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Sugar top sectoral pick for next 1-2 years: Pankaj Pandey

In sugar space, we are liking a good number of companies, especially the players that are based in Uttar Pradesh.

ET Now|
Updated: Jan 14, 2020, 09.35 PM IST
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Primary picks in the sugar space is Balrampur Chini where we have a target price of Rs 210.
Pankaj Pandey, Head Research at ICICIdirect.com isn’t expecting much from the government in Budget 2020. In an interview to ET NOW he said the Centre does not have a lot of headroom to accommodate a lot of changes: Edited Excerpts:

ET NOW: We have been discussing revival in the broader market. The momentum has left investors spoilt for choice. What is catching your eye amidst the kind of stock moment. Is there a theme or select names that has struck out as seeing substantial strength?
Pankaj Pandey: We are seeing stock specific move across largecaps, midcaps and smallcaps. We remain positive on smallcaps on the road to EPC players such as KNR PNC. At least in the last one or two months there has been some ordering and tendering. We have seen and think going forward, with the kind of land acquisition the government has done, we would expect this segment to pick up. We are quite positive on these stocks as they have done well and we are bullish on their future performances. Also, a lot of smallcap stocks have been doing well even before PVR. Going forward, with the kind of capex, which is being lined up by the government, especially nearly about 20 lakh crore over the next four-five years, I think road EPC players should have a good run.

ET NOW: Which way would you be leaning ahead of the Budget. Do you have a trade in your mind?
Pankaj Pandey: From Budget perspective, I think the only thing that most of the market participants are looking at, is the kind of investment the government will support. Besides that, nothing much is expected or in a matter of fact the government does not have a lot of headroom to accommodate a lot of changes. So, from this perspective we will have to look at infra players. In my opinion these segments have not seen substantial performance, so whoever is looking attractive in the infra sector can be your pick. L&T will perform only if you see a broad based improvement in the overall ordering and tendering, which is why L&T might still take some time.

ET NOW: With the government giving high priority to investing in the infrastructure sector, how are you looking at this renewed thrust ? Do you believe that there is potential after a Rs 100 lakh crore plus fund flow over the next five fiscal.
Pankaj Pandey: Definitely, but I think one needs to be very selective. For example, in road it looks like the capex is largely going to be driven by the government measures, which again is a positive thing. In case of power, I think, we are expecting a lot more private participation although the overall capex is expected to be over Rs 24 lakh crore, which includes both thermal plus renewable energy. However, in my view, we are still not very comfortable because the entire value chain is still challenging given the fact that SEBs have not yet started picking up power and their finances are stressed. Besides that, railway is another interesting opportunity, which is shaping out. Here again we are seeing a decent amount of structural moves by the government. These two segments broadly can look at primary being the road because on a standalone basis it is expected to be the biggest contributor to the overall government capex.

ET NOW: Given the kind of rebound in steel prices, steel stocks have been up more than 20 per cent in the last five months. Keeping the global trends in mind are steel stocks going to be on your radar now?
Pankaj Pandey: If you look at the last three quarters, the volume growth has been dipping in the steel sector. Earlier it used to be about 7 per cent in Q1, it declined to about 3 per cent and now we saw a negative growth in Q3. Hence, we do not expect much of a volume growth to pan out. However, we are expecting that the margin could improve given the fact that some of the raw material prices have cooled off. But structurally, we are still not chasing steel stocks largely because till the time we do not see a ramp downs in capacity in China, the demand-supply balance will remain edgy. Nevertheless, it can be a tactical buy or a short-term buy but one should not be reading too much structural into this. Structural changes will only happen if you see shut down of capacity in China which is again government led.

ET NOW: If you are looking at sugar stocks, we have seen some rally build of lately, there has been a drop in the sugar production. Is there anything within this space that you like?
Pankaj Pandey: In sugar stocks, we are liking a good number of companies, especially the players which are based in UP. Primary pick in that space is Balrampur Chini where we have a target price of Rs 210. Another stock which we are bullish of is Dwarikesh Sugar where we have a target price of Rs 37. At the moment, Balrampur Chini is trading at about six times the target price whereas Dwarikesh is trading at about three times.

With the kind of push the government is doing for ethanol blending and the global prices being elevated, our expectations are that these companies would be able to offload the excess inventory, which is there domestically at a good price. This should reflect in better set of numbers and we expect good ROCE profile for these companies. So, sugar as an investment space is looking quite interesting even for the next one or two years perspective.

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