See capital goods, electronics as big export themes: Kotak

Below is the verbatim transcript of Lokesh Garg & Jasdeep Walia's interview on CNBC-TV18

Q: Take us through the gist of your conference, why are you having this and what is your call now on this capital goods space?

Garg: This conference is happening in the backdrop of an anticipation that exports should start to pickup from the country. Essentially India faces a very large current account deficit (CAD) and even larger merchandise deficit which is about 10 percent. And this large merchandise deficit at a time when more than half of workforce is actually still employed in a very low yielding agriculture, is essentially a reflection of a very stunted manufacturing sector. So to that extent manufacturing sector has to pickup for providing that incremental leg of growth and one of the levers of that is essentially exports.

So this is how we came up with this idea of having a deep down vertical specific conference on manufacturing and exports wherein we can have speakers who represent a broader policy making, policy influencing domain which is represented by national manufacturing competitiveness council, Export-import, Bank of India and Federation of Indian export organization; also, interspersed with some specific sectors which are important from an exports perspective such as automobiles, textiles, electronics and niche engineering exports.

So to that extent genesis lies in an expectation, genesis lies in some recent changes which are essentially some amount of currency depreciation. Potential picking of working age population in China which can actually start some sort of realignment and this realignment would also possibly happen on the back of US trying to become more competitive in manufacturing as a space. So that is the backdrop in which we have chosen to do this most specific conference.

Q: What are the sectors that will benefit going ahead because clearly in this quarter gone by we have seen a lot of the sectors that you spoke about, automobiles, textiles, pharma show us that because of exports their earnings have seen a good growth, but going ahead if you wanted to latch on to this export theme and play some sectors that have a potential of growing their business in the exports category, which are the ones that you are looking at?

Garg: Essentially we are not looking after only the low cost or labour-driven sectors to do well, so labour cost is not the only thing, cost is not the only thing. Design and quality both matter and matter strongly in creating a different position. Having said that, the sectors that come to mind are essentially automobiles, pharma which are already well established but they still have a huge potential for growth. We can look forward to that but those are already well discovered sectors in the market. Two sectors which will emphasize more are essentially capital goods and electronics. Both of those are highly designed and quality specific and are not low cost and could actually start to do well.

Capital goods have some establishments already doing well and we have profiled them in our report also that we have realised by the side of the conference. Electronics is a sector which still doesn't have many listed companies in India but it is a sector of huge vulnerability incrementally unless a country starts to establish this one well.

Q: Lot of interest in a lot of these midcap names, PI Industries you track, can you tell us what the story is and why do you like it?

Walia: I don't track PI, we mentioned PI in our report because it is one of the companies which has significant amount of dollar revenues, but we don't track it formally so we don't have a target price or a rating on the company. PI is engaged in the custom business which involves partnering with the innovator right from initial stages in which a formulation is being conceived. So the company typically works on one or more components that go into this formulation and if at all that formulation is successful and is commercialized later on, the company gets bulk order with regard to the same.

So in that respect in this business the company brings a lot to the table, so rupee-dollar rate frankly does not carry much significance. So even if rupee were at 50-55/USD, the company would have done equally well. Of course rupee at 60-62/USD provides a tailwind but it is not paramount. So the company brings a lot of skills to the table also.

If you see the custom business, the company has been as far as the first half is concerned, the company has more than doubled its revenues and as per the guidance from the company it is expected to grow its revenues and earnings at a CAGR of around 25 percent odd in the coming two-three years. Hence, we feel that PI Industries is a good opportunity, good play on the current export theme which is running in the market and valuations are decent. Last year the company did around Rs 7 of EPS and this year it is slated to do close to around Rs 13. So valuations around 16 times one year forward multiples is decent given that the company will grow at a much higher rate of 20-25 percent CAGR going forward.

Q: Which are the midcap companies in your coverage which have the potential to give higher earnings and higher stock prices from these levels?

Walia: In terms of companies which will benefit out of rupee depreciation and also the companies which are covered by us, Rallis India is one of the opportunities that could do well given the recent depreciation in rupee. Company derives around 33 percent of its revenues from contract manufacturing which is essentially exports business and it may not play out immediately because most of the company’s facilities are running around 100 percent utilization level, but we are given to understand that companies investing further into these facilities.

So in the coming years we will see further investments from the company into contract manufacturing business and may be with a lag you will see earnings also growing in line. Also the company is investing a lot into R&D which will increase the component of value in exports going forward. And in terms of valuations last year the company did EPS of around Rs 6.8 per share and in the next two years we foresee that EPS growing to around Rs 10.8 in FY15. So we have a target of around Rs 185 on the company and we see it as a good opportunity going forward.