What is your take on the cement counter?
Cement companies have started utilising their capacities at a threshold level which is above 85% capacity utilisation. This is good news because up till now, the companies have been holding the price but at the same time, the capacity utilisation remained in the vicinity of 65-75%. So from that perspective, if you start looking at cement companies, the advantage would be twofold. The volume-led growth was spurred by higher consumption taking place. Better capacity utilisation also means better profits for the companies at the bottom line level.
All in all, cement as a sector is heading for relatively better times. We prefer some of the large capacity companies with a strong pan-India presence, like Holcim and Ultra Tech. Some of the regional players like Shree Cement, Ramco Cement and India Cement also look interesting. We like cement as a space. We believe that it will continue the good run going forward.
Traction is building in the ONGC counter. What would be your strategy right now?
Fortunately, the exploration companies are finding themselves in a relatively better period now, locally as well as globally. The cost of exploration would remain at $48-54 per barrel and many of the companies have started looking about this level. So, most of these companies can expect higher profits including ONGC. A steadier crude price of around $50-60 would improve things going forward for companies like ONGC. I do not have any specific recommendation on this company since we do not cover the public sector companies. But in general, we believe they are in for better times.
What about Reliance? What could we hear from the management this time around?
The Reliance refinery business has steadier GRMs now. Reliance is going to have a more profitable delta. They have been successful with a larger amount of cracks on the diesel side as well which has basically seen the traction. So, things could look up for Reliance in the current year from the GRM perspective.
Petrochemical polymer prices have remained firm during this period and along with the buoyancy in crude oil prices, have started contributing to higher revenue and profit. The core business of the company, which is refining and petrochemical polymers along with exploration business, could see a relatively better quarter compared to the earlier two quarters in the current financial year.
On the other hand, the consumer facing businesses — telecom and retail — are showing distinct growth. Jio is seeing relatively better ARPU as they progress every single quarter. They are inching towards higher ARPUs At the same time, we would like to hear from the company about the fibre-to-home and fibre-to-enterprise rollout plans.
Should these two platforms gain traction and momentum, then 2021-22 would be the year to watch out for as far as Jio performance is concerned, which has the potential to go up 30-35% over the previous year. So, that is one area which we would like to look at.
As for the retail segment, the company has tied up on the supply chain side and we are going to watch for progress in the Jio Mart business. We expect the retail segment to grow at around 15% CAGR at least in the near term. Put together, all Reliance verticals are expected to show better performance in the current quarter.
Yesterday’s decline in Tata Steel, Vedanta and even JSW Steel gives a good entry point for those who missed buying metals in the first leg. Do you agree?
It is always going to be very challenging to chase the price point as far as cyclicals are concerned. Metals are no exception to this. Commodity prices are remaining strong and are likely to remain strong given the fuel prices remaining on the higher side. It suggests hardened commodity prices going forward as well.
Whether you are a trader or a stock investor, it is very challenging to decide at what price point you should buy a particular company. As I see it, yesterday’s fall probably happened because traders offloaded their position. Also in light of the fact that the pandemic surge is happening elsewhere in the world including in China and Japan, crude oil prices have softened yesterday to a certain extent. That is where the larger amount of selloff took place.
In this kind of cyclical counters, where traders dominate, one has to be prepared for such sharp selloffs. It is very difficult to put a handle on the price as far as buying is concerned but if a correction is of a sharper degree, it makes a case for buying if you are a trader. If the correction continues, I would probably like to buy into the metal space at lower price points, particularly companies like Hindustan Zinc and Vedanta.
What is your favourite idea which is a clear proxy to the economy and could be a big beneficiary of a resurgent economy?
With the consumerisation drive which is happening in the country, one would probably like to stay with companies which are in financing business — be it corporate banks, private sector banks or some of the stronger NBFCs in housing or consumer finance.
On one side, the consumer is spending. The cost of money is low and in some of the larger banks like HDFC Bank and NBFCs like Bajaj Finance and HFCs like HDFC, the size of the balance sheet is good enough for them to grow the entire business activity. As demand grows and as the size of the balance sheet allows then to lend further, one can expect faster and more consistent growth. We are looking at 20-25% CAGR growth in the credit lending businesses of HDFC, Bajaj Finance and even HDFC Bank. This is an area where we would be comfortable investing our money. Every correction would mean a buying opportunity in this space.
Any view on Tata Motors or from within the auto basket?
Tata Motors is probably in a sweet spot. Their passenger vehicle portfolio has been growing very smartly. The company has struggled for a very long period of time. Now they probably have got the right kind of products and most importantly they have addressed the needs and the distribution reach of the consumers. Both these factors are working in favour of the company with a passenger vehicle portfolio. At every price point, they have a vehicle to offer.
On the other side, the commercial vehicle segment is showing a good demand and has growth potential as well. More importantly, the fleet operators have started operating above 80% capacity utilisation which is very important because that means economy-wise, things are improving and the demand for commercial vehicles has started improving.
Most importantly, JLR which was a bleeding portfolio up till now, is also improving. All these factors are giving the company a good amount of visibility, including a scope for restructuring the balance sheet of the company where JLR could be separated out at some point of time and that could mean a relatively better rating coming up for the company. In my view, the company is in a better position currently and I see it as a buy on dips for Tata Motors share.
What about realty and infra pack?
We are comfortable investing in proxy to real estate and would probably bank more on the housing finance companies (HFCs). We believe that cyclicality is definitely attached to real estate business but the housing finance business is probably more consistent.
Real estate finding traction is a good news. It will probably give a larger amount of growth and so instead of fielding the cyclicality of the real estate company and being on the receiving end, we think the low cycle I would rather stay focused on to the housing finance companies per se as far as I think real estate outlook is concerned.
In case of infrastructure, many of the InvIT companies would be a better proxy compared to buying directly into the infrastructure because an InvIT company would probably also have sufficient amount of cash flows and if they are available at discounted price, they will remain a relatively better play compared to directly investing in infrastructure.
Also, I believe that infrastructure direct investment is a play best suited to larger funds including endowment and sovereign funds which have more appetite to put larger amounts of money into such kinds of businesses. But for retail investors and midsized investors, InvITs and REITs are much better comparatively.