Raamdeo Agrawal's top sector picks for your portfolio

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Q: There is one sector I remember talking to you about post earnings where you liked what you saw and those were the tyre companies. Usually, they are extremely rangebound but they have now begun to see buying. What is that? Are tyres still a value call for you or do you think the best is behind them?

A: Tyres are going through one of their best phases. I believe some large trucks companies are forced to curtail down the production. In fact, I have heard some deals are happening without even tyres the trucks are been sold out to the buyers. It's a buyers market and despite rubber being at Rs 150, I think they are gathering courage to make decent money and all these companies have large turnover running into almost Rs 4,000-6,000 crore but somehow they were not able to make money.

In fact, they have bad track record of last 10 years of profitability and because there was not surplus there was not much of investment. You saw suddenly automotive growth is absolutely through the sky. So there is a shortage of tyre and these guys have pricing power.

Q: You mentioned very briefly about niche space, which is some of these sponge iron players. What is the story over there? Again is it a supply demand situation or do you think they have a lot more pricing traction than anything else in the steel space?

A: One is of course that domestic steel demand is booming and we are net still short. We are importing some amount of steel but second thing is that cost structure of sponge iron industry where they do not have to use coke-they have to use ordinary coal, which is available locally and iron ore.

So if they have source of iron ore coal most of them do not have but if you can use ordinary coal in that case their cost of production remains somewhat under control and prices of metallic; sponge iron itself is moving up very rapidly. There is a margin expansion and of course selling is not an issue.

My sense is that lot of well run, sizeable companies with almost half to one million tonne kind of capacity companies will do well in sponge iron industry.

Q: You made an interesting point earlier that it's not necessarily the beaten down sectors, which have value. Companies which have discovered reasonably valued but have such growth matrix that you could seek value in them. I presume that you are talking about some of the autos like Hero Honda and Maruti where there is scepticism about valuations, further growth going forward and competitive pressures. Can you defend Hero Honda and Maruti given these kinds of concerns which have come up?

A: I would think so in the sense that I can talk about Hero Honda where I have invested for quite sometime and I have been tracking the stock. Most of the time I hear, even yesterday a reporter asked me, "Is there any growth left for two-wheeler?" I think the sheer size potential in China-they do almost 35 million motorized-cum-electric bikes in China every yearand we do about 9.5-10 million. So the potential to grow and the size of the market which can be for two-wheelers for this country, which has USD 1,100-1,200 per capita income, is very large because it also has to cater to the replacement demand.

Four-wheelers though we may like to have for the masses but at this level of income the nation cannot afford it for everybody. The competition is very limited. What we have to focus on is not the size of the opportunity. I think in India everything will grow. What is important is how many players are going to share that particular opportunity and in two-wheelers there are only two; we are just talking about Hero Honda and Bajaj Auto who are going to take about 80-85% of market share.

There is a reasonable race in the valuation and in India value doesn't exist without growth. So one has to calibrate quality of growth at expected growth levels and see how exactly it plays out in the current valuation. So a growth stock could be a very good value in Indian context of value investing.