, the preferred pick in this environment right now seems to be telecom where we continue to remain upbeat. We are looking at Bharti Airtel as one of our preferred picks. A big block was offered and that led to some correction in the stock price and that has been absorbed well. The stock has recovered and we see further significant gains in the company from here on. We expect the gradual improvement in ARPUs. We have already seen in the March quarter how strongly the ARPUs for Bharti Airtel improved; from around Rs 125 levels to more than Rs 150. We expect that trend to continue as people shift from 2G to 4G. We are seeing that increasing trend in the rural areas where people are shifting from 2G to 4G and that improves the overall ARPU trend.

Second is the lower capex requirement in the near future which should also help the cash flows and financials as well as the huge interest that we are seeing in the Indian telecom space because of what Jio has been doing. That brings the sector into focus. We believe that the telecom space should do well because of the merger or the integration of telecom with technology and the platform that these telecom players can offer to any foreign player or any significant strategy investor where the number of subscribers are huge. There is consolidation that has already happened in the industry with three players largely accounting for the bulk of the industry. So that is the key theme that we are looking at.

Another theme in this market that we are liking is the rural consumption theme. We have already seen the rabi crop season being at a very good harvest. We are seeing the monsoon forecast being normal. The monsoon arrival this year has been on time unlike last year where it got delayed. You have the government supporting the rural side by increasing the MGNREGA spending and increasing the MSP. You have the migrant labourers going back to the rural economy where the demand is likely to inch up. So some of these plays that we believe are linked to the rural economy could do well; tractors, two wheelers, some of the rural financing companies, fertilisers and some of the agrochemical companies should do well.

What about two wheelers?
We like tractors and the two wheelers which are almost a proxy play to the rural side. In the tractor space, we like M&M. It is one of the best rural proxy plays with two of the three core businesses being on the strong footing. M&M has one of the highest exposures to the rural markets; 65% of its volume are expected to be less impacted by the ongoing pandemic. We believe that the rural market should contribute about 60% of its revenues and 80% to the core net profits and also contribute to about 70% of its fair value in the SOTP based on FY22 basis. So that is a stock that we like. We have a target price of Rs 576.

In the two wheeler space, Hero Moto is the best rural proxy play. We have Bajaj but that is also in the exports market and in the three wheeler segment which dilutes the rural play to some extent. Hence Hero could be the preferred bet to play the rural story in the two wheeler space.