Month: August 2021

You have been tracking very closely the ethanol opportunity. What kind of opportunity do you see for sugar companies, for players like Praj? Or is the best behind us given how steep the move has been in some of these stocks?
It is just beginning, it is not behind us. We are still seeing the early stages of adoption of ethanol in this country. We have accelerated the pace, very clearly the government is clear that they want to accelerate this space. The prime minister also mentioned about the focus that he wants to give hydrogen as a clean fuel.

In India, sugar companies are likely to turn into energy companies. Sugar is more likely to become a by-product and ethanol is likely to become a big product. But there are several layers of opportunity. What we are currently seeing is just a momentum in 1G ethanol which is the traditional sugar based ethanol. Where we see opportunities going ahead is when ethanol starts getting made out of food grains. As you know, we have a huge stock of foodgrains lying in our godowns and that is the next big opportunity that we see in terms of converting this extra food grain into ethanol and then biomass into ethanol.

Then there is a large opportunity for CBG. It is a medium term opportunity and still a little bit away but we are already starting to see the early signs of that and then there is hydrogen. The entire move to cleaner fuels, bio-fuels is a reality. The kind of climate change issues that we have seen around the world — the temperatures in Canada, the floods all around the world including Europe. The world is waking up to the fact that they need to move to greener fuels. The best is not behind us; it is just starting in my view.

How would you approach a stock like Bajaj Finance? It is at an all time high. The stock in a sense has been a great wealth creator for shareholders in the last 20 years. Do you think in the next three years, Bajaj Finance can give double digit returns and outperform the Nifty?
I think that the opportunity is significantly big and they have shown that they have been able to execute on that opportunity very well over the last few years. Financial services is undergoing a very silent revolution. It is one sector which is likely to be impacted by technology the most and if you look at the kind of soft infrastructure or digital infrastructure that India has laid out in terms of the UPI, payment companies etc. there is likely to be competition from all sides in financial services.

Apart from looking at a bank or an NBFC in a very traditional sense, like we used to evaluate them in the past when you look at if they are very strong on the liability side, asset side, credit underwriting standards, the most relevant is going to be all these trends plus digital capabilities. Amongst all the financial services companies that are listed today, in my opinion Bajaj Finance is way ahead of everybody. We saw what happened to the HDFC Bank stock price when they encountered digital issues and there was a moratorium by the RBI on issuing new credit cards. The stock underperformed for a long period of time. Now at least that part of the problem is over but going forward, we want to be invested in financial services companies which are ahead of the curve when it comes to digital adoption. Two companies make the cut — one is Bajaj Finance and the other is ICICI Bank, The rest follow.

How would you play the recovery and business normalcy? Would it be via the consumption facing names in retail, the entertainment and multiplexes stocks or through the construction industrial materials and metals and even real estate?
We firmly believe that there is significant upside in the so called opening up trade or consumer discretionary stocks and there are several ways to play that. One can play it through banks because in general, banks have been underperforming through the Covid period. So one of the opening up trade is banks. You mentioned real estate. We do not have a very significant exposure there but we are very closely looking at the opportunity in real estate. We believe that it is not just an opening up trade. After a long consolidation in that sector, we are seeing a significant uptick and that is the other way to play.

Thirdly, where we have exposure in a lot of big grocery retailers like Avenue Supermart, Trent, V-Mart. We are also very bullish on the QSR opportunity. We believe that all these opening up opportunities are significant. Many of these businesses have gotten more agile on the cost side; they have become more digital and their economics will only improve as things open up.

While incomes in the lower middle class and the rural areas have been hit, there has also been savings and as things open up, there will be a lot of pent up demand and spending is likely to come back with vengeance once we are through with the large part of the vaccination. So whether it is hospitality, retail, consumer banks or real estate, there are a slew of sectors that can be played. We continue to be extremely bullish on the opening up trade.

There is one more sector and one more stock which is in trouble and that is nothing to do with demand, it has got to do with availability. The semiconductor shortage has affected Tata Motors and now Maruti. Should one be a buyer in Tata Motors or Maruti?
Thus is a genuine constraint. Unfortunately it has come at a time when demand is so robust. Had there not been this issue, the sector would have been off the rockers but having said that, this may persist for maybe a quarter or two. Even OEMs are looking at alternative strategies.

We have to watch the situation. If the semiconductor issue gets resolved in a matter of few months, then there is a huge pent up demand in automotives and we believe that Tata Motors has done some phenomenal restructuring of the business both at the JLR end as well as on the domestic piece as well and today they are not only perceived but are actual leaders in the EV race in their passenger vehicle segment. A significant value creation can happen over the long run but investors will have to possibly live with some uncertainty in the short to medium term because of the semiconductor issue. But in the long run, we see a significant potential for rerating.