Trent is quoting at 50x P/E and not at 110x P/E as assumed by analysts
One of the paramount concerns of analysts about Trent is its alleged nose-bleed valuations of 110x P/E.
Saurabh straightaway dealt with this concern and rubbished it.
“When the market says it trades at 110 times PE, I am always circumspect on PE. There are three reasons why PE in this case is relatively useless. Firstly, remember the Ind AS rules mean that every time you take stores on lease, you have to hit your accounting earnings, your declared earnings with an amortisation hit, so it is a non-cash hit. It is not really relevant, but courtesy the accounting rules you have to depress the published account, but it is a non-cash hit, so we adjust earnings for that,” he explained.
He referred in particular to Trent’s Star Bazaar (grocery) which is likely to turn profitable in the next few quarters. He disclosed that he has been visiting a lot of Star Bazaar stores over the last six months and so therefore he has personal knowledge of Star Bazaar profits which other analysts may not be aware about.
In the case of Zudio, the same store sales growth will be considerably faster than what the rest of the market is expecting, he said.
“So, our reading is this company’s real PE, the actual PE rather than the PE that the market looks at is somewhere around 50 times. As I have always said, when you look at franchises of this quality, 50 times PE is an attractive level for us to enter,” he added.
Saurabh also pointed out that Trent is walking in the illustrious footsteps as Titan.
“Much like Titan 20 years ago, Titan 20 years ago was basically a watchers business, over the last 20 years it has become a jewellery business, now increasingly it is becoming a sarees business as well and an eyewear business. We think Trent has many more engines than the market understands it to have,” he said.
“Hopefully over the next 20 years, Trent will give our clients the 2000x that Titan has given in the last 20 years,” he added.
Reduced holding in Bajaj Finance
Saurabh has been one of the die-hard fans of Bajaj Finance and the stock has rewarded him well with multibagger gains. However, he has now tempered his expectations from the Blue-chip stock and reduced his holding.
“We have reduced the weight on Bajaj in our portfolio after the Q2 results. After the Q2 results, we reduced Bajaj, we increased the weight in HDFC Bank in our portfolios, in our largecap portfolio CCB. We switched a decent amount of money from Bajaj into HDFC Bank,” he said.
Saurabh clarified that his fund still holds a large holding in Bajaj Finance.
He also made it clear that he is not much perturbed about the RBI’s penal action against Bajaj Finance. He called it a mere “rap on the knuckles” whose adverse impact would be very minimal.
“I would not lose too much sleep about the RBI rap on the knuckles. My reckoning is it is at the most going to impact around 2% of Bajaj Finance books and if the Bajaj Finance management expeditiously deals with the issue, the impact on a full year profit should be hopefully less than 1%. So, it is a rap on the knuckles, as you say, but I am not so sure it is that big of a material impact on their FY20 for profitability,” he said in a soothing tone.
Saurabh is also not much worried about the impact of the change of risk weightage in personal loan side of the unsecured book. He said it was a good decision by the RBI because the personal loan business was going out of hand with 30-40% loan book growth in many places.
He pointed out that while the RBI’s move would increase the cost of funding for NBFCs by around 50 bps, Bajaj would not be adversely afected because it is well capitalised and has raised another fresh round of capital recently.
On CNBC-TV18 | Brokerages have written on @Bajaj_Finance with #CLSA and #Jefferies issuing a #buy rating while @Macquarie has issued an #outperform rating on the stock. @kothariabhishek with the details pic.twitter.com/DpqutRF2AL
— CNBC-TV18 (@CNBCTV18News) November 16, 2023
Cera Sanitaryware is a well-run business
It was reported earlier that Saurabh Mukherjea’s Little Champs Fund of mid-cap stocks had added Cera Sanitaryware to the portfolio (see Cera Sanitaryware is a proxy for the realty sector. Saurabh Mukherjea has added it to the Little Champs portfolio).
Saurabh explained that Cera Sanitaryware is number two in sanitaryware in the country and is a well-run business. The remarkable aspect about Cera is that its working capital cycle has reduced from around 110 days five years ago to 70 days now, which means cash flows have jumped up. He also stated that Cera would benefit immensely from the impending recovery in the real estate sector.