What are you making of the other side of the commodity cost pressures? The coal and pet coke prices have doubled in the second quarter for them and energy costs are higher by 17% on a year on year basis?
We are neutral in the cement space and we have very select positive calls of which
is a bit of a hold kind of a situation on accumulate call within our universe. We are not very positive on the others because we think there is going to be margin pressure and also the valuations are above their long term mean.
We were expecting revenues a little below what the company delivered just now but we were expecting margins to be a tad better. We were already building in a fair bit of margin compression and the EBITDA per tonne number was Rs 1,275 per tonne which is 5% or 6% lower YoY and about 17%-18% lower on a QoQ basis. We had been building in a fair bit of raw material cost related pressure coming through but it seems like Q3 could be even worse compared to Q2 because what I understand from analysts is that coal prices are up about 60-70% even from Q2 levels and I am not sure all of that could be passed on to the consumers going forward.
I would say that volume growth is probably 8-10% for some of the larger companies. I am not sure that would sustain but I am not sure we can see beyond that if prices are not increasing in a very material way. There is this margin pressure building up in the cement sector and that has been one key reason why we have been a little cautious on the cement sector. We have been neutral-ish and we have a very select positive stance out there. We are neutral on UltraTech and we have a sell call on most of the other companies.
Have you been following and what has been happening with the stock?
I do look at the retail sector, not so much Avenue Supermart. But I do look at a couple of other stocks — Bata and V-Mart. Those are the two stocks I look at and they have done fairly well. In the last 12 months, they have been fairly significant outperformers and I think that the open up trade has played out well for Bata.
They suffered quite a bit in FY21 because at that point in time, it was more of low-end open footwear which helped a player like Relaxo but Bata will be back in business in a significant way now that office openings are happening and schools are also opening up.
It is trading at its lifetime highs but I think that there is a structural story there which is going to be based on the fact that Bata is going to be focussing more on what I would call as non-CoCo expansion. When I say CoCo it is “company on company” operated stores. So the focus of the management is going to be more on driving growth in the non-CoCo channels which will be the reason why Bata’s revenues will probably be growing faster than what they have done thus far.
In the case of V-Mart, it is going from a regional player to value fashion retailer to probably a national value fashion retailer through acquisitions. There are fairly bright prospects for it. From a near term perspective, both stocks would have challenging valuations to look at. For those looking from a 5-10 year investment horizon, these stocks look very interesting bets.
