Why is Gurmeet Chadha bullish on Bharti Airtel?

“I think one thing the market is trying to price in now is whether it will survive and I think the first concern was whether it will survive or not. I think the bigger concern from an investor’s point of view will be how quickly it can build a network, how quickly it can win back the lost market share,” says Gurmeet Chadha, Complete Circle Consultants.

Is the market in a mood to take a breather, as it really looks like it is heading in a one-way uptrend since the verdict on Wednesday?
Well, it always seems like, naturally when the market is going up, the risk also goes up. So, you have to be selective. I think it is easy to get carried away. I think the market is trying to meet the expectations of the budget. So, if you look at some of the rural economy stocks, some of the consumption stocks are going up, housing finance companies are going up, and the economy facing stocks are coming back after the post-election correction, whether it is railway stocks or defence stocks, they are back again after a 20-30% correction. So, all I am saying is that you should be a little bit selective now. And I think maybe the expectations need to be lowered a little bit. That is the only risk in the market. Rest, I think the India story is solid.

If you keep an eye on the telecom sector, I would like to know your specific opinion. What do you think about the future of Vodafone Idea?
I think one thing the market is trying to price in now is whether it will survive and I think the first concern was whether it will survive or not. I think the bigger concern from an investor’s point of view will be how quickly it can build the network, how quickly it can win back the lost market share.

They have lost more than 21 crore customers since the merger and they are losing money every second. Secondly, if you look at the debt levels, their EBIT is currently around 12,000 crores and the debt service is 3 times more than that, so I think you will probably need more capital and everything. Then you can use more leverage to raise funds and take more capital.
So, this will be a long process and at some point of time, there could be some equity dilution as the delayed spectrum payments approach maturity early next year.

So, honestly I am more happy to play it through Bharti. I think it is clearly on track. The mobility business continues to do well. It continues to add the highest 5G additions quarter-on-quarter. Industry leading ARPU. The home and broadband business also continues to do well and I think it has been re-rated and for the first time I see Rs 12,000-15,000 crore free cash flow after adjusting for all the debt payments in Bharti, which means there will be very good financial leverage apart from operating leverage because of the ARPU growth. So, I think it is a more stable play. I agree the risk reward is probably higher in Vodafone, but I would still avoid it.

What about names like ABB, Siemens? They are almost like Trent. I don’t think valuation is a parameter by which you can evaluate them.
It is difficult to put additional money in these pockets, so ABB is at 50 times EV by EBITDA, 80-90 times earnings and probably has the next four-five years of order book priced in that as well.

The same is the case for Siemens and some of the defence companies, where you are probably looking at most part of the order book for the next three-four years. So, any increase in commodity prices, any reduction in orders, right now I don’t think the market is taking any of these things into account, so while we have a lot of cap goods and infra plays, I don’t think you can add incrementally.

You can still add some PSUs like NTPC is still at about 18 times. We are facing a power shortage. We will continue to add more of both thermal as there will be spin-off of renewable energy business. Power Grid is another one which is at about 18 times earnings, 5-6% dividend yield. So, these are some pockets. There are some subsidiaries of railways where maybe still we can see good margin expansion and as I said, now one should be very selective and as I said one should reduce it. I think the worry is that people are getting used to this 30-40% returns, which we know and history tells us is not sustainable year after year.

What is your opinion about this latest IPO? Of course, Ola may also come soon. If you have studied it, what are your initial thoughts on it? And if not, what is your opinion about the auto sector anyway?
No, I think I am very constructive. I think it will be one of the biggest IPOs and is likely to re-rate the entire auto value chain. What has happened is that if you look, the whole world is on EVs and hybrids could be the future only after Toyota did a study on it, then people realised you need ICE parts as well.
So, China was a hub, it has moved towards EV. Europe has its own supply chain problems and Ukraine is another strong country which was on ICE auto anc which is obviously going through war like situations.

So, in Indian auto ancillaries, there is hardly any capital expenditure on say fabrication, say forging, etc. And a lot of ICE parts and I think a lot of companies can make a comeback.

One of them which has done very well recently and we continue to hold it for a very long time is Uno Minda, which is both, it is a good mix of content, convenience in the car, as well as the EV portfolio. And then you have Sandhar Technologies, which actually makes frames and locks for two-wheelers and then it is moving into the EV portfolio, getting into manufacturing etc.

There are a lot of forging companies, fabrication companies. So, I think one would see some pretty decent operational levels in the sector because there is hardly any capital expenditure.

So, we are constructive across the value chain. We are also looking at some two-wheeler and farm equipment names as the government is looking to boost the rural economy a little more.

There is still some crisis there, which is evident from the overall results in major states and assembly elections are coming up in Maharashtra, Haryana and some other states. So, there will be more focus on the agriculture sector as well, which is also a good sign for two-wheeler companies.