Ethanol, Pharma Key Opportunities For Investors, Says Kotak's Anshul Saigal
When the street realises that earnings of these companies are consistently moving higher, the multiples will go up, Saigal says.
Indian companies operating in ethanol and sugar production, and pharmaceuticals firms hold opportunities for investors to put in their money, according to Anshul Saigal of Kotak Portfolio Management Services.
The dynamics of ethanol companies have changed so dramatically that the sector will see both earnings uptick as well as multiple expansion over the course of the next two to three years, Saigal, the chief investment officer, executive vice president and head of Kotak Portfolio Management Services, told BQ Prime's Niraj Shah.
Saigal also said that when the street realises that earnings of these companies are consistently moving on an upward trajectory, the multiples will have other way but to go up.
Speaking on the opportunities in pharmaceutical space, Saigal said that there are shortages of generics on U.S. racks and at the same time there are significant price cuts that the drug regulator is imposing on generic exporters from India.
To address this shortage, prices have to go up because "it has to be remunerative for the companies to actually go about and manufacture", said Saigal. He expects the cycle to play out now in 1-2 years.
This will lead to more multiple expansions and further tailwinds to these expansions, especially for exporters to U.S. There are also bottom-up individual opportunities, Saigal said.
Ethanol Profitability
Saigal expects ethanol profitability to go up meaningfully. Many ethanol companies have set up ethanol capacities and have expanded the sugar and refined sugar capacities in recent times.
The capacity utilisation will increase in the current sugar season and the next, he said.
To support this, Saigal cited an example of the largest, listed sugar producer which until about four years ago, reported Rs 300-400 crore Ebitda from sugar and none from ethanol. While Saigal expects the amount will remain same from sugar, but predicts that the company will post Rs 700-800 crore Ebitda from the ethanol business.
"The scales have tilted in favour of ethanol which is much more stable, steady cash flow business, where margins are guaranteed by the pricing mechanism and as a result profitability will go up meaningfully."
PSU Banks
Talking about banks, especially public-sector undertakings, Saigal said that the differential will be how they communicate.
Further elaborating, he added that banks that communicate well and indicate to the market that their RoE trajectory is steadily and consistently on an uptick, will see further bouts of rerating.
Meanwhile all the others will see compounding in line with earnings.
Saigal also spoke about certain opportunities, like cables and wires where earnings triggers are present and expectations are only chasing real earnings, Similarly, there is capital goods sector where the earnings power is not yet reflected.
According to Saigal, when this plays out, companies that now look slightly expensive will not be in future and as a result there will be value unlocking in these names.
"Rather than focus on where the price have run up too much, our focus is to understand whether expectations are still chasing earnings and earnings power is significantly greater than current earnings," he said.
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