Betting on capital goods, agri and cement sectors: Deven Choksey

In a chat with ET Now, Deven Choksey, KR Choksey Securities, says in the next two, three years time you are going to see a larger amount of growth coming into the businesses of capital goods companies.

Edited excerpts:


What do you think was in the quarter for Reliance Industries? What do you think the stock will do today?


A few things are emerging very clearly. On on one side. we have seen the capex cycle completing for the petchem business. On the other side, the capex cycle is also getting completed now for the refining business, wherein the refinery capacity would now stand increased to 100 million tons and it would go into the commercial production in the first quarter of the financial year 2017-2018 which is next quarter.

The petrochemical segment has already expanded the capacity. Some areas would also go into the full production. So a larger part of the capex programme is over. That is the first key takeaway in this entire situation including in Reliance Jio. The major part of the capex programme is over.

Maybe further investment in expanding the network is needed, but overall the capex programme for even Jio is over. So from a perspective of looking at what could be the rise in the profit going forward for Reliance from its core businesses -- refining and petrochemicals -- with the increase in the capacity to 24 million tons in petrochemical, the company’s profit could increase by 50% from its current base eventually in the full year of working.

So either the full year of working would be 2017-18 or maybe partly it would be in 2018-19. I would think that the company’s profit base is improving from here on. Reliance Jio is promising to start the billing cycle from April onwards with 10 crore customer base which could possibly be expanded to another 10 crore in the 2017-18 financial year. This means once again promising to produce somewhere around Rs 18,000-20,000 crore worth of profit from the Jio business eventually in the full year of working.

So I think both these points are auguring well as far as the outlook for the Reliance is concerned, expanded capacity and the Jio coming into the commercial cycle.

The other thing which works for Jio is they have a large cash bag. Jio yesterday said they will invest further Rs 30000 crore in the business. That is a large worry for the existing telcos as well which are anyways cash starved. Is the call on telcos be avoid for the time being, be it Bharti, be it Ideal and obviously RCom?


Yes, certainly. The amount of money getting invested by Jio is in building the fibre network across the country. A larger part of the investment is now going to happen in completing the last mile connectively wherein your broadband is going to start operating in a significant manner which is direct to home, direct to offices kind of a network which is being created. This is likely to drive a large amount of data traffic for them eventually through this fibre network and that is where major capex programme is going on.

It also says that if other telcos have to remain in the competition, they will have to invest huge on the building the ecosystem, the fibres particularly. So, that is an area where I believe Reliance Jio has an edge and others will have to at least struggle for the next two to three years. During that period of investment, it is better to stay away from the other telecom companies and stay more focussed on how Reliance Jio unfolds its commercial programme.

What are the stock ideas that you are working with right now? Something which is looking good in terms of the value it currently represents and could be a good buy?

We have been liking businesses and companies in the capital goods segment which is catering to the infrastructure, particularly the power and transmission line of activities in which some of the names which stands prominent would be companies like Snider or ABB Siemens or GE T&D.

These are some of the companies which are shaping up well, but of course, have a long way to go. The order books have just started opening up for them. So obviously in the next two, three years time you are going to see a larger amount of growth coming into their businesses.

Similarly, we like the agri space, particularly companies in the micro irrigation space. Both EPC and Jain Irrigation are positioned very well and given the kind of a growth that they probably would have and are having right now, it again suggests that they should be considered along with crop protection businesses, seed business where we remain distinctly comfortable.

Cement is one more area where we feel very comfortable as a good commodity particularly cement would show a larger amount of volume growth and at the present the profit growth in the coming year and thereafter. Obviously, that is one more area which we have been liking.

Given the fact that some of the commercial vehicle companies have started performing well, auto ancillary companies could possibly show relatively a better performance going forward.

Some of the companies are available at a valuation far more attractive. So yes, you can look at individual segment and at the same time the companies there in wherein the opportunities are becoming quite large now.

Are the housing finance companies and particularly LIC Housing Finance looking good from an investment perspective?

From the macro perspective, the investment should be made in the housing finance companies. One or two key points are in their favour; a) with the cost of funds coming down, these companies are in a much better position to borrow at a lower rate of interest and housing being given a push by the government including in the affordable areas of housing.

Certainly the demand off take for the real estate on the housing side is likely to be on a much bigger volume as I see it in the next few years. Given that position companies like LIC Housing Finance or HDFC or Gruh Finance or even for that matter SBI’s home finance arm, are favourably placed as far as the growth in the housing finance business is concerned.

I distinctly believe that there would be a decent set of margin protection, NIM protection for them. At the same time, a larger amount of business to talk about and one could consider these companies from investment point of view and stay invested in the portfolio of at least two to three years of horizon from now.