Rakesh Jhunjhunwala's protege, Ravi Dharamshi, is not worried about ethanol producers after government's new regulations.
The Centre on December 7 instructed all sugar mills and distilleries to refrain from using sugarcane juice for the production of ethanol to ensure sufficient sugar supply for domestic consumption and to rein in prices.
The CIO of ValueQuest Investment Advisors, who manages assets worth over $1.2 billion, told CNBC-TV18 that "this (the new regulation) is nothing more than a minor blip in the current numbers."
Dharamshi has been a big believer in the energy transition theme with ethanol maker Praj Industries as one of his big ideas.
Read the full transcript of the conversation below:
Q: How you see the change in regulation that we saw for ethanol, no cane juice for ethanol. It's for a limited period, but it's cost a fair bit of anxiety amongst investors, both in sugar stocks and in names like Praj Industries etc.as well. As a big believer in this theme, what's your take, and what would you do here now?
A: Without commenting on any particular company, what I would like to say is this that this year, of course, a couple of the major sugar producing states, Maharashtra and Karnataka have had deficient rainfall. So that is going to lead to a significant reduction in coverage area for sugar. And that can lead to some sort of a shortage in the future. Hence, government is being proactive by cutting down on the production of ethanol from the molasses root.
However, just to point it out, incrementally, all the new capacities that were coming up for ethanol production were all already moving towards grain-based production. And in fact, I would say the, the story going forward is going to be less and less about the first generation ethanol being produced from sugar and molasses. And it is going to be about second generation where it will be produced from agri residue, forest residue, and those kinds of feedstock. So in general, the biofuel story of India is more about multi feedstock and multi output. So I don't think this is anything more than a minor blip in the current numbers.
Q: So nothing changes in that sense. Because the point is there are various ways right in which this transition will take place. So, in that sense, you would continue to believe in the names that you own, you would probably add more at lower levels.
A: Energy transition remains one theme that we very strongly believe in. World has no choice but to move away from fossil fuels, move towards renewables and move towards circular bio economy, essentially using more feedstocks, which can be recycled. So I don't think there is a choice as a humanity that we have. But various technologies are at various stages in terms of commercialisation in terms of adaptation so there will be fits and starts, no doubt. And there will be times when there might be tightness in the older technologies like fossil fuel as well, which can go into shortage, but it is more likely to be a shorter-term phenomena, then anything. Over a longer term period, we have no choice but to move towards newer technologies.
So in that sense, for example, second generation ethanol is still a technology that is not commercially viable. But at the same time, the motivation remains high the intent of the governments, the policies, and the money that will flow towards this eventually has to bring the cost down. So we are moving in that direction, but it will probably take some time.
Sustainable aviation fuel is another technology, for example, even electric vehicle requires a lot of infrastructure build up before the adaptation can start. So I think various technologies are at various stages of adoption.
Q: You think now the time has come for some of these heavyweights. HDFC Bank, Axis Bank of the world that haven't done anything in 2023 You think the time has come for them to perform and how are you feeling about this space now?
A: I do tend to agree with your assessment over there that the time has come and allow me a few minutes to explain why I feel so. So post-COVID We actually did a great job managing COVID as well as managing the balance sheet. At that point of time, we were all creeping that, you know, government is not doing enough to provide fiscal stimulus to help the economy revive. But today we are in a better position because we didn't bloat our balance sheet at that point of time. So, our inflation is also in check and our balance sheet is also still not out of shape, which most of the developed world is facing today.
So, from that point of view, India was already a relative outperformer in the world, but most of this relative outperformance was driven by domestic flows. Now, that is going to change going forward. The one of the reason why the foreign flows were kind of not coming to India was kind of uncertainty, we are too close to the central Elections for next year. And there was uncertainty regarding whether there will be political continuity and stability or no.
Markets like stability and continuity so, post the Assembly elections, the probability has moved in favor of continuity and stability. And that is why the markets are actually responding to that. FII positioning overall in the market in the cash market is at the lowest level ever, they own about 16.6% of the Indian equities, which is a decade low. Positioning on the derivatives market side has also been on the, till very recently on the short side. Last two weeks have seen inflows of about $3 billion odd come in, and I think this is just the beginning of a longer term trend. And whenever FII flows come in, it eventually flows into the large sectors like financials and IT because that is the space that bore the brunt of the flows going out now that is going to be the beneficiary of the flows coming in.
Read Here | Surge in FII flows seen on BJP's 3-1 sweep in state polls, says PhillipCapital — check top picks
Q: My question was more about specifically for the banks. So, I mean, this banks versus IT argument, right, that we generally have, do you think banks will now take center stage, at least in the first half of the new calendar year? And if yes, do you stick with the larger banks HDFC Banks of the world.
A: So, absolutely right. The larger banks, larger private banks are available at a really, really attractive valuation from a five-seven-year perspective. And these, this space still remains relatively a high growth area. 18-20% growth for some of the large banks is a very commendable growth over the next three to four-year horizon. And when you look at the financial space globally, you will not find too many financial companies growing at this kind of rate.
So, from a relative perspective, maybe there are some smaller banks which can grow faster and don't rule that out. But this is the best risk reward available in the market in my opinion, where money is easily going to flow into this sector and there is going to be an outperformance of the large private banks going forward.
Q: Just to another theme, which has done phenomenally well, which is PSUs and it's been described as the leader of this bull market. And it has been so far and perhaps many believe it will continue to be. What are your thoughts there and PSUs of course, is the common thread across a range of companies in different sectors, do you believe that and where do you find the maximum opportunities from here in that space?
A: I am not a believer in that a particular sector should go up because it is owned by government, no. Even within PSU there are different themes, one is a kind of extremely cheap valuation, second is some improvement of some efficiencies and third is there are some businesses which are almost monopolistic in nature. So we are more tilted towards businesses which are more monopolistic in nature rather than towards, kind of a reversion to mean trade because the valuations are very attractive.
Yes, it's a rising cycle, and usually all the companies tend to do well in that space, so even a company that does not have any kind of a competitive advantage in a rising scenario will do well. But there will come a time where as you were mentioning, before we started speaking, that there will be separation of men and boys going forward, because the NIM pressure will start showing, I am talking about the bank specifically, but ability to gather CASA, ability to open up branches, execution, ability to adapt to the new digital age, all that will come into the reckoning going forward.
Also, some of the PSU banks are actually levered almost 15 -18X, and it is not a choice for them. Yes, the first QIP for the PSU bank got off to a flying start, they got a lot of demand, but it is more a need it and it is not a luxury, they are raising capital to reduce their leverage. It is not the growth capital that they have. So I am not going to paint every PSU with the same brush that okay, it's a PSU, this is the market of PSUs, let's buy PSUs. I have to be first excited about the business then it doesn't matter to me whether that business is owned by government or is it privately owned.
Q: You track the pharma space very closely, so your thoughts on what's happening with Dr Reddy’s. There is this US FDA note that has come through and some of the observations seem like they are severe, according to some analysts, but if you if someone holds on to Dr Reddy’s for the long term, should they be worried?
A: I won't be able to comment on a specific stock. But I can tell you, yes, there are some issues with FDA compliance and FDA tends to constantly keep increasing the bar. So I am not saying these are bad companies or there are lapses of course but the goal post has also been constantly moving higher and higher. So won’t blame the Indian companies too much. But the main problem in the pharma space is not that they have US FDA compliance issues but it is also to do with the fact that the competitive intensity has been tremendous in this space.
The buyers have consolidated in the US and the sellers are actually fragmented, so the buying power has been shifted in the favours of the buyers. The base business that these companies have of the oral solid generics constantly keep deteriorating on an annual basis by anywhere between 8-10%, so they need to introduce new and new products just to stay in the same place.
The problem with the Indian pharma is that they have not invested enough in innovative R&D to be able to replace that pipeline of drugs with some blockbuster products that can take them through. There are some one odd complex generics or one odd inhaler or bio-generic opportunities, but no great innovation coming out of India yet and has been a bugbear where their dependence on the commodity business still remains very high.
Also Read | Food Ministry letter to sugar mills — how the ethanol curbs will hurt India's sugar industry
(Edited by : Shweta Mungre)
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
