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The sector has been through a lot of pain over the last four years especially on the back of significant challenges that we have had in the US generic space. Clearly, the sector earnings are troughing out, meaning there are select opportunities in the sector. But some of these companies which have made significant investments in their business over the last three or four years probably should be beneficiaries as growth recovers from here on in this sector. So, we like select names in the healthcare sector.
What are you making of the rebound in the market?
Broadly, the markets are in a range. There was some bit of disappointment post the budget and if you recollect we had a sharp fall on budget day. After that markets had some bounce and since then they are trading in a range. Clearly, markets are looking for direction. The fact remains that globally there are some headwinds to global growth that has emerged post this coronavirus outbreak and we are still trying to assess the impact of that on the global growth. The fact remains that as far as domestic growth is concerned, clearly, it has disappointed. If you look at the Indian economy, it is clearly floored at 4% which no one anticipated and now as it turns out the growth recovery will be somewhat more gradual and probably more back-ended. Again we are looking for a big disruption or upheaval in the auto sector from 1st April because of this transition to BS-IV to BS-VI and autos all said and done is 50% of India’s manufacturing. The markets probably will remain in range for some time to come before they start taking a direction.
Let us talk about cement. Shree Cement’ management outlook going forward, particularly after the Nifty inclusion, is sounding very bullish. Within the cement pack, what is looking attractive to you?
As far as the cement sector is concerned, it is a direct play on the core sector of the economy. Clearly, volume growth has been pretty modest but we have seen some very smart price increases that have come through in a couple of regional markets over the last few months. But as and when growth recovers, probably cement should be a big beneficiary of that because it has a direct linkage to the growth. Some of these more efficient players have been able to deliver some very healthy numbers despite the slowdown in volume growth because we have seen their cost come down and as a result, their margins have improved significantly. Again outlook from a slightly medium-term perspective is positive but for the time being, one has to remain focussed on some of the very high-quality players within the sectors such as UltraTech and Shree Cement.
What is the correct way of looking at telecom? There is no clarity as of now whether it will be a duopoly for the telecom sector or not. But what do you do if you have already managed to ride the wave in Bharti? Should you completely exit out of Voda Idea and should you buy more of Reliance Industries?
The outlook for the sector is extremely bullish because this is a sector that was extremely fragmented three years back with 10-12 players and now it has become an oligopoly. Whether it remains an oligopoly or it will become a duopoly is something that we will know in the next few weeks. But we have seen massive consolidation that has happened in the sector.
When any sector goes through this kind of massive consolidation what happens is that all the weaker players exit the market which is what exactly has happened and the stronger players are able to get a lot of pricing power back. This is exactly what we saw. We saw a very sharp price hike of 25% in telecom tariffs a few months back. That is just the first tariff hike that we have seen in a series of many more, which are likely to come over the next few years.
As consumers, all of us should be prepared that our telecom bills are going to go much higher and the telecom as a sector and the companies within the sector are going to make significantly high profits. Today, the profit pool of the whole sector is negative because the other two players are losing money and the leader is making money. But the losses of the other two players are higher than the money that the leader makes. Directionally, the view on the sector is extremely positive and telecom tariffs will go much higher. At the same time remember that all of this initiative about digital India and all of that that will drive very strong volume growth for the sector as well. So data consumption is only going to increase.
Dec quarter showed that paints was completely unaffected by the slowdown. What is your analysis of paints as a segment and whether or not it will continue to do well?
Paints is one sector that has been an outlier and they have demonstrated a big surprise on the positive side in terms of the volume growth despite such a sharp slowdown in the economy. What really helped the sector is the fact that 80% of the paint demand comes from re-painting. People do repaint their houses or offices every five-seven years and that cycle continues. People do not stop repainting just because the economy is not doing well. So, the repainting cycle continues as usual and that is what contributes to a large part of their volumes. While the volume from the new housing construction has slowed down, the repainting-driven volume growth continues and that is what is driving the sector. The sector has been an outlier in terms of the growth it has delivered and probably will continue to remain so because the organised players are still about 65% of the market. There is still a very large part of the market which is unorganised and gradually as these companies are going lower down the price points, they are trying to drive growth by taking market share away from the unorganised players. This sector should continue to do well in terms of volume growth, though, the valuations are pretty expensive. But that is what happens when the polarisation across segments of the markets is sharp.
Would you say IRCTC is still a subscribe?
The space in which they operate is really very exciting. They are the largest internet company in India because they have a monopoly on rail ticket booking. In terms of the kind of business they do and the visitors they have, they are the number one internet company in India and probably as long as that monopoly holds they will continue to do that. On top of that, railways are gradually getting into privatisation mode and for the time being, at least they are the only play on that because they have started running private trains. They already have a couple of them and they have won bids for a couple more. It is a huge play on the internet and on privatisation of railways. India has the largest rail traffic in the world. It is just constrained by the availability of trains. The growth opportunity for them is just humongous.
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