Seeing early signs of cycle reversal in the power sector.
a. The power demand grew 3.7% in January after 5 months of decline.
b. The sector is witnessing consolidation as players with healthy balance sheets are lapping up distressed ones (like JSW Energy buying GMR’s Kamalanga Energy)
c. Also GOI’s continuous selling of stocks of companies like NTPC through CPSE ETF is coming to an end and the absence of excessive supply should firm up stock prices.(This has ensured that Jitenji’s mantra of buying at high PE for a cyclical sector does not apply in this case)
d. Power is in some sense a surrogate for consumption & economic recovery
e. Promoters are closely evaluating viability & days of obscene bids are over.
However as Jitenji pointed out, Discoms continued to be a factor of worry. Also, I think the other risk is that power is slowly becoming a ‘good political freebie’ (used by AAP in Delhi elections)
The OPMs of IMFA is likely to be in single digits in this year, which is the lowest in last 10 years. Do you have any visibility about consolidation in the sector, say IMFA buying Facor Alloys or Rohit Ferro-Alloys ?
There was some news of IMFA’s interest in buying Facor’s manufacturing unit of 60,000 tpa and not the mines.
Consolidation happening in the sector. Vedanta has acquired FACOR. FACOR owns a ferro chrome plant with capacity of 72,000 tonne per annum (tpa), two operational chrome mines and a 100 MW of captive power plant through its subsidiary, FPL
Over the last 15 years, Indian chemical industry has outperformed the world average growth by a factor of 2
CAGR growth in this period has been even higher than FMCG, Auto, Pharma. In fact it is highest amongst all industries
EBITDA growth has outpaced revenue growth. Speaks about quality, and acceptance
Pollution control and current CoronaVirus crisis in China will throw even more opportunities for India in the future
The world would want to derisk from China’s commanding presence and key RM dependency. India is top contender for some of this shift
India’s share in global chemical trade is only 3%. I see that doubling in few years.
Despite all this India faces a trade deficit in chemicals. I expect a lot of backward integration and companies trying to remove dependencies on China.
Chemicals despite being a cyclical sector is going to see structural growth
Beware of companies operating at abnormal margins and do not pay up for these. Always look at normalized margins. See levers for topline growth.
Sugar Industry Insights (Feb 25, 2020) - Jiten Parmar
Last few years sugar industry has been a beneficiary of government largesse. Sugar cycle turned in 2015. Post that there has been surplus production. Government has helped the industry by various incentives like export subsidy, ethanol blending, allowing cane juice to ethanol conversion, msp, etc. UP and Maharashtra are the 2 major states in sugarcane plantations. The 2 largest players in the world are Brazil and India. In Brazil sugarcane is used for ethanol a lot lot more than in India. Brazil is way ahead of any country in ethanol from cane. US is the largest producer of ethanol in the world followed by Brazil. US uses mainly corn for making ethanol.
Indian sugar scenario : Sugar still constitutes 85% of revenue in sugar companies. So, essentially it has to do well for sugar companies to be profitable. We have had record production in last couple of years. Sugar opening stock at end of last sugar year was 14.5 mt. Indian consumption is 25-26mt. This year production will be 26-27 mt. Some of the surplus will be removed due to export (which the government is giving subsidy for). Some due to diversion to ethanol, where government has been a big enabler and provided good prices. I expect this year to end at inventory of 9.5-10 mt. Expectations of a good crop for next year is again high due to reservoirs being full.
We have to understand that sugar story depends on government help a lot. It does remain a political commodity.
The risks to sugar story are:
High production next year
Current year production above the industry expectation of 26 mt (for UP one can get data as most are listed, but for Mah it is difficult as there are many private players and co-operatives)
Government doesn’t support by the way of export subsidy as expected by the industry
Crude falls, to let’s say, 40-50$. The whole ethanol story becomes very difficult. Brazil also starts diverting cane to sugar instead of ethanol
Government increases price of sugarcane, as UP elections will be in 2022
Government removes MSP
My view : One should not change narrative of investment reasons post entering the sector/stock. If you have invested because of sugar cycle, stay invested or exit, due to that reason only. If sugar doesn’t do well, I don’t think other ancillaries can save the pain.
Best time to enter sugar was in 2015 when cycle turn was evident. That’s when you make big returns. I got a 7x return in next 18 months. Post that in mid-cycle it has always been trading calls, where you are playing for percentage returns.
Remember : When downcycle turns into upcycle you make “X” returns, in mid-cycle you make “%age” returns.
Sugar industry in victim of Govt FRP and state advice price policy, leave it to market force & industry can flourish on it’s own.
Your use of words “government largesse” gives me a very good answer as to why farmers who earn more than one crore rupees every year are not taxed at all whereas investors pay STT even if they do not earn a paisa.
Sugar industry survives on govt handouts/subsidies, almost fully managed market. Like railways or air-india. They got lucky with ethanol but imports are possible and oil companies are getting into the game themselves. It is difficult to play this with brazil, politics etc. in the picture. Strangely, best time to buy was at lowest PE, recently May-July 2018. I thought commodity valuation worked contrary to that.
Co 0238 – The Wonder Variety of Sugarcane
This has been a boost in past 2 years, it matures 2-3 months faster and yields are 30% higher.
“Hence in the present scenario, the variety has helped in reducing the losses of sugar mills up to some extent. During 2014-15, Co 0238 has resulted in an additional return of 137.5 crores to the farmers and sugar mills in the UP state alone.”
Pusa Basmati 1121 and Co-0238 are two most important milestones of Indian agriculture research which directly helped farmers to increase their income.
Massive sowing of Sugarcane is UP is due to high FRP and state advised prices by Uttar Pradesh Govt. Leave it to market forces and farmers will shift from cane to other crops because it will never be as remunerative. You explore Govt interventions in this industry and you will find answers to India’s poverty.
what you say is true that govt gives SAP. But they have kept it constant for a while. This has been a problem for a very long time, and look at arrears in 2013-2014. At least, situation has been tackled in a much better way in the last few years.
And I always have maintained that it’s a political commodity. I understand that, but will shy away from discussing the actual politics on this.
Dear @jitenp sir,
What’s your current view on Paper industry? PE compression is making them look attractive but margin sustainability and China demand-supply factor are key risks.
Co (uflex) Says:
Might not be able to achieve revenue guidance of 350cr in aseptic packaging business
BOPP gross margins have gone up by 35-40%
BOPET gross margins have gone up by 15-20%
Q3 BOPET spreads were at Rs50-55/kg,
BOPP spreads were at Rs50/kg vs Rs38/kg
Sir this is from an interview of uflex on cnbc recently. The spreads mentioned by them for bopp as 50-55 / kg vs cosmo saying the same is 20/kg. Any idea why is there such a stark diff in both ?
15%