Look for growth and profitability in cement, chemical and capital goods: Aveek Mitra
The market has moved quite significantly since Feb and this trend has been upward, says Mitra.
After a fair amount of rally in March and some consolidation at the start of April, it does not seem like we are headed for another pre-election outcome rally?
That is difficult to predict but the market will remain volatile and I do not expect some great results in Q4 of FY19. But the market is expecting some kind of steady outcome from elections. If it does not happen, then it will be volatile for another few more months. But definitely, the market has moved quite significantly since February and this trend looks to be upward only.
You seem to be looking at midcap cement. What exactly are the fundamentals that are likely to play out? What makes Sagar Cement and Odisha Cement interesting bets?
We are long-term investors. We do not really go by the market mood on a month- on-month basis. We have short-listed a few areas where we think growth and profitability may come back. These are cement, chemical and capital goods. We are positioned there for almost a year but we did not generate much return out of this. I do not know how long it will take but we are quite positive about these three areas.
I found KCP, valuation-wise one of the cheapest stocks. The new capacity which they have added in sugar is substantially efficient and the consumption centre is also nearby. The cash they are generating out of their Vietnam sugar business will continue for another two-three years. The engineering business may not keep on actually bleeding money for the coming years.
The same is true of Sagar, the way the area in which they operate and the kind of acquisitions and expansions which they have done, look to be interesting. We are also bullish on chemical stories. We are also invested in fast moving industrial goods (FMCG) sector.
What about IT? We are seeing divergent reaction on TCS and Infy. How are you reading their numbers?
IT results are encouraging and this may continue to do well. But we are really not focussed on largecap IT stocks in our investment universe because our investment universe is very focussed in the midcap and smaller sized largecap companies up to the market cap of Rs 20,000-30,000 crore. These gives us an overall trend about what is happening but we have not really given too much time in analysing those company results and stuff like that.
Where else are you digging out for opportunities in the category?
We have actually been able to halt the draw-down which happened last year. We did not get much return from some of the capital goods but our draw down from the level of our investment was minimal. We have invested in a few companies like Kennametal, Greaves Cotton and the third company which is in chemical space called Gujarat Fluorochem.
These are the companies which over the last one year have not shown the kind of butchering which has happened in many other stocks. Again, this did not give us that much of return but only about say 5-6% positive or 5-6% negative return we have generated. We feel that these kind of companies are in a position where they can take the next leap of growth in the market. Whenever the market takes interest in the space, the revaluation happens quite quickly.
We are quite patient with holding these companies as quarter on quarter fundamentals are fine and we are not that greedy to change every month or every quarter. People can look into the stocks like Gujarat Fluorochem, Kennametal, even SRF and Greaves Cotton. Valuation wise, these are the stocks which have gone up a little bit in the last few months. But these are not recommendations,
There has been a lot of headway by the current government in the infrastructure pocket, roads and highways. A lot of market men are talking about how in the runup to the elections, this is a theme to look at and bet on. Do you have any preferences within this space?
I fully agree because if the liquidity concerns auto correct themselves over the period of next few months and which is really happening on the ground, the banks will be in a position to lend. If the cost of capital comes down a little bit over a period of time and the issues of land acquisition gets streamlined, there are companies with a clean balance sheet on standalone basis, which may have loan on SPVs, companies like PNC Infratch, KNR Construction. In this type of companies, we find the loan is tied up to the SPV but there is not much debt on the standalone book. There we are positioned with small allocations. We had some investments in a company which was a little risky one, fortunately we made good profit and came out and we may look into it once again post election outcome. It is Dilip Buildcon and because the kind of projects it does is quite good, the execution capacity is good but the only thing of concern is their balance sheet and there are too many projects which they have taken and too many concerns which have been raised by different quarters. That has depressed the price but again we feel that their execution quality is quite good. We have no investments right now. It it is not a recommendation but we feel that infrastructure is indeed a space where people should look at provided the balance sheet is fine.
What about aviation?
Unfortunately we do not follow this sector at all because there are too many moving parts and too many issues which are simply beyond us to comprehend and make a serious allocation into it.
When it comes to the broader markets, you mentioned a couple of stocks that you were finding interesting. How strong do you feel is real estate, construction, cement as a theme, given the election timeline?
Election is a phenomenon which will affect the market temporarily. The market may be having some expectation and if market’s expectations do not get fulfilled, then it will be actually correcting within a month or two. End of the day, it is earnings which matters and all said and done, earnings will keep coming from the next two, three quarters onwards.
If we find all the issues which affected the market like one demonetisation, GST and IL&FS liquidity crisis, these will auto correct over a period of time or following some government or regulatory action. will keep coming. That is one side. The other side is that the banking sector mess is really getting cleared for about two, three years.
Once these banks are coming out of this PCA, the interest rate comes down a little bit and the credit cycle recovers, NBFCs pull out of it mess then all these areas will see a bounce back and this will happen irrespective of whosoever is in power. It is good if a stable government comes in. It may not be as good for the first few months if a not-so stable government comes in, but these are structurally directed towards a positive move for the sectors which were lagging or not performing to the market’s expectation for one, two years.
We cannot really not have capital investments coming into the sector because otherwise the jobs would not be created. Whatever we do, the main issue in front of us is creating steady jobs and that will happen when the capital cycle comes back and money returns into the hands of people. As they start spending more, more capacity utilisation happens, more jobs are created. That cycle will come. I am misreading it for the last more than one year but it is fine and I am ready to wait for another six months to one year to make these things play out. There is a lot of money waiting on the sidelines which are going to come in.