Going forward, how do you see things shaping up for RIL?
Reliance at this stage has a confused strategy. They had made big forays into two new segments telecom — Jio Platforms and retail. Just after announcing that they are making a huge fundraise and will become debt free, now they have announced huge forays into completely diverse industries.
That in my view, reduces the potential of the companies on the debt-free aspect. In fact, last year was the worst for Reliance in terms of cash flows. It was a negative of minus Rs 80,000 crore. So the cash flows are not there from the new businesses because both Jio Platforms and Reliance Retail require continuous investments for growth. Reliance will also start getting more and more of the conglomerate discount because as more businesses come in, cyclicality mismatches happen. Also they still have a ROE of just 6-7%. I guess the market is already concerned that there is a confusion in the management as to what direction they should be taking and to that extent, Reliance will be an underperformer going forward.
Where within sugar, would you be comfortable about buying afresh or adding positions?
Sugar stocks have moved up substantially and need to consolidate or potentially give up some gains before new investors come in. For old investors, it remains a good story. We could ride out some corrections because the longer term story is good. But in the near term, prices have not moved up as companies are expecting the government to raise the minimum prices and that has not happened till now.
The ethanol story is strong and that will play out over the next few years but unlike the global scenario, domestic production this year is expected to be quite strong especially in Maharashtra and so unless and until the government moves on the minimum selling price, we might have a scenario where the profitability improvement in the immediate term that many people have started to expect for companies might not play out. People who are holding should hold on, and people who want to buy afresh should wait for better levels.
What about the cement sector? CLSA is saying there is limited room for rerating. India Cements is in focus and there has been a lot of commentary.
I believe there is limited room for rerating in cement stocks. These stocks have got rerated substantially over the last two years given the resilience in earnings and given the fact that cost management came to the fore and pricing in the market remains strong despite the pandemic slowdown and demand. So, there has already been a rerating. From here on for stocks to move up, the increase in profit has to be strong and in the near term, we could see some challenges on that given that the cost pressures have been quite high both in terms of fuel prices as well as rates which have also gone up substantially. That could impact margins in the near term.
So I would say that the long term story remains intact but in the near term, for someone who wants to invest for the next one year, it is very tough to build an argument that there can be significant absolute gains in these stocks. Some small cap cement or other companies might offer value at some point of time but most of the larger ones have already factored in a large part of the positive. We have to wait for some opportunity and buy on dips.
