Sun Pharma, India Cement value plays; enter Britannia in next 6 months

HCL Tech has crossed $10 billion of market cap and in order to celebrate that the management has decided to give a one-time bonus to all the employees, adding up to Rs 700 crore. I have not seen any gesture like this from any of the management which is linked to market cap
Yes it is interesting. Globally, the mandate of management is to create wealth for shareholders. Over the years, many CEOs got fired if stock prices did not do well. So, HCL Tech’s move is a good one because most of the companies through this pandemic have cut costs by cutting salaries and bonuses. But this is a measure on the other side. There are various stakeholders in the company and it is a good move because companies which do these kinds of measures, stand to benefit in the long run.



Divi’s has delivered again. Just when we thought that the API business was getting crowded and the one-time Covid tailwind was behind us, the numbers they have delivered tick all the boxes.
It is a company which has been doing exceptionally well. Over the years they have done well. In between, for one or two years, they have not delivered but this is a reflection of the strength of their business model and it is also reflected in cash flow generation. In many of the pharma companies, it is important for investors to focus on the cash flow because in many companies we see that the receivables have moved up, debt position not reduced and to that extent we do not see the cash. Once you see the cash, you realise that the figures are for real.

I believe they are doing exceptionally well. Although the company has indicated that margins could remain strong, given the significant pressure on input prices. across-the-board, we could see some moderation in margins going forward. However, growth might remain strong and that could take care of part of it. Overall, a healthy set which could keep the stock buoyant. The valuations are higher than most of the other larger pharma companies.

Last week was all about Budget. It was all about inward looking sectors but on Wednesday, Thursday and Friday, the comeback in pharma was quite robust.
Yes, pharma has done well and one of the companies showing clear signs of a turnaround is Sun Pharma. Many companies like

have been trading at valuations which are even lower than that of cyclical companies. Now they are coming back strongly. Profits have outperformed expectations. The debt on the balance sheet is getting paid off and the stock is relatively cheap in the context of the overall market and the pharma basket as a whole and it is somewhat under owned also.

This is one stock which still seems to have value in the pharma basket and I am positive on it. Today at 15,000, it is tough to make the index move up by 20%. But Sun Pharma has the potential of delivering that.

Is there a potential for more upside in the cement basket?
Cement remains a good play longer term, given that a volume revival is expected. Pricing has held up although it has moderated a bit from the top. The only challenge for cement companies will be to manage the cost because a lot of the cost is related to what they consume in terms of their energy basket.

Those have moved up sharply and managing these costs could be a challenge in the near term. But given the revival in the housing sector combined with the infrastructure push that we are seeing today and the kind of order books we are seeing for most of the infrastructure companies as well as improved implementation, we should see the sector do well. Unlike in many other commodities, most of the cement companies are not very highly leveraged. Many have balance sheets which are very light and that also makes the case for cement stocks to trade at valuations higher than most of the commodity companies. They have been generating a lot of cash. So I think the cement sector should do well.

We hold UltraTech Cement as a long term bet and it has done well. We need to look at the companies which can grow volumes and which have the capacity to do that and that is where the focus should be. On the midcap side, we are holding India Cement as a value play. It has some debt on the balance sheet and that concern always remains. But I still believe that it trades at much lower than most of the cement companies.

In the last one year, despite the recent underperformance, Reliance has done better than the Nifty.

Yes, it has and the fear factor was the pace of recovery we saw from the March lows where it went from 800 to Rs 1,400-1,500 without a break. There was a huge outperformance over the index at that stage where the index moved up by just 15-20 odd percent. Reliance was a play where they were continuously getting funds flow at a time when the people were unsure of the economy, unsure of how other companies would do. But now people have seen a broad-based recovery. Many other companies are doing well and investment focus has shifted to other companies. That has led to Reliance not doing as well. Also there is a gap in terms of what the Jio platform would do and what it is doing right now. That gap is leading to some doubts in the minds of investors as to how well Reliance can actually do. So, the promise was much greater than the delivery and that is leading to under performance. Now whether they can perform or not is something we will see over the next two-three years.

At the conference call, Mahindra & Mahindra used words like capital allocation and a renewed focus on not investing in those businesses which are not working for them. What does that mean for M&M?
Mahindra & Mahindra has traded at a discount to most auto companies. It was completely undeserved because their subsidiaries and products have done very well and they have been market leaders in the utility vehicle segment in India. They, in fact, built up that entire segment in this country. In between, they had issues related to the fact that many of their segments were not doing well. So I think this rethink is a good idea. Even now, after the sharp up move, the stock trades at much lower valuations than other companies.

The challenge in Mahindra & Mahindra is their auto basket. Tractors are doing well, but the auto basket has challenges because they do not have any exciting product out there. Also, many other players have come in who are taking market share away from them in the utility vehicle (UV) space. That is a challenge which I do not think is going to get addressed in the very near term. We could still see a higher re-rating but it will be followed by a roadblock because even in tractors, a two-three year upcycle is followed by a period where the sales do not grow. So, as the tractor cycle reaches its peak, they have to have a strategy for growing the auto business.

Should one add heavyweights like given that they continue to outperform?
Britannia has unperformed in the near term and there was an expectation that growth will moderate, but the way they have been able to hold up their margins is pretty credible and that could keep the stock afloat in the near term.

The challenge for investors — who are not very long term in Britannia — is that at least over the next two-three quarters, we could see a de-growth in Britannia as things normalise in the first and second quarter of 2021-22. Typically, markets do not like de-growth and there could be a de-growth in earnings also. So long-term investors should continue to hold, but for people who are looking to buy afresh, the next six months might give better opportunities for entry into Britannia.

How are you looking at the prospects of the road as well as building companies post the Budget announcements?
The announcements are significant and they have also come on the back of significant growth in the order books of many of these companies. There are two ways people can participate: one, bet on companies which are actually bidding for these road projects; second bet on the companies which provide equipment or infrastructure companies which are actually doing the execution.

Some of these companies like JMC Projects, Ahluwalia Contracts are in the construction side but they do not get into asset ownership. These companies could do well. On the equipment side, there are companies like Action Construction which have come out with very good results and have given a strong outlook. Longer term, they are seeing very strong order booking and restriction on imports from China is also helping these companies. So these are some of the companies one could look at.

Companies like Ashok Leyland or a Shriram Transport have moved up but the exception here is Mahindra & Mahindra Financials. Why?

Simply because of the fact that they decided to take the entire hit upfront on their balance sheet and do the write down. It has been a feature of this market that people are rewarding managements which are talking bullish and not rewarding those managements which are trying to be a bit conservative and give a conservative outlook. But that does not determine how the longer term performance of that particular stock goes.

So to cut a long story short, I am bullish on Mahindra Financials simply because of the fact that as the entire ecosystem improves and the rural economy improves, this company has to do well. They have taken all the NPA write-offs and now they will see faster recovery than most of the other NBFCs and banks. It has underperformed but that does not mean that it will continue to underperform. It is one of the stocks in the financial basket which still offers value.

Does it make sense to buy any NBFC when bond yields are hardening?

That is a fact for all NBFCs across the board as well as for banks. FD rates have been subdued significantly and their premium over the savings and rates has been very low, given the huge liquidity in the system. The markets globally and specifically in India are ignoring the fact that inflationary pressures are coming back. We see Brent Crude at $60 today and it is at a 52-week high now. RBI conveniently did not talk about inflationary pressures which are building up.

Post results, the uptick in input prices has been very severe and many commodity prices have moved up 60-70% in just four-five months. Look at what happened to steel, plastics. The debate has started in the US also as they plan the next round of stimulus. These are risks which markets are ignoring, not only for financials but for the overall market. Given the huge fiscal deficit that has been projected for next year, the government will need to borrow a lot, which in turn will harden yields. The yields are at 6.15% already, an almost 35-40 bps up in one-one and a half months. The economy which is just starting to recover, could have a challenge adjusting to it. This is a risk which could come to haunt us in a few months.