Stick to Reliance as value unlocking in retail & Jio continues

Having moved from sub-Rs 1,000 to almost Rs 2,300, some amount of profit booking was inevitable in the stocks, says Vivek Mavani, Independent Investment Advisor

How are you looking at Reliance Industries? It is back above the Rs 2,000 mark.
As far as fundamentals are concerned, this value unlocking story in both Jio and retail businesses will continue. But the plan to bring in Aramco as a strategic partner for the oil and gas petrochemicals business seems to have been put on shelf. In the last few months, the stock has moved from sub-Rs 1,000 level to almost Rs 2,300. Some amount of profit booking had to come at some point of time. In the short term, it may stay in the range of Rs 1,900 on the downside and Rs 2,400 on the upside but in the medium to long term, Reliance continues to be a top holding and a top pick for most of us.

Where do you stand on auto recovery?
The auto recovery is for real and it will continue. Maruti and Hero have been giving out very positive commentaries and the numbers are there as well. The rural markets continue to remain strong and now the urban markets will catch up. However, auto companies have already had a sharp run. What has lagged is the auto ancillaries. A lot of ancillary companies have been giving good results and one of the segments which stands out is tyres.

JK Tyres, Ceat, Apollo have come out with very impressive numbers. There is a genuine cyclical upturn as far as tyres are concerned, backed by benign raw material prices and some bit of pricing power coming back. The replacement market has been driving sales while auto OEMs have also started clocking high single digit, double digit growth rates. JK Tyres remains my top pick. The latest quarter EBITDA numbers at about Rs 355 crore was the highest quarterly EBITDA in five years with margins at multi-year high of almost 16%.

For the auto sector, the first quarter was a washout but in six months, JK Tyres has repaid Rs 600 crore of debt, which signifies very strong cash flows. The management is committed to deleverage and for repaying another may be Rs 1,200 crore of debt over the next three to four quarters.

From a valuation perspective, at about Rs 71-72, the stock price is ridiculously cheap. Considering the market cap of about Rs 1,600 crore, six months’ cash flow alone was over Rs 900 crores. Rarely do we have a company which has been so beaten down and trades at one time annual cash flow as if the company was going out of business any time soon. But that is not the case. Tyres as a sector has been doing well. JK Tyres is my preferred pick simply because of its ridiculously low valuation relative to cash flow.

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