June 17, 2024

“You are seeing what is with this all this global warming and the temperature touching 46, 48 degree even in the month of April and early May, so I think power is a structural story and there will be a lot of opportunities in this sector,” says Madhu Kela, Market Veteran.
Given the increasing demand for power due to factors like global warming and higher temperatures, and considering the structural growth story of the power sector, what are some strategies for investors to identify undervalued companies within this sector that have the potential to provide reasonable returns over the next five to ten years?
You have to dig a little bit more deeper and you will be able to find companies. Whether power sector will have growth for the next five to ten years, I have absolutely no doubt in my mind. Now whether it is a thermal power, whether it is a renewable power, we require power. You are seeing what is with this all this global warming and the temperature touching 46, 48 degree even in the month of April and early May, so I think power is a structural story and there will be a lot of opportunities in this sector.
However, I would say investors need to be careful when they are investing. They need to do their homework. Now it is more about not top-down. It is more about bottom-up. The top-down sector has played out but it is more about digging and really being able to figure out this is the company which is still undervalued and this is a company which has potential to give reasonable returns over the next few years.

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One more point which I would like to suggest that because as you rightly said lot of money is being made in this sector over the last three-four years, so one has to be really in the expectation of return one has to moderate the expectation and look for reasonable return. You just cannot extrapolate what happened in the last three years exactly the same thing will get repeated over the next three years.

These are the bull market is perhaps over and now comes the tricky part where you have to dig deeper and find better quality names, so that is the word coming in from you.
I would correct, I do not think the bull market is over. I am sorry I will correct you. I do not think the bull market is over. I think the easy money is over. You could buy anything and make money that is over. I think now it is a more difficult part.

You also went behind PSUs when nobody was talking about them, be it PSU banks and several other PSUs and the journey of not so efficient kind of business models to now efficient and almost compared to their private sector peers on several performance metrics, the journey has been long and very rewarding. Do you think the investment argument for PSUs is still as intact and strong across sectors? What are your thoughts on PSUs?
I do not think it is either strong from a stock market perspective on the overall PSU sector. I would say but there are pockets like I would make an argument and you know my bullishness and I hold a couple of stocks still in my portfolio. So, investors must do their own due diligence before taking action on what I am saying. I still remain very-very bullish on the PSU banks for instance selectively. I think they are not trading at crazy valuation. Some of the large banks you can still find that they are trading at 5-6 PE multiple if you are willing to take a two-three-year view. Now why should a public sector bank which is making 20% ROE should trade at 5 or 6 PE multiple? I am not able to figure out. Market has re-rated quite a lot in the last three years in terms of prices have gone up, but the valuations have not yet become crazy for me to give the discomfort but the same level of comfort I do not have across PSU sector.

One section of the market is getting attention we have not seen in almost several quarters that is consumers and within consumers I do not think you have looked at anything beyond liquor stocks. So, I am tempted to ask you a little more about consumers overall right from staples to discretionary but in particular last three-four days liquor stocks are making big moves, you had some of those names for two-three years now, they have done well, what has changed and what are your thoughts on liquor if you can explain that.
You have to give me some time to explain this. Just to clarify I hold some consumer names but that is fine. So, liquor in my opinion is a very good structural theme in India and I think this sector will play out over the next 5 to 10 years and let me give you the reason.

So, we analysed China in detail. The largest company in China makes over 10 billion dollars of profit, let me repeat it makes over 10 billion dollars of profit, it sells 600 million cases of liquor and it has a market capitalisation of 325 billion dollars even in a Chinese market like currently what it is trading.

The overall profit pool of Chinese companies all put together smaller companies, big companies, some private companies would be in excess of 15 billion dollars.

If I compare that to the overall profit pool of Indian companies, it will not be even 1 billion dollars at a PAT level. So, now this is an industry or this is one segment which you can strictly compare because there is no reason why liquor industry will not be as vibrant in India as it is there in China, we have more people as compared with China now, younger population who will look to consume liquor, once per capita income increases we have seen in lot of other places that this liquor consumption has increased and hence there has been birth of many-many valuable companies, that is such a point number one.

The point number two, why is it so in India because it is a state subject and there is lot of inefficiency in this which is essentially holding of the sector. Let me just give you one example. When Yogi Adityanath government came in Uttar Pradesh the total excise revenue of Uttar Pradesh was 17,500 crores. It was around 8,000 crores in 2010, from 8,000 it went to roughly 17,500 crores by 2017-18 when the government came in.

Today that revenue is 50,000 crores, I repeat again, it is 50,000 crores, previously it was 6% of the overall Uttar Pradesh revenue collection, as of now it is over 10% of the overall revenue collection when the revenue itself has doubled.

So, you have seen what a positive government can do because they came in, they cleaned up the whole system, previously it was only one wholesaler which was controlling the whole state, they cleaned up the full system and they came in and you have seen the results and it has become a clean system now.

There are 500 wholesalers, retail shops are being auctioned and it is a fair system now. I see this will put a lot of pressure to other states to replicate because we know states are really stretched for revenue and I see it starting now Chandrababu Naidu in Andhra Pradesh I am quite hopeful he as a pragmatic leader will take the same approach and I will not be surprised that if other states by force or by choice will have to follow the suit.

Once this becomes then the overall profitability of the sector will rise and we have to play this and I am not speaking from a 1 or 2 year perspective I am speaking this from a next 5 to 10 year perspective, I think there is a lot of wealth creation here and I must disclose I have significant investment in this sector.

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