Should one buy into auto ancillaries like Amara Raja, Motherson Sumi and Bharat Forge in dips?
Absolutely right. We have been bullish on auto ancillaries as well as the battery industry for quite some time and I believe it is a great opportunity to pick up these stocks at current valuation. Of course, if there is a correction, it is even better to look globally. It is a matter of time before the auto industry recovers. Initial signs are already visible.
In auto, one does not know which one will be a winner after the pandemic and also with the electric vehicles coming in a big way in Europe and the US and I am sure over a period of time even in India and other parts of the world. Auto ancillary companies on the other hand, will have their share of business going up continuously because auto companies will have more and more advanced components from the auto ancillary manufacturers.
Motherson Sumi, which has got one of the largest facilities for producing plastic equipment for automobiles which they acquired in Europe last year, are in a great position to benefit out of this. Similarly, in electric vehicles, the most important component is the battery and Indian manufacturers like Amara Raja or Exide will benefit from global orders. Also once Indian manufacturers start making electric vehicles, their demand for batteries will evolve. For a long term investor, both auto ancillary as well as battery are must haves in the portfolio.
Infrastructure, capital goods sectors are very closely linked to the economy. Do you think there is merit in betting on these names over the next few months, essentially in the second half?
I will be very careful about the capital goods sector as such. Even pre Covid, the industry has been going through quite a bit of pressure for some time. And now with Covid and almost six months of loss of revenue, production, profitability, I am not very sure if the private sector is in a position to look for significant incremental capex in the current fiscal and will probably take a call on that kind of a capex in the near future.
It is true there is some capex in the public sector, but there are other challenges in front of the government and employment generation is probably one of the biggest challenges. So I will be a little cautious on the capital goods sector. But having said that, I think infrastructure is one sector I would like to bet on on the back of the fact that there has to be a significant amount of public spending on infrastructure just to ensure that the government is giving adequate incentive to create demand in the economy. And the government can do that by infrastructure spending. We have been seeing a pickup in road construction activity and maybe the tendering process for new roads and new infrastructure projects from the government, both state as well as central. It will keep the infrastructure and the related companies on a good stead.
If I have to look at pure play road construction companies, in spite of the ups and downs in performance, Dilip Buildcon looks good. They have a credible track record and at current valuations, that definitely can be looked at.
On the other hand, think of backward integration and look at what goes into infrastructure. Cement is one space we can consider but a little carefully since there are certain pockets in India where the demand is significant but supply is limited. The companies that are in this area can be looked at. So, companies like JK Lakshmi Cement or Heidelberg Cement, Birla Corp, operating in central and northern India, can be looked at because we believe there are long-term positives as far as these cement companies are concerned. Also, one can look at some of the other building material and building related companies and these probably will do well going forward.
What about the telecom space? Would you join the bandwagon betting on Bharti Airtel as a clear winner?
I have been careful about Bharti Airtel as well. I think it has run up quite a bit and there are a whole lot of uncertainties. Of course, the AGR dues and whether it has to be paid over 10 or 15 years or something else, one does not know. Beyond the AGR, the looming auction of 5G airwaves will require a lot of investment on part of Bharti Airtel. They also have to compete against Reliance Jio, who will bid aggressively for acquiring 5G airwaves.
Under these circumstances, going forward Bharti Airtel will again come under significant balance sheet pressure for AGR dues payment and 5G acquisition. Therefore, I will be a little cautious on Bharti Airtel at current levels. It has significant potential of incremental customer acquisition and that is what is getting played out now. In spite of ARPUs increasing, I will be cautious considering the future.