IRCTC | IRCTC share price: trade reopening is real, but quit IRCTC because the price is correct: Sandip Sabharwal
A massive sell-off has occurred in the iron ore market and the markets are curious about the significance of the FOMC meeting. Can you explain these factors to us?
Many people who gamble in multiple markets do so on the assumption that the Chinese are cutting back on production and that commodity prices should continue to rise; but what most don’t realize is that 70% of most of the commodities consumed come from China. As the Chinese economy slows, we hear about the crisis and its impact on the housing market.
The Chinese housing market could be in decline for many years to come given the kind of decline that has accumulated there. All of this is not very good for the demand for steel among the biggest consumer. This has had an impact on iron ore and will eventually trickle down to steel prices, because ultimately, with all the noise around the US infrastructure pipeline, it will take a long time for all of this demand to arrive. China is the main driver of demand and to that extent commodities could weaken further and on top of that we have the rally in the US dollar index which is generally negative for commodities. This in my opinion could continue. Iron ore prices are 50% lower at the top. They could go down further, along with many other commodities.
Tapering is approaching, but if the deadline is November, will it surprise the market?
The markets need a reason to correct and the announcement of the decline could be the reason or the markets could have started correcting even before that because the markets normally fall under their own weight and to that extent we must continue to find the reasons why this happened. Now tapering is a big decision for the US Fed because if they don’t decline even at a time when the economy has stabilized and things are normal, there are more job vacancies than people looking for. looking for a job, then they prepare for another crisis around higher inflation, which is normally more difficult to control.
If they don’t start to pull out then they are not ready for another crisis that may arise so they must have MO ready for any new crisis because the interest rates are zero and they are buying an insane amount of securities. each month. I guess they are going ahead with tapering now, but when interest rates actually go up it remains a question mark because if this China crisis is any example, they seem to have caused it themselves. by imposing all kinds of restrictions on companies and so on. If the crisis on the housing side worsens, then the threat of inflation could be reduced from what it is now and actual interest rate hikes could be postponed. It’s a very complex scenario.
Now there are some stocks that have seen massive upward moves recently and it’s all around the same theme of reopening. IRCTC is about 47% high in the past month; was nearly 11% high in trading over the weekend. The government has now formalized that air capacity can be returned to 85% by airlines and that low cap fares will also disappear. What is your take on the theme of the reopening and the theme of travel in particular?
The reopening trade is real and it depends on how one wants to play this trade. In IRCTC, I find the reviews odious. Market cap today is around Rs 65,000 odd crore or more. At its peak, they made a profit of Rs 600-700 crore in 2019 and that profit will not come for the next two years. It’s a stable business, but it’s not a very high growth business. I would say anyone who has it and made a lot of money out of it, should be releasing it now at this great price. From there, I see no benefit over the next two years. People who buy at these prices might not make any money and could in fact lose money by investing in IRCTC.
Interglobe Aviation is in a different space due to the dominance of Indian skies with 57% market share. So unless there is a regulatory measure that limits the growth of their market share, they are in a good space. As the reopening goes on, the threat to them is that new players will come in as the price restricts and we could see more price competition.
Jet is likely to be reborn; there is another low cost carrier that is planned and as Air India is sold the new owners might want to expand more aggressively as Air India has not increased at all pending divestment. These are the risks.
There are other trades in reopening such as hotel stocks that we still like. We have a good position in Indian hotels and I think they are still doing well. On the luggage side, there is
which did exceptionally well in the last quarter. Their sales were actually a lot higher than people expected and these are the stocks where the participation is low at this point and to that extent they could see a bigger upside as the reopening takes hold. Actually.
There are different plays that we can play, people have been trying to play multiplexes, we also have a stake in Inox and I think the game will be played within a year or two now as well, it’s a matter of patience that we just need to wait and when the actual reopening takes place, even the consolidation in the industry that is playing could also occur.
The Chinese real estate market, which is about to slow down, is also having a ripple effect on commodity prices. Can this make Indian real estate history even more compelling? Could funds be allocated more to Indian real estate?
It works on both sides; one is that if funds experience losses in other countries, their tendency to invest more elsewhere decreases. On the other hand, the Indian real estate sector which is now starting to recover after a 10 year hiatus. This is the first year of awakening after a decade and this stage of awakening will continue. I agree that we could potentially see a greater flow in Indian real estate projects, especially after RERA. Thus, project-specific investments should accelerate in the future as there is no excess in real estate. Unlike the rest of the world where it is very hot, the recovery cycle in India is expected to unfold in the next few years.
Over the weekend, very small incremental changes were made to the GST after the meeting; First, food delivery companies will have to pay taxes. It can be recovered from consumers at a rate of 5% but overall nothing has changed. Nothing has changed for cigarettes or tobacco, nothing has changed for hair oil or any other major category?
Yes, nothing has really changed at the GST Council other than the fact that it has imposed new taxes on small categories like soft drinks etc. not have a GST number, etc. and they could just charge people but not pay. The government wants to consolidate the whole movement. I don’t think this is a bad decision because in most cases the GST is charged on the consumer side, where the final consumption occurs. So, it shouldn’t have an incremental impact on a player in any significant way.
There was some talk about the possible inclusion of fuel in the GST, which I think will never happen. Central and state governments can now collect any amount of fuel tax without offering compensation that state and central government have on fuel, if they include it in the GST and have to give the compensations that their losses could reach thousands of crores in fact. I don’t think this will happen anytime soon. Never is a bad word, I don’t think that will happen in the next five years at least.
The IRCTC is in the limelight, but there are interesting small subsidiaries of Indian Railways that could gradually benefit as capital spending improves and the railways begin to modernize. As they sell more, privatize more, will they have more money to improve and rebuild investments?
There could in fact be, but I haven’t looked at any of them so extensively as PSUs that I’ve avoided because there are only a limited number of stocks you can analyze. So I’m sure there will be but I can’t comment.
What else are you analyzing?
Opportunities arise in areas that are truly under-owned. Considering the type of activities that have started to take place in the field of infrastructure and real estate, we have started to take a small exposure in large companies of these categories like Ahluwalia Contracts or NC. These are high quality businesses that are avoided altogether. They have good order books and execution will increase dramatically over the next 2-3 years, while valuations are very cheap relative to the overall market and historical value. It is a space that could be interesting.
On the capital goods side, there might be some companies that might start to look interesting, but they’ve also grown, so I think we have to wait for better levels.