“Power and power equipment is something that we really like because we think that in the wind and in solar we could see doubling of capacity in the next three-four years,” says Sridhar Sivaram, Enam Holdings.
So, when you say that you find more value in largecap pocket, which are the themes in largecap which you like? Is it telecom? Is it anything else?
Sridhar Sivaram: So, telecom is something that we have been bullish for a while and the rough numbers based on the ARPUs that have gone up is that the industry revenues can go up by about 40-50 thousand crore, now that goes straight into the EBITDA even if you take a 10 times EV-EBITDA that is 5 lakh crores of extra market cap for the industry. Then, you can figure out how you want to allocate between the three players, but that gives you a reasonable leeway to play around with that. We think ARPUs will continue to move up given that they have been flat for multiple years now, so that is a secular theme that we like.
Financials, I already spoke about. Power and power equipment is something that we really like because we think that in the wind and in solar we could see doubling of capacity in the next three-four years. Wind from some about 40 gigawatts to around 80 and in solar from about 70 to say about 200 and same is with thermal that we could see an addition of 40-50 gigawatts in the next few years and this brings a huge opportunity for the power equipment players.
Having said that I have to also warn that power equipment companies have really gone through the roof and obviously at this stage they look very expensive, but they could show 40-50% earnings growth over the next few years.
So, when you say power equipment, you mean the most obvious larger candidates or you are going a step deeper as well. Similar, for renewables and solar, there are only two-three companies there.
Sridhar Sivaram: So, in wind the number of players are far lesser, so the opportunity size will be split between a few players, so that looks quite exciting if the number of players are less. In solar, the number of players are far more, so the opportunity is going to get split between a number of players there.
But in power equipment I think at the end of the day if you generate power, it has to be transmitted, it has to be distributed, so the entire T&D play, your transformers, the entire ecosystem starts to buzz and recently one of the companies suggested that for the current year they will have 400 basis points of EBITDA margin improvement from 10 to 14 in one year.
Because of debt reduction?
Sridhar Sivaram: No, this is the EBITDA margin improvement because of the fresh orders. I mean, those are not things that you normally see where power equipment company coming and saying that your margins are going to improve by 400 basis points. So, obviously this space is very exciting. Having said that as I mentioned that the valuations have also gone up, so one has to be cautious. But earnings are going to be very strong.
The last time that we spoke with you, you were talking about within manufacturing of course auto ancillaries and you talked about some chemical companies as well. Does that call still hold?
Sridhar Sivaram: It stays. So, I think especially in chemicals and in auto ancillary it is no longer China plus one, it is also Europe plus one. So, number of European companies especially in the chemical side, you are getting a lot of orders even on the auto ancillary side which is coming from the European companies because of the own challenges that Europe is facing.
So, this is a space where there is a lot of opportunity and it is very stock specific. So, you cannot say that this is true for the entire segment. Chemicals have their own set of challenges because of what is happening from China, the dumping that we have seen in the last one year. But we think that lot of it is turning around now, so that entire space remains.
I think manufacturing is going to be a space to watch at least for the next five years. We focus a lot on services and services have their own set of challenges. Manufacturing will surely take over from here. I mean, just look at Apple as an example.
I mean, their ambition is of 100 billion exports from India over the next three-four years and they are at what 10 billion today.
Even if you assume that 80% is imported, at least 20% is going to be manufactured here and over a period the indigenisation of that entire process will ensure that we will have more and more manufacturing in India.
Since you talked about chemical, chemical is much like pharma, each company is different than the other. So, what within chemicals do you bet on? And is it the obvious larger players or do you look for something niche?
Sridhar Sivaram: No, I think it is the larger players because they have the advantage of scale. So, if you get a large order from say any European company, you are in position to execute it, put up new capacity. So, at this stage, we are more bullish on the larger chemical companies.
What about auto ancillary? I mean, I was just looking at Maruti was gaining 5%. 5% in trade in a matter of five minutes of market opening because there is a change in policy. So, when we go for auto ancillary, one is the EV end of the business which is coming and then the ICE. People are saying that there is so much focus on EV side that people have forgotten that ICE companies are not going away in a hurry. Are you going in any of the legacy companies or only EV based?
Sridhar Sivaram: I would tend to agree that today there is a fad in the market that anything related to EV and the stocks just goes up, but just keep in mind that it is very difficult to make actual money when you are producing EVs today as auto company because you are dependent on subsidies and the volumes have still not reached the level that one should.
And just look at Maruti or Suzuki in general, that they are more looking at hybrid than EVs even though they are present in EVs, but their focus is more on EVs.
I think this technology is changing, evolving. It is very difficult to say that ICE is dead and EV is the future. We do not even know what the future is. So, if the valuations and the matrix do not add up, I really do not care whether it is EV or it is ICE or whatever. There has to be some method in the madness. I mean, we are slightly old school, but I think it works over a period of time.