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Why Angel Broking's Mayuresh Joshi is betting on cement and paper stocks

ET Now|
Last Updated: Sep 07, 2019, 10.59 AM IST
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  • We are adopting the stock/sector specific approach in these markets.
  • Bullish on Orient Paper, JK Paper and Ultra Tech.
  • Both ferrous and non-ferrous players might have a quarter or two of pain left.
Companies with strong earnings profiles should withstand the pressures and deliver over the next few quarters and years, says Mayuresh Joshi, Fund Manager, Angel Broking. Excerpts from an interview with ETNOW.

We ended Friday on a very positive note but FIIs still continue to sell and DIIs are buying only at lower levels. What is your perspective on the market?
FIIs are probably exiting the market at this point. DIIs are offering some amount of support and the markets are getting jinxed because of two factors; one, is the perception of a structural slowdown that the economy is probably facing as displayed by auto numbers, a few commentaries by FMCG players and a few of the other discretionary companies which are stating that there is some amount of inherent slowdown that they are seeing in their business models.

Add to that, global pressure is probably getting added both in terms of the yield movement that we are witnessing and the structural discretionary slowdown that one perceives. Both these factors are having a huge say in terms of our markets as well. As for the expectations on how corporate earnings will play out over the next few quarters, though the Street is extremely optimistic, the run rate that they need to catch up, specifically in the second half, is pretty large. So, the valuations on that front, on a price earnings or price to book basis, still looks a tad expensive. But most of the concerns and factors are embedded into the markets at this point of time. There are expectations that the second half will be relatively better on hopes of easing of the US-China trade war, measures to stimulate demand and the festivities around the corner.

We are adopting the stock/sector specific approach in these markets. Our own sense is that companies, where earnings profile remains extremely strong should withstand the pressures and deliver over the next few quarters and years.

The metal index did well. Can you just talk about the valuations? Some of these stocks were extremely attractive from a valuation perspective before the upmove.
Valuations are on their side. There is no two ways about it but in terms of a structural slowdown for the industry as a whole, we come back to two moot points. a) The US-China trade fears are clearly getting displayed in terms of how the LME prices are behaving at this point of time. b)What is happening around the globe in terms of discretionary demand patterns. There is an evident slowdown across the broader universe.

These two factors are affecting both ferrous and non-ferrous stocks at this point of time. If one really needs to analyse the demand supply dynamics, the inventory levels are extremely low for most of the metal counters at this point of time. Any respite on the first two fronts, whenever it comes through, is very difficult to gauge. But at least at this point of time, it can create tremendous value from a realisation perspective.

In the Indian context, when we consider ferrous players, the prices of HRC, CRC are abysmally low. So, in terms of competition intensity, top line growth becomes a constraint. Add to that the input cost volatility which plays out on the EBITDA front. The capex that a lot of these guys are doing at this point of time, a few acquisitions that they are probably doing also adds to the earnings not growing at the pace that one desires.

Both ferrous and non-ferrous players might still have a quarter or two of pain left. But as the valuations are on their side, if they correct further because of the slowdown fear, the next quarter or two will be very good entry points, specifically in the domestic-based ferrous players.

What is your view on Reliance Industries?
The Jio Fiber plans are not at a discounted rate, comparable to Airtel’s basic ARPUs of around Rs 825 odd. Having said that, the acquisition of 20 million odd customers for broadband, is going to be a very, very slow and a gradual approach would be needed.

The best part about this approach is that it is going to be more ARPU driven at this point of time. As for their core businesses, specifically petchem and refining there is a different perspective and the Aramco deal is expected to get through over the next few quarters and months. That probably should have a very positive impact on its EBIT performance.

From January 1, the new IMO regulations comes through which helps Reliance in terms of their distillate distribution as well. Even in terms of their wireless business for Jio, ARPUs would bottom out at Rs 122. The retail business is expected to hold up along with Jio. The company is taking different steps to go debt free in 18 months. Higher dividend payouts leading to higher ROEs remain a strong possibility. We remain absolutely optimistic on the stock from a long term view and clear disclaimer is we own the stock in our funds.

What will be your advice for our viewers?
One has to remain a little bit sector/stock specific in markets like these. Depending on the regulatory changes coming through for banks, for example, repo rate getting benchmark in terms of lending rates and its impact on NIMs and spreads are going to be critical.

Every bank probably needs to do their internal asset liability management to that extent but we still prefer larger private sector banks. We see growth there both in terms of advances as well as the stability which is reflected in reported NIMs. The asset quality should hold out as credit cost is expected to come down while provisioning remains quite strong. Again the return ratios are expected to remain strong.

We are also optimistic about cement as a sector because in the second half, demand should hold up as realisations are expected to inch higher and input stock expected to stabilise. That means the EBITDA per tonne should probably improve for the sector as a whole. We continue to have a positive outlook on specific cement names like UltraTech..

In the broader market, paper stocks seem to be a very interesting bet over the next two to three years. Last quarter, there was some amount of pressure point in terms of input costs playing out on the margins and that should probably stabilise over the next couple of quarters. As demand comes back, there is shout and cry for banning plastic and the usage of paper improving expectations of large capex for the majority of the players. Though the dependence on water as a resource still remains extremely high, some of the players have probably conserved that to a certain extent. We continue holding stocks like Orient Paper, JK Paper in our portfolios.

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