You have been tracking the prospects of sugar pretty closely. Just wanted to understand what you are making of this surge that one is anticipating on sugar prices and how that is going to benefit the stocks here back home.
So, the sugar stocks are reasonably priced given the fact that we are on the cusp of a potential upswing in domestic sugar prices and the sugar company profitability tends to be very leveraged to that because all their costs are fixed.
So, every rupee increase in sugar prices effectively goes to the bottom line. So, as many of the companies also indicated post the current year production data and inventory situation that prices from here on till the start of the next crushing season, October-November, festival season should trend up and they have started trending up a bit also.
So, next few months should be good for sugar stocks. The key we will need to watch out subsequent to this and the start of the next sugar season is given that there are elections next year. What happens to the sugarcane advice price, etc, and that has an impact on profitability. So, that is the small uncertainty which is there for sugar companies. Ex of that the story looks reasonable.
On Avenue Supermarts, just wanted to understand where is it that you stand on this one considering all that hype that it listed with, the amount of money that it has made for shareholders and then the recent underperformance in the stock?
Yes, the initial run-up was based on assumptions of a particular amount of growth, like people assumed that the company will keep on growing at 30-40% with high margins forever. As the last few years have shown, the growth has moderated, margins have moderated and in a slowdown typically the value plays do better but that also has not happened in Avenue Supermart.
So, at the current prices, stock is at some 80 price-earning ratio where earnings growth should be just around 10 odd percent, not more than that and maybe we will see an uptick next year. So, on what basis people are giving a buy on this stock is totally beyond me.
A sharpish tactical rally in some of these stocks could happen. Value retail as a category has underperformed, whether it is DMart or V-Mart. Inflation is fading away. Monsoon progress is decent. Rural economy is stabilising. Could there be a tactical buy in a V-Mart and a DMart?
I think specifically V-Mart has some other issues going for it. I think it is in a bigger trouble, DMart is still a cash generating company. So, if you have to make a choice, I think the choice has to be DMart or Avenue Supermarts but I am not buying.
What happens when suddenly a whammy like this comes? Of course, the stock falls but for the shareholders, what do they do now?
I think that is the challenge always in buying into companies which are prone to government decisions taking away or bringing about huge profitability swings. So I think that is the challenge that all the OMCs stocks also face, and that is the challenge now IEX faces.
So I think it is tough to say. I think people should avoid this stock because as it is, I think the performance of the stock always used to pick up during summer when the electricity shortage rates go up and then cool off. So in any case, it is a cyclical stock. And on top of that, if you have government intervention, then obviously the story becomes more sour.
Can Jimny be the game changer for Maruti? Everybody is saying that this is a new category where they are trying now to really extend themselves?
I think we are seeing incremental improvements at Maruti from first being in denial two-three years back the changes which were happening in the market space to adapting to that and I think that is driving the stock price also. And I believe Maruti will continue to do well.
So I do not see it as a challenge to M&M’s Thar but I think it should be a complementing product because the market share as it is low of these products.
And as consumers see more of these products, we typically see it complementing rather than having a cannibalising effect. So I think to that extent, it is good for category growth. How this particular product does is something which is tough to predict which as it was, how the market will take it, we have to see.
Here is a stock which has potential to make a comeback. I mean, it has been a lost decade for Hero MotoCorp if you frankly ask me.
Yes, I agree with that and I think it is the same story on some of the like even Bajaj Auto etc. First, these companies were in denial about EV moves then they accepted it. And now, my view always was that all these start-ups in the two wheeler EV space, they will eventually not do well. And once the bigger players realise that this is what is the market trend, they will gain market share and they will become dominant and that is something which has started to happen. I would agree that Hero MotoCorp incremental positives might be greater. It is under owned stock now. So if the rural revival also plays out, then we should see Hero MotoCorp do better.
What is the outlook when it comes to the entire real estate space? The Morgan Stanley Conference really seems to be indicating that we are seeing a housing demand up cycle and we are likely to see supply side consolidation as well continue. They have singled out Oberoi Realty and DLF within this space. Would you concur with that assessment?
DLF was the first one to recognize that for a real estate company to have sustainable growth, they need to correct their balance sheet. They did it. The market did not reward them for a very long time and now once the sales pickup has happened, the stocks got rewarded and moved much higher. Oberoi Realty obviously is more Mumbai play but they have also done well but seems to be richly priced at this stage. So I think people should wait for better opportunities to buy into it. Overall, directionally, longer term real estate story looks fine but after the near term uptick I think there is lesser value in the near term in most of these stocks.
Are we missing on some fine print in the credit policy because there is nothing which has come to my attention which warrants such a sharp reversal in some of the NBFC stocks?
No, there is nothing in that. So it is just that whenever the trading or short term positions get too intense in a particular stock or set of stocks, then we see such moves because the short term players who do not really know why they are buying or selling tend to sell and buy. So I think that this is a regular phenomenon, I do not think we should pay too much attention to it.
NBFCs because interest rates have peaked out, credit is still strong and you pretty much now know that which way the wholesale rates would move and that is a time when NBFCs do well, when the cost of liabilities, it gets fixed and growth is still strong.
If the banking or the financial sector holds through its asset quality in an interest rate up cycle, then typically it should do better. And I think that is a very strong position which the Indian economy has and which most people fail to recognize that you have the financials in such a strong position with record low NPAs and buffers in their balance sheet and high capital adequacy ratio across the board, that it can help fuel economic growth for a longish time, without even them having to raise capital. So I think the financial sector is in a very good health.