Porinju Veliyath & Shyam Sekhar Make 1,000% Gain From Turnaround Sector Stocks

Novice investors warned to keep away from sugar stocks

Novice investors like you and me have always been warned to stay away from sugar stocks. There are two reasons for this.

The first is that sugar is a commodity which is subject to the vagaries of economic cycles. Economic cycles are notorious for their unpredictability and so it is impossible to tell when the fortunes of the sugar sector will turn for the better or the worse.

The second is that sugar stocks are subject to an unending tussle between the farmers and the sugar mills over the fixation of the MSP (minimum support price) at which the sugar mills buy sugarcane from the farmers. It is a highly politicized environment and the farmers are usually able to wrest concessions at the cost of the sugar mills.

Yet, sugar stocks are at 7-year highs

There is a time and a place for everything. If one buys commodity stocks at the bottom of the cycle, there is a massive risk-free fortune that can be effortlessly harvested as the commodities make their way up the cycle.

This is exemplified by the performance of the sugar stocks. It is an understatement to say that the stocks are on fire because some of them have given mind-boggling gains in excess of 1,000% over the past 24 months.

According to a report in the Business Standard, sugar stocks are at their highest levels over the past seven years.

All sugar stocks hitting Upper Circuit ???

— Rahul Chhajed (@rahul6202) January 2, 2017

Sugar Stocks Extend Gains #CNBCTV18Market pic.twitter.com/JBYCkb3SKE

— CNBC-TV18 (@CNBCTV18Live) January 2, 2017

Sugar sector is undergoing a transformational change: Shyam Sekhar

Shyam Sekhar, the noted value investor, provided a masterful explanation on why stocks in the sugar sector are an excellent investment opportunity at present.

He explained that the woes for the sector in the past arose from the fact that due to extreme political sensitivity, the State Governments had framed policies which ostensibly appeared to benefit farmers but which were actually disadvantageous to them in the long run. The Governments have now realized the folly and are tailoring pragmatic policies which are for the mutual benefit of all stakeholders.

He pointed out the State Governments are taking steps to ensure that there is drip irrigation and other measures necessary to increase the yield of the sugar cane crop.

Shyam Sekhar also revealed that he had taken the contrarian call to buy sugar stocks in June 2015, when the stocks were going a-begging at throwaway valuations. If so, he has raked in an enormous fortune from these stocks because they have been on a steep upward trajectory since then.

My Contra call on sugar was 90 days ago. Knowing past cycles, turnarounds swift & sudden. REAL triggered a black swan. Cuban drought kicker.

— Shyam Sekhar (@shyamsek) October 13, 2015

He also revealed that he bought the stocks when they were quoting at “100+ PE”, implying that the earnings of the sugar companies were at the bottom of the barrel at that time.

@rameshgmehta1 @RaghunathAjjuga Each has a way of managing risk. Sugar stocks were @100 + PE when i bought them. What PE do you buy -be EPS?

— Shyam Sekhar (@shyamsek) December 20, 2015

Porinju Veliyath pockets 1,200% gain from sugar stocks

Porinju Veliyath was/is also bullish about sugar sector on the back of an expected turnaround. He revealed that he bought Dwarikesh Sugar in mid 2015 when it was languishing at Rs. 30.

Dwarikesh is today quoting at Rs. 390. This means that Porinju has pocketed massive gains of 1,200% in just 18 months.

Bought Sugar after a decade
'turnaround sector' on @ETNOWlive Diwali show with @Niraj__Shah
Stocks up 10-20% today!https://t.co/e8d8ghBG2C

— Porinju Veliyath (@porinju) November 13, 2015

Sugar Turnaround @ Diwali RapidFire with @_nirajshah – been buying Dwarikesh Sug since Rs.30 mid-2015 #stockPickinghttps://t.co/17VjrfPK5R

— Porinju Veliyath (@porinju) March 4, 2016

Rahul Saraogi of Atyant Capital also rushed in

Rahul Saraogi of Atyant Capital was also amongst the visionaries who noticed that the sugar sector is undergoing a transformation. His fund has been aggressively buying the stock of Ponni Sugars (Erode), a micro-cap (Rs. 202 crore). As of 31st December, Atyant Capital holds 813,525 shares.

Too late for us to join the party?

Now, the moot question is whether we have to remain content with being mute spectators or we can also join the party.

Here, the opinion of the knowledgeable investors is divided.

Porinju himself opined that the sugar stocks may now be overvalued and it is time to cash in on the gains. He said:

“What is your view on the sugar sector now after the gains that the sector has already seen? What would be your advice?

There could be some more space. I normally do not wait for the peak, because peaks and bottoms happen accidently, not by luck. So, when I find something, the value is Rs 100 but today it is available at Rs 20, it is called a potential five-bagger. So you buy at Rs 20, normally you do not wait till Rs 100, you may start exiting at Rs 70-80 kind of prices. That is always better.”

I like Coffee without Sugar!

— Porinju Veliyath (@porinju) June 14, 2016

Retail investors buying sugar stocks now will learn a lesson. I paid tuiton fee in 2006.

— Devesh Kayal (@_devesh_) January 10, 2017

However, S. P. Tulsian has taken a contrary view and is gung ho about sugar stocks. He called the sector “very promising” and said:

“If you take a call on the UP based sugar mills where the crushing is going on at the normal pace while the sugar prices have kept hardening and if you see the inflation figure also the sugar prices have not softened and that is likely to continue and the kind of production estimates will only be known by the end of January and when the figures will be estimated at about maybe 221 million tonnes against 25 million tonnes which we have seen for the season which has ended then definitely that will add fuel to the fire.

So, I am keeping a positive stance on the UP based sugar mill for the simple reason that no disruption is seen in the crushing. Secondly very good recovery. In fact the recovery of many of the mills are seen better than what it has been in the last year and I have maintained that in my earlier few shows also that FY17 is going to be seen the highest profits to be posted by few of the better managed companies in UP sugar belt. So, keeping a positive stance on that sector where about maybe 4-5 companies can easily be picked up but as I said there are many other ideas but this is just for an example and second could be the natural resources in the ferrous field. That area is also looking to me very promising.”

G Chokkalingam and Sanjiv Bhasin are also still bullish about sugar stocks.

G Chokkalingam opined as follows:

“There is a huge fundamental shift in the sector. Sugar companies surged on account of a rise in domestic sugar prices. However, we see some bubbles in the smallcap sugar stocks. For 2017, most of the stocks have already priced in the positives. One has to be selective while selecting sugar stocks. I am bullish on Andhra Sugar and KCP Sugar and see nearly 30-50 per cent upside over the next 12 months.”

Sanjiv Bhasin opined as follows:

“Soft commodities are doing well. Sugar stocks will continue to give good returns to investors in 2017 as well. However, demonetisation of high-value currency notes may impact their performance in the near term. We are expecting nearly 25 per cent return from DCM Shriram, EID Parry and Balrampur Chini in the next one year.”

10-Bagger gains still ahead?

Shyam Sekhar opined that there is a massive “structural change” happening and that it is too early to cash in on the gains. He pointed out that in the earlier cycles, the sugar stocks had given 10x gains, sending the subtle hint that more multibagger gains are in store for investors in these stocks.

A structural change story must be invested upon. If you speculate, selling early lowers returns.

Sugar stocks gave 10X in each past cycle.

— Shyam Sekhar (@shyamsek) December 30, 2016

Best mid-cap sugar stock to buy now

Sharekhan has opined that the surge in sugar prices is sustainable not only in FY2017 but also in FY2018. This implies that sugar stocks are still a good buy.

Sharekhan has recommended a buy of KM Sugar Mills, which is said to be a “mid-sized sugar company with integrated operations, low leverage and healthy free cash flows”.

The buy recommendation is given on lucid logic:

“KSM is our preferred pick in the mid-sized sugar space. The company has efficient operations, a healthy balance sheet, strong relationships with cane farmers and an encouraging growth outlook aided by its Ghana project. The company’s expansion in Ghana by 9,000TCD, without stretching the balance sheet, would result in a geographical diversification, along with a relatively brighter growth outlook. We have a positive view on KSM and expect returns of 20-25% over the next few months. The returns could be much better if its Ghana plant is commissioned in time.”

Next bonanza is in fertilizer/ agriculture stocks?

Porinju hinted that Fertilizers is the next sector which will see a turnaround and create humungous wealth for shareholders.

After Sugar and Cement, next Fertiliser?

— Porinju Veliyath (@porinju) April 7, 2016

It is worth noting that Shyam Sekhar and Kenneth Andrade are also bullish about fertilizer/ agriculture stocks. The difference between the two stalwarts is that while Kenneth is bullish about the “input” side, Shyam Sekhar is bullish about the “output” side.

Kenneth has revealed that Coromandal International, the blue-chip from the Murugappa group is his favourite stock. Shyam Sekhar has revealed that KRBL, the makers of ‘India Gate’ basmati rice is his favourite stock. He also has a big holding in Aries Agro, where Vijay Kedia is a major shareholder.

Ekansh Mittal of Katalyst Wealth has recommended a buy of Chaman Lal Sethia, the manufactuers of ‘Maharani’ basmati. He has given detailed logic in support of his buy recommendation. The logic is similar to that propounded by the other stalwarts.

Conclusion

We need to be proactive in recognizing the trends before they happen. If we can learn to master this, we can also dream of taking home 1,000% gains someday or the other!