In a chat with ET Now, Vinay Khattar Of Edelweiss has identified his favourite sectors & stocks.
Construction sector & stocks like KNR Construction, Sadbhav Engineering and NCC will benefit from the Budget
Construction definitely remains one of the key sectors which could get impetus from the budget. If you were to just look at the road construction sector, this year Nitin Gadkari’s ministry is talking of almost 5500 kilometres of tendering out before March 31 and a significant chunk of this would be in the EPC segment which would definitely benefit number of simple road constructions players like KNR Construction and so on.
You could have benefits even for the likes of Sadbhav and NCC. Next year number is what one is really looking at in the market and there is a talk of almost 10 to 11 thousand kilometre worth of tendering out which could happen before 31st of March 2016.
Now one still needs to see how much of it is going to be in the EPC side and how much of it is going to be on the broad side but right now the indications are that significant chunk is going to be on the EPC side which means that the opportunity available for the road construction players and some of these I have just named could be very interesting over next two, three, four years.
PI Industries & SRF will benefit from shift to India, enjoy high RoEs:
Chemicals is an exciting place to be in. Though there may be a quarter or two of disappointment but overall India is in a very sweet spot as far as chemicals is concerned. Predominant, all continuous process industries were very China specific, large scales, huge amount of global market shares and so on and countries like India had lost out significantly because of lack of manufacturing capabilities, scale issues, infrastructure issues in addition to some of the very basic items which you need in the chemical spaces.
Now the tide is turning the other way where you are finding that the labour cost in China is moving up dramatically. The pollution issue has become stringent and lot of industries are either being asked to shut down or set up plants to rectify chemicals before they are discharged into the atmosphere or into water and to add to all, this is not appreciating you on.
So, combinations of these two or three factors is causing manufacturing to shift out of China in the chemical space to India and we are excited about PI and SRF. It contracts manufacturing for some of the chemicals in the agri space where the tie ups with the international players for whom the manufacturing is being done.
There are significant offtake clauses. PI has put in lot of capex in last few years so that tells us couple of things. One, the return on capital could move up significantly as asset utilisation improves very significantly over few years. So, these are the stocks where one may not really look at quarterly numbers each time and play the thematic. Our sense is both of these stocks could be very good bet over next two to three years.
V-Mart – good growth, very well managed cost structure, very tight working capital, inventory management and ROCE
V-Mart is one of the better and the more attractive bets based on what management is doing. They want to open stores in tier II, tier III towns in very upmarketish localities so for a place like Saharanpur, it is equivalent to a Lifestyle kind of an opening. Second, the price point at which they sell their apparel is in the region of anywhere between Rs 500 to Rs 1000 which is the basic range plus they also have premium products and apparel constitutes majority of their sales.
They were also in kirana earlier. This business is now coming on dramatically and probably they will be off it totally. Another very important factor which plays out in their favour is the cluster based approach that means I am not opening pan India stores everywhere I can but I am opening in certain geographies which are contiguous to each other so between two stores I should not have more than 100 kilometre distance which takes care of my logistics in a significant manner.
So, this company is present in eastern and western UP, Jharkhand and now into Bihar. That way growth becomes contiguous and the cost of growth comes down, logistics can also be taken care of. Another very important thing which impact the entire sector the likes of Shoppers Stop is the rental cost which for this particular company is just 3% to 4% almost half to one-third for most of the competing players.
Labour another important factor, they pay minimum wages and train when they get the guys in. So some of these things have caused huge amount of cost benefits to accrue which makes an interesting play. You got a good growth coming in, very well managed cost structure, very tight working capital and inventory management and ROCE which meets our expectations. V-Mart is also a good bet for next three-four years on the retail space.