Cement sector will be the biggest beneficiary of government spend and infrastructure projects, says S Krishna Kumar, CIO Equity, Sundaram Mutual Fund.
India's macro conditions are improving, more so because of positive events like the Goods and Services Tax (GST) Bill getting passed and monsoon significantly increasing kharif and rabi volumes, said S Krishnakumar, CIO Equity, Sundaram Mutual Fund. This makes him bullish on rural economy, he added.
Speaking to CNBC-TV18, Kumar said search for yields globally is bringing money into emerging markets (EMs) and Indian valuations largely reflect global liquidity.
He is of the view that current valuations of non-banking financial companies (NBFCs) do reflect optimism but said there NBFCs have huge growth opportunity and that high disposable incomes will drive retail growth.
On the cement industry, he said the sector will be the biggest beneficiary of government spend and infrastructure projects. "Cement is the only sector to have great play from state government investments, housing projects, broad-based construction activities and agricultural constructions; it is running on capacity utilisation of over 80 percent in most parts of the country."
Below is the verbatim transcript of S Krishna Kumar’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy.
Anuj: You are a stock picker and so many stocks have done well for you. Let us talk about the two biggest ones; non-banking finance companies (NBFCs), stocks like Bajaj Finance which has now become a largecap and even midcap cement stocks some of which have doubled this year do you see any signs of exuberance or bubble in any of these two sectors?
A: The current valuations definitely build in a lot of optimism in terms of secular growth opportunities and improving ratios, if you look at the NBFCs, which is actually very true. However, given that India is under banked and credit to gross domestic product (GDP) ratio is pretty low and we have Indian consumer who has fairly high disposable incomes at this point in time given the low inflation and the ability to leverage, so that is going to drive a lot of retail focus in NBFCs in terms of growth.
If you look the other areas in terms of transport, equipments financing be it commercial vehicle, tractor or passenger car or agricultural, rural housing etc, I think there is a huge demand for those products and offerings given that India’s penetration for the financial sectors has been just increasing in the last one year with the Jan-Dhan Yojana (JDY) scheme. So, there is a huge growth opportunity and the optimism is built in there.
From the cement space again, I think cement is probably, the only sector which has great play both on the government spend on infra projects, the state government activities from irrigation, water supply projects etc, the housing programme and also the broad based construction activity in the economy which will appear again higher with the improvement in the rural incomes, we will see rural housing come back in a pretty strong manner in the next two years.
So, I think with capacity utilisation being above 80 percent in most parts of India except the south I think cement industry is in a very good wicket. The cost structures have eased and the profit margins are pretty significant after a long while. The rising demand at about 8-10 percent per annum only provides better base for improving pricing scenario and get a profitability which will justify the valuations.
Latha: The other stock that has actually made a lot of money for you is PVR. Do you plan to hold it? Can you justify the valuations at this juncture?
A: In the near-term the pipeline in terms of content has been very good. In first quarter and second quarter, the films that have come out have been successful - that is a near-term positive. The fact that companies are expanding into the more lucrative south market, which is typically high occupancy market is something that is structural positive for the multiplex companies going forward. South has typically occupancy of 85 percent even during weekdays unlike other parts of India. So, that is something which is going to improve in their mix.
The more recent and very positive development is the goods and services tax (GST). As you know these companies are having a very high tax rate and are subject to entertainment taxes and local taxes at the exhibition centres in addition to a service tax. So, clearly with the GST coming in all the taxes are going to be subsumed into a unified rate and that would be a big saving of about 300 to 400 basis points from a cost perspective.
Given the sickness of ticket pricing etc these companies will be able to maintain the prices and pocket the difference which will improve the profitability significantly going forward. So, that is a big positive from the GST which is also getting played out in the markets.
Sonia: Ashok Leyland has made a lot of money for you over the last three years. We have seen some distinct signs of slowdown now. What next for that stock?
A: Commercial vehicles have been doing well in the last one-and-a-half years and we do believe the uptrend can last another 12-18 months. In the interim there will be base effects which will catch-up here and there which has been created by any changes in terms of regulatory issues of safety systems or emission norm changed which has created some lumpiness in the past. So, I would like to believe that the current bit of weakness is more transient and post September, post the rainy season we will come back pretty strongly from a commercial vehicle cycle.
We need to improve the age of the fleet, we need to take stock of the improving freight availability and the need for more different types of specialised trucks in terms of construction projects, in terms of infra projects, so we need lot more fleet to be added and also the flatbed trailers etc, given the improvement in the economy that we are seeing and the containerisation trend we are seeing, we will need a lot more of these multi-axle vehicles. So, clearly the cycle is far from over, the up cycle will continue post probably a little bit of consolidation now.
Anuj: What about overall market. Is it still good or do you see some signs of exuberance because of liquidity?
A: While one would definitely believe that there have been a lot of flows into emerging markets driven by the global liquidity and the risk on trade. The surge for yields globally is bringing money to emerging markets and particularly to a country and an economy like India where the macro fundamentals are improving pretty strongly. Therefore, we do believe that this situation will continue for some time in terms of global liquidity being available at very low rates.
However, having said that there are lot of positive events in India which again give rise to positive buyers, be it the GST that has got passed; the benefits over the next two couples of years would be pretty significant, it is one of the largest structural reforms that the country has undertaken in the last decade. If you look at monsoons, the monsoons progress is pretty strong and we expect both kharif and the rabi crops to be very good in terms of volume growth and availability. This and along with some of the structural measures the central government has been taking to improve a lot of the rural population through various developmental works and job creation opportunities. I think there is the structural growth opportunity that is staring in our face.
The rural markets, rural growth has been pretty weak in the last two to two and a half years and that has really good turn in the current fiscal. In the next we are going to see far higher contribution to the GDP growth from the rural and the agricultural sector in addition to the services holding up pretty well.
I wouldn’t really be negative at this point in time, valuations definitely reflect a) the global liquidity that is awash b) also reflects the fact that the fundamentals of Indian corporate are improving at this point in time and we are set for a long-term structural rally. Corrections always will be there, volatility will be there which are driven by certain global events or local events but that would be again an opportunity to buy the market not to get worried about.