Why Choksey prefers Adani to Birla stocks in '24

Deven Choksey, MD, DRChoksey FinServ Pvt. Ltd, says “the Adani group has got Rs 80,000 crore worth of EBITDA which is growing at a steady pace of around 20%, that is absolutely convincing. On the other hand, the debt to the EBITDA ratio has come down to around 2.25% levels. So, to a greater extent, this is one area where the infrastructure story is now probably generating cash and the very same cash is getting deployed back into creating additional capacities, inorganic growth or the expansion that they are talking about.”

There’s a good momentum in the market. Let us pick up on the defence sector because the quarterly updates have been very strong – be it for Hindustan Aeronautics, Bharat Electronics or Bharat Dynamics. What is your call on whether or not one can look to add positions within the defence pack, even at the current levels?

Deven Choksey: On one hand, we have got a very robust order position in most of the defence companies, thanks to the government’s relentless programme for putting more business into India defence companies. They are having one of the best times probably that they have seen in history and it is not likely to stop. It is likely to continue for next three-five years and we are seeing this particular visibility – be it HAL, be it Cochin Shipyard. The names will keep on popping but most of these companies are getting significantly large amounts of order books.

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The key challenge is execution. On one side, there is a very robust order position and whether they will be in a position to execute more than 15-20% on a year-over-year basis is the question that one should be asking and if that is not coming into affirmative, then the possibility of the sustenance of the valuation of these companies would be really challenging.

In my viewpoint, one will have to trade off very smartly in this particular activity. While the potential remains huge, execution is between 15% and 20% year-over-year basis growth. If that is an equation, then possibly the valuation will have to remain in line with this particular growth.

What is the take on the Aditya Birla Fashion? They are looking to demerge Madura Fashion and Lifestyle business into a separate listed entity. How are you reading into this move and the ones that have been previously done by the Aditya Birla Group as well?

Deven Choksey: I guess two or three things come to me. About portfolio of 20 odd brands is getting into a separate listed company. Nothing wrong with that particular process, but on the other side, Reliance Retail is probably accumulating more brands in their portfolio. They have got the larger brands, the internet brands, they have got their own store brands. Each of these brand portfolios they are creating within the company and here is another example where they are trying to go with this particular portfolio.

One will have to see how exactly time proves them right. But in my viewpoint, till the time you grow the size probably is not easy for anybody to accept this particular argument that hiving a smaller portfolio of 20 brands into a separate company will help. The only rationale that you can put across here is that this particular business is becoming extremely demanding as far as generating the higher return out of every brand is concerned and that is where you are probably required to put a maximum amount of money behind it.

Business is also becoming very capital intensive. Given that situation, Madura is a separate unit now for sustaining the brand activity that they are basically talking about. But on the other side, Reliance is showing a very different character, different model. They are putting a significant amount of thrust in their supply chain mechanics, on the logistic management. They are putting in a good amount of thrust on creating their own brand portfolio to get higher margins.

So, all in all put together, they are achieving around 7-7.5% of EBITDA margin and that is where they are creating a differentiator. I would remain more convinced with the Reliance Retail strategy vis-a-vis the Aditya Birla Fashion strategy at this point of time.

How do you think some of these consumer durables could perform? Analysts are talking about a very strong recovery due to a strong demand for cooling products. The Met department is forecasting an above normal summer season with multiple heat waves. Which stocks do you see capitalising on this?

Deven Choksey: Typically this is the quarter where you are having the maximum amount of business for the white goods companies, in particular the companies as you mentioned who are in the air conditioning segment. Each and every company has their own business to talk about – be it Blue Star, be it Havells. I guess each of these companies, even Voltas, are seeing relatively slow movement/ I believe that I think they are all talking about the growth in this three-four months’ period.

Given the kind of severe summer that we are talking about, the business condition could remain relatively stronger. If you keep aside this seasonality for the time being where one is buying because the season is remaining very strong, I feel these companies have a very steady growth model to offer. On one side, our economy is growing at a nominal growth of around 12-13%.

If these companies end up producing around 14-15% kind of year-over-year growth on a sustainable basis, they would probably be adequately giving the return to investors. Given that situation for investors to make money out of these counters, the corrective price would be the best time to buy into. Maybe somewhere in the July to September quarter, maybe a better time to buy into some of these counters and stay invested for around six-nine months to get the seasonal return out of these particular investments.

What happened with the auto names yesterday and that of course was the reaction to the March sales data, but it was a below count not just from farm equipment majors like an Escorts or for that matter M&M, but overall also fell short of expectations. It was the case from Maruti and even Tata Motors passenger vehicles.

Deven Choksey: Generally this particular month has remained a little low and likely to remain lower in the month of April as well. In April, we have Gudi Padwa coming up so obviously at that time the sales might have some influence, but beyond that due to the long vacation season I would think that the demand would probably shift to some other months and this is a typical trend.

Vis-a-vis the passenger vehicles on the two-wheeler side because of the marriage season happening in some parts of the country we are likely to see April and May the pickup in two-wheelers maybe more smarter than I think the passenger vehicle. But what is more promising to us at this point of time is commercial vehicles. We believe that the commercial vehicle journey is unfolding. It is beginning to grow.

Each of the verticals be it the transportation and the logistic related vehicles, be it defence vehicles, be it passenger vehicles like buses or even for that matter electric buses, and now hydrogen powered buses. These kind of vehicles are likely to show relatively more stable growth going forward and at the same time we believe that the demand could grow for the logistic and the transportation segment for goods and cargo largely because the scrappage policy is coming into force, infrastructure spending is on drive and at the same time, the PLI scheme is resulting in higher amount of industry expansions.

All in all, we feel that comparatively commercial vehicles would be better off to the passenger vehicle at this point of time.

Choose between Adani stocks and Birla stocks for 2024, which one would you choose?

Deven Choksey: Certainly the Adani ones because on one hand, they have got Rs 80,000 crore worth of EBITDA which is growing at a steady pace of around 20%, that is absolutely convincing. On the other hand, the debt to the EBITDA ratio has come down to around 2.25% levels. So, to a greater extent, this is one area where the infrastructure story is now probably generating cash and the very same cash is getting deployed back into creating additional capacities, inorganic growth or the expansion that they are talking about.

So be it road asset, port asset, power asset and utilities or new capacities coming up in the commodity segment including the copper plant, here they have the maximum amount of ability to generate cash vis-à-vis the earlier period of this group of companies where they have been sucking cash. Today, they are generating cash. I believe that is where the equations are favourable even from the timing point of view. The Adani Group is going to perform better going forward.

Harry Byrne

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