Theme 1: Road construction – Sadbhav Engineering:
I don’t think there is any sectors where in totality the sector will give you storm shelter. It is very stock specific. Just to take three themes which I think have worked in the last few months and I think will continue to hold up reasonably well. It is reasonably clear that road construction is the one facet of infrastructure where the government has been able to give a meaningful impetus. So, government money leading to road engineering, procurement, construction (EPC) seems to work in our country. I think we will see a lot more of that in the next 12 months. Hence, well run road companies well run road EPC companies should be a feature of discerning investor’s portfolio. So, Sadbhav Engineering I would classify as the premiere road builder. Their EPC side it is an efficient operation and they also own 15 roads right in the heart of the country which should do well as and when they economic recovery arrives, so roads is a sector I would look at.
Theme 2: Exporters of manufactured goods – TVS Motor, AIA Engineering, PI Industries:
The second area where there is reasonable grounds for optimism is the rupee weak. I think it will get weaker. Interest rates are down they will fall a little bit more. More generally our manufacturing export sector will become more competitive in the coming year. I know we got a horrible run on manufacturing — 13 consecutive months of shrinkage in manufactured goods exports. A shrinkage in exports in totality but I do reckon manufactured goods exports will make a comeback next year. There is a gamut of players to look at – we cover TVS Motor , we cover AIA Engineering.
Let’s take PI Industries a specialty chemical manufacturer; 60-70 percent of revenue coming from exports to global chemical major such as Bayer, Dow Chemicals. High revenue visibility well run company, good balance sheet, good cash flows. Stock has come off a fair bit in the last three months. I look would at a company like PI Industries to play India’s manufacturing revival which I think will come and in a way, in effect as to come. We are not going to create jobs any other route really.
Theme 3: Urban consumption – Trent, Titan:
The third theme which we are looking at quite carefully, it is a little fragile at the moment is this urban consumption recovery. As crop prices, as minimum support price (MSP) stay under pressure, as things like the Pay Commission click in, as fuel prices throttle off, interest rates fall a little bit the urban consumer will have a little bit more money in its pocket and he will spend a part of that and hence we are looking for plays around that.
We have been buyers of Trent ; we have been buyers of Titan for a while. I know Titan is in the news for the wrong reasons today but I think well run retail players like Trent and Titan are worth looking at as urban consumption centric plays. These are really few pockets I can look at but on honesty if I had to look at India today I wouldn’t be able to give you more than a dozen names where I could tell you confidently these are worth buying these are sensibly valued well run companies. It is a very difficult landscape for stock picking but stock picking I believe is the main way to deal with the current situation.
Avoid Banking & Finance stocks in view of NPA problems:
We have been sellers of ICICI Bank for the best part of 11 months now and with everything that we are hearing about the Q3-Q4 banking result season, all the discussion around 130-150 new non-performing assets (NPAs) our concerned around banks is heightened. So, ICICI I would say symptomatic of the challenges facing the Indian banking sector where barring a two or three banks everybody else has rotten apples in their balance sheet. It is just a matter of time when they announce the rotten apples to the rest of the world. My hunch is we are moving to an end game in the banking sector where the rotten apple will get announced over the next 3-5 months and hence my gun-shy attitude with regards to the banking sector.
Avoid Auto and OMC stocks in view of pollution control measures:
The overall tone and tenor of the discussions I have had with the auto industry over the last six months is reasonably clear-eye. The auto original equipment manufacturer (OEM) were expecting a degree of pressure to move to lower emission engines and that journey towards better quality diesel engines, engines which lower emission in the auto industry will accelerate on the back of everything that is happening in Delhi.
Oil marketing companies (OMCs) and the oil refining companies will come under pressure to look at the quality of the diesel they are putting out. Whilst Delhi is front in center because it is the capital city and it is clearly in bad shape from air quality. There are several towns north of the Vindhyas, several towns in North India which have serious air quality problems. So, Delhi might be the city we hear about the most but it is not the only city. There will be at least 10 other large cities in our country with serious air quality issues. So, this matter is not going to be a one day issue. I think this is a fairly serious issue it will stay with us. We will need to move towards cleaner engines and we will need to move towards cleaner fuel. I don’t think that those pressures will go away. It obviously will have a bearing on the auto industry and also on the oil refiners.