Muted growth, excess supply keep cement sector outlook tepid: Sandip Sabharwal

Synopsis

Sandip Sabharwal suggests that auto, consumer durables, infrastructure, and capital goods sectors, previously subdued due to elections, may see a revival. He expresses concern over platform companies' capital allocation and the lack of moat in quick delivery services. Sabharwal notes muted cement volume growth and high valuations in the EMS space, making it difficult to find value.

"Many interest rate sensitives or those plays on consumer demand revival are still in decent zone. So, I would think many of the auto stocks, some of the consumer durable companies, many infrastructure, capital good companies which have shown subdued results because of election related and delayed order booking, order flows, etc, last year could see a revival this year," says Sandip Sabharwal, asksandipsabharwal.com.

I just wanted to understand in this sort of a market where we have seen a very sharp rally where some of the sectors and most of the sectors may have actually reached a valuation uncomfortable zone to put it so, which is the sector that you think still has some more value left and one can actually look at in this sort of a scenario?
Sandip Sabharwal: Many interest rate sensitives or those plays on consumer demand revival are still in decent zone. So, I would think many of the auto stocks, some of the consumer durable companies, many infrastructure, capital good companies which have shown subdued results because of election related and delayed order booking, order flows, etc, last year could see a revival this year. So, these could be a few pockets.

I wanted your view on the platform companies. How are these looking to you right now given the fact that I believe we have got earnings for almost all of them right now and in that sort of genre, are you looking at something afresh?
Sandip Sabharwal: Not really because after the initial move towards profitability, many of these companies are taking measures which will again put a strain on their cash flows and profitability. There is, like especially Swiggy and Eternal Zomato, etc, there is a misallocation of capital happening which is exciting analysts because it leads to higher growth on the top line while they make big losses and then they keep on saying that these losses will go away after some time, that is something we need to see because food business was a good moat for these companies, but the quick delivery business has no moat for these companies. So, they could see challenging times at least over the next one year.s

Want to get your view on the entire cement space. Quarter four for the cement companies has been largely good. A double-digit volume growth is what we have seen largely for most of these companies. What is the outlook on the cement space going ahead given now that we are heading into a quarter where monsoons are going to be at play and cement demand could be slightly muted, what is your take on the sector?
Sandip Sabharwal: I do not think we have seen double digit volume growth for the industry. Actually, the growth has been pretty muted in single digits and that also lower single digits. So, there are two things. The positive in the cement sector is that the cost control of many of these companies has been so strong that despite prices being stable at the same levels where they were many-many years back, the profitability has improved. The negative part is the supply increases are so high that whatever pricing discipline they try to build in or try to increase prices that does not hold for too long and the valuations are not cheap. So, those are the perspectives with which we should see the cement sector, for them to do well from here on we need to see volume growth significantly picking up, so that is something we need to watch out for but does not look like it is going to happen immediately.

On the entire EMS theme and the EMS space because you have Amber Enterprises, you have Kaynes also that has come out with their numbers and for Kaynes actually if you look at the core EMS business that has not performed that well when you compare it to the previous performance of the company. What is your take? Do you think they are looking good?
Sandip Sabharwal: No, these companies had a selloff, then they have had a bounce back and they trade at valuations which are much greater than branded consumer durable company valuations. So, although their growth might be higher at this stage, but still even in the growth which they have the valuations of most of these companies I would say is very-very excessive given the kind of business they do which is outsourcing of products for other companies and their margins also tend to be in low single digits.

So, very tough to justify current valuations. So, there might be one or two companies which might end up doing well from here also, but broadly as a sector it is very tough to find value there.

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