Impact likely on India Inc if coronavirus issue drags beyond April: Sanjay Dongre, UTI AMC

Till three days back there was a lot of fear that coronavirus will hit global growth badly and earnings growth in India. Whatever happened this quarter was purely because of tax cuts. There is nothing much to cheer about and the telecom debt related issues are also dampening sentiment by bringing banks down. Today, again, the markets are looking perky. If you have to analyse the market, what are the positives that you are seeing and what are the headwinds?

The coronavirus issue is likely to get resolved over the next two-three weeks as we have seen the spread is actually getting contained and the numbers of deaths are coming down. Therefore, the Chinese economy should come back to normalcy in a month or so. Some of the companies that are getting their raw materials from Chinese companies tend to have some amount of inventory which will take them through this quarter. Only if the coronavirus issue gets prolonged beyond March-April will it impact the earnings of the Indian companies. At this point, I do not think there is going to be any impact, as far as the corona issue is concerned, on the earnings of the Indian companies. On the contrary, because of these issues some of the global majors might rebalance their country risk weightages and may in future shift some of their production facilities to India; to that extent, it will be positive for the country.

Another stock that is doing well today and got included in Nifty is Shree Cement. As a market veteran, how long have you seen Shree Cement as a company? What is your take on the quality of management and the way the company has evolved over a 10-15 year period?

I would not be able to talk anything stock-specific or my views on individual stocks but if you look at the cement as a sector what you will find is that the most efficient players in the industry, in terms of cost, have always benefited from the volume growth as well as the pricing growth. These companies are able to generate much higher EBITDA per tonne and therefore the free cash flow generation for the most efficient companies is always far higher. That cash flow is used for financing their capex and therefore the most efficient players in the cement industry tend to have very little debt on their balance sheet. They have been able to grow their balance sheet capacities and profitability in a much better fashion and that is what is reflected in their valuations.

What are your thoughts on chemicals as a space?

The space is looking a lot more attractive because the runway for growth for this company got extended. There is much more visibility of revenue as well as the profitability growth over the medium to long term and that is because of the environmental constraint. The Chinese government wants to cut down pollution in their country and therefore some of the chemical capacities are being closed down some market share gains are actually coming in the way of Indian companies. Also, Indian companies have proved in the past that they are credible players in the chemical industry with regards to pollution, safety and so on and so forth. Therefore, as far as the delivery is concerned they are ranked very highly by the global majors. The kind of deals we have seen in the past goes on to indicate that the growth visibility for the chemical companies is likely to be much longer and that is what is getting reflected in the valuation of these chemical companies.

There is also talk on the dependence of Indian pharma and chemical space on China for their raw material, intermediates, and API. Have you looked at this issue? Do you think this will rectify soon?

There is no doubt that some of the Indian companies are actually sourcing part of their bulk of requirements including intermediates from China. But these companies tend to have some kind of inventory in their system and therefore as long as this corona related issue does not last beyond the month of March-April, Indian companies should be okay as far as their production, revenue growth, and profitability are concerned. But this episode also throws some light on the kind of outsourcing these guys have been doing in the past and therefore we could see some companies actually having some backward integration and start producing some of those intermediates in the country.

What’s your view on the cyclical sectors in the market? Auto has been in a prolonged difficult phase fundamentally as well as on the stock prices for some time now. How are you analysing the phase of the cycle right now?

The slowdown in the economy has clearly impacted the volume numbers for the auto sector in the last 15 to 18 months but I think the bigger test will be the transition to Bharat VI from 1st April 2020. It is expected that the prices of two-wheelers or CVs would go up in the range of 6 per cent to 10 per cent while the transition cost for petrol passenger vehicles is going to be on a much lower side. Therefore, in the coming quarters, the consumers will have to get used to the new pricing for auto products. But in that space, I feel that the passenger vehicle looks a lot more attractive because one is the transition cost to Bharat VI emission norms is likely to be far lower for them and also the competitive environment in the passenger vehicle segment remains pretty stable and benign. Therefore, one can expect the recovery in the volumes in the passenger vehicles to happen relatively earlier compared with your commercial vehicles.