Apr 21, 2017 12:29 PM IST | Source: CNBC-TV18

Agri sector to continue to do well; cautious on sugar space: Emkay Global

Krishna Kumar Karwa of Emkay Global Financial Services expects positive headwinds for fertilisers going forward. However, he said that the sugar sector could be played for short-term, but there is no compounding seen in the long term

With the government’s larger push on rural India, Emkay Global Financial Services expects the agri space to perform well going forward.

Within this sector, Krishna Kumar Karwa, its MD and CFO, is positive on the fertiliser consumption space. "There are positive tailwinds expected going forward for the sector ahead," he told CNBC-TV18, adding, government policies on urea consumption, subsidies should aid the segment. Additionally, he believes that if the monsoon situation is good in the country, agro chemicals will perform better too.

However, sugar sector may not be compounders for the long term, he said. While the sector has had a good run in the past 12-18 months, it has deep political intervention, which makes Karwa stay away from the sector.

In midcaps, he suggests on looking at independent stocks. "It is all about bottom up investing…you cannot paint all midcaps with the same brush," he told the channel.

Meanwhile, he believes the rally in metals is not an occasion to exit steel or the entire metals space. Domestically, improving capex cycle in the infrastructure sector should be a positive, he said.

Karwa is positive on real estate, with new policies being a game changer. These will help only the strong financial players conduct business. The overall valuations of the sector is very low and there are region-specific players which could be in focus, he said.

However, he has a contrarian suggestion to the pharma sector. “All companies have gone through the cycle of US FDA inspections at various plants. In 12-18 months, this will be behind us,” he said. He pointed that while the sector may be going through the worst phase of the cycle, in such an environment one can invest in 2-3 sector leaders. He expects pharma stocks to bottom out in 12-18 months.

Sun TV Networks witnessed an up move on Thursday on the back of upgrades by brokerages. This was after the state-run operator received a provisional digital licence, which set the ball rolling for digitisation in the state. Karwa also attributed digitisation among reasons for the stock’s surge.

Below is the verbatim transcript of the interview.

Sonia: What is your view on the agriculture space? A lot of these spaces like sugar, fertilisers, some of the other commodities have started to do very well. Is this a start of an up cycle here and what are you guys recommending to investors?

A: As far as the whole agri space is concerned, as far as sugar sector is concerned, it has had a very good run for the last 12-18 months but it is a deep cyclical and a lot of political intervention sector. We do not have an official coverage on the sector and we are always very wary so you will probably make some return in 12-18 months phase and then probably two-three years again it goes back into negative returns.

So from a short-term perspective, this could be a good sector for trading but I do not think they are compounders as such.

As far as the fertiliser sector is concerned, there has been a lot of government policies which are expected in terms of urea consumption, in terms of how to rationalise the urea consumption etc. so there I believe that there is a lot of positive tailwinds which are expected in the sector going forward and that should also help rationalise the subsidy burdens as well as the misuse of urea etc including direct benefit transfer (DBT) also being introduced in that segment. So a lot of policy initiatives are expected. We are positive on the fertiliser consumption space basically on the urea part as well as on the NPK fertilizer. So that is our view.

Overall looking at the thrust of the government on the rural India segment, we believe that agriculture sector will continue to do well and monsoons play out the way it is then even agrochemical sector should also deliver good returns in the coming year.

Latha: Are those the only two agro themes you are playing, fertiliser, agro-chemicals?

A: I would think so but then you have to play the agriculture and along with that you go into the whole rural India story as such. It is not only agriculture by itself because if the government of India’s thrust being what it is on the whole rural India theme and minimum support prices (MSPs) are also expected to be drawn, so the whole rural consumption story plays along with the agri theme as such.

Sonia: Since you have been tracking midcaps for very long and your top recommendations have done very well. How are you positioned on the midcap space right now? Do you think that there is some euphoria building up in the midcaps or is there still a lot of value that one can find here?

A: Mid-market segment investing is all about lot of bottoms-up investing. So on an aggregate basis, you may feel that midcaps are overvalued vis-à-vis largecaps and that is the story or the theme that has been going along for long now. The fact is that you cannot paint all midcap stocks with the same brush.

So at any point of time, there will be segments, sub-segments, sub-sectors within the economy where you will find many midcap companies, which are developing and the story which are developing and which offer a value. What happens is that in the bullish kind of an environment, you find more positive vibes for midcap companies and they deliver superior returns and then liquidity kind dries off then there are some challenges in midcap but we continue to remain extremely positive on the midcap segment broadly.

In an improving economy where the economy is expected to do well in the next two-three years, undiscovered stories from the mid-market segment will continue to do well. Plus if you see the amount of flows, liquidity which is coming into the domestic mutual funds and that tends to go towards the mid-market segment apart from the largecaps.

Sonia: I wanted to talk to you about some of the sectors that have done very well. Media for example and Sun TV Network has been one of your top favourites. Even if you look at the valuations between Sun and Zee Entertainment Enterprises now, there is still a huge difference. Sun trades at 21-22 times and Zee trading at more than 40 times. Do you think that it is just a valuation catch up that is happening in names like Sun or is there a huge structural change that is happening down in the south as well?

A: There has been some news announcement regarding digitisation etc for the state channel over there. That will have its positive rub off on Sun TV. So that is one of the reasons why the stock has done well in the last two-three months and apart from that the recent announcement has also added to the positive bias for the stock as such.

So there is a lot of valuation mismatch, there were concerns on the political issues on the management etc. So many of those clouds have possibly gone by and that is the reason why we have seen the rally and we believe that there is still some more legs to this rally in these stocks.

Latha: I also wanted to ask you about the metal stocks. Like we saw in Hindustan Zinc Ltd (HZL), we are going to see superlative numbers from some of these steel companies, would that be an occasion to sell them because globally prices look like peaking off?

A: Yes, I think there has been a very sharp rally in most of the metal names in the last six-nine months. The expected reflection trade or infrastructure spending etc in the US – doesn’t seem to be as quick as it was earlier expected.

Domestically we believe that improving infrastructure, capex cycle should be positive and also the regime which has been set in terms of minimum import price (MIP) etc, kind of protection which is being available to domestic companies, so yes, there can be consolidation in the sector or domestic companies per se but improving domestic economic consumption and the government policies to support the domestic metal companies should be supportive of the domestic stocks. So there could be consolidation but I do not think it is time to exit the sector.

Latha: What do you think about real estate? That is the flavour of the moment. Will it last?

A: Three months ago, we had come out with a research report on the real estate sector and there is an extreme amount of institutional under-ownership in the sector and for obvious reasons but some of the government policies in terms of the new real estate act etc which is in the process of getting implemented -- that is going to be a game-changer across the sector as such where you only have the strong financial guy able to conduct business per se and the weaker stocks will not be able to survive. That is a very big positive.

Then many of these real estate companies are huge rental portfolios and which they are in the process of monetising through the

Real Estate Investment Trusts (REITs) etc and that will release a lot of capital for many of these companies.

There are pockets where post demonetisation and now the economy being on an uptick, they are seeing good amount of upticks in terms of pickup in sales also. So all these factors together, the overall valuations of the real estate sector in terms of the listed space versus the size of the overall marketcap, the valuations are very low. So you have to give recognition to that fact and possibly we are seeing the first round of that rally. So yes, there are region specific companies which will do well, which will have challenges but overall I think we are positive on the sector.

Latha: Do you like any of the pharma stocks at all?

A: We have been having this issue with pharma companies in terms of US-FDA inspections of various plants and almost all companies have probably gone through that cycle and I believe in the next 12-18 months, everything will be behind us and valuations have also started reflecting the negative impact of most of these inspections and the negative thing. Also, in the US, the generic bias etc, they are also consolidated and we have seen the price erosion. My sense is that possibly we are in that last phase of the worst phase of the cycle and in the next 12 months, we should see most of the pharma stocks bottoming out.

In these kind of an environment where there is some headwind, we try to invest into the top two-three sector leaders and hope that they will weather the storm. So as a contra investing opportunity, it is a good time because valuations are reasonable, there is a reason for that so if you are a patient investor then the top two-three pharma companies makes sense to invest in them.
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