Coming on YES Bank, we are debating whether it is a stock where if you go against the crowd, you can make money or not?
Right now, Yes Bank needs a lot of capital and the news that has come in is of the likelihood of a promoter stake sale, which does not necessarily bring in the capital. That is a very key trigger which could help the stock as well as the company raise the money that they have been talking about for quite some time now from large PE investors.
It is important that at this price, they need to raise capital from some long-term investor rather than any short-term investors or mutual funds or FIIs which can exit in one or two years. They need this capital for the next three, four years or at least five years and put this stake at a higher valuation so that the dilution is less. Till that time, these are the trading opportunities. The stock had fallen sharply and this kind of news will provide some trading opportunities.
Let us focus on some of these auto names because we have seen a nice bounce-back, even though fundamentally nothing has changed as of now. Perhaps there are some expectations of a boost around the festive season, what is your take and where would you be looking which would be the specific names or segments within the auto pack?
The overall auto sector has been in the news for the last couple of months and noise has increased in the last couple of days. The industry has been lobbing very hard for a GST rate cut. We have also heard some of the government ministries are looking at it and they have recommended the GST Council to see whether rate cut is feasible or not. If the GST Council were to cut rates from 28% to 18% for cars, that would be a big trigger and that is what the market is looking for.
Otherwise, the volume growth has been declining for the past few months and one key factor is that on a month-on-month basis, the volumes for some of the players like Maruti are now bottoming out. We do not know whether things will improve. The monsoon has been good, the festive season is up ahead and if the government were to come up with some stimulus package either in form of GST rate cut or some other stimulus targeted towards the auto sector, things could look up from here.
In terms of valuation, most of the stocks are still trading closer to their long-term averages. Their valuations have not corrected that far. It is only the earnings that have come down and the stock has corrected in line with the earnings. The stock that we would like to focus on in the auto sector would be Maruti.
We believe that four-wheelers is a space which could see a good revival if things were to improve. The valuation comfort as well as the volume growth that can come in Maruti is much better compared to some of the two-wheeler names where the valuations are closer to long-term averages and do not have room for much upside. We stick with four-wheelers and in that Maruti would be our top pick.
If I work with an assumption that Maruti will do Rs 200 EPS versus Rs 250 EPS last year, we are still looking at a valuation of 30 times. But 30 times cannot be attractive for franchise like Maruti?
Yes, if you are looking at trailing or at least FY20 numbers, they do not look that attractive. But 30 times compared to 40 times on a trailing basis is what I am comparing. If you look at FY21 where the growth is likely to come back, then the valuations do come down to about 22-24 times on one year forward. That is where one can look at the sector as a whole in terms of where the growth could come back, at least in the auto pack. Maruti is something that we are more comfortable with growth coming back and the valuations obviously are 22-24 times. We are expecting at least 20% earnings growth in FY21 on a weak base of FY20. One can expect that kind of upside in Maruti over the next one year.
You are saying growth will come back in FY21 and Maruti will do Rs 250. It is still available at 25 times or 30 times one-and-a-half year forward. Is that attractive?
If we do this discussion based on the trailing PE as well as on the forward PE, the long-term averages, the current valuation does not look that attractive compared to what it was trading at. On a like to like basis, the valuations have come down a little bit but the growth should provide comfort and obviously there is not much upside if you want to see at least a 15% to 20% upside in the next one and a half years.