Raamdeo Agarwal's best bets in stocks

Raamdeo Agarwal of Motilal Oswal Securities believes that the current market valuations are fair. He feels that the market is still buoyant and the sentiment will remain positive.

According to him, Monday's market correction was healthy. He advises investors to remain fully invested in the markets. He expects the Indian GDP to grow by 8.5% this year.

Agrawal is positive on Amtek Auto and Apollo Tyre.

Excerpts from CNBC-TV18's exclusive interview with Raamdeo Agarwal:

We have seen a huge interest developing in the auto component space and that has been continuing for quite some time, at least for the last year and a half. How long can this continue?

The story is pretty long-term. In a presentation in Delhi recently, Anand Mahindra stated that the vision of Indian automotive industry is to have something like a $135 billion turnover by 2015.

So there is a massive expectation and ambition of the industry. They think they can deliver even with some infrastructural bottlenecks. So the story is very large.

I don't have any doubts that Indian companies will do well. The only issue is that the cost is Indian but the price is Chinese. Unlike the Indian IT industry with Indian cost and American value, here it is Indian cost and Chinese value.

In the past it's been said that even if there is an auto slowdown within the domestic market, the Indian auto component manufacturers will have it good abroad. Are you saying now that may not be the case, it's more of a domestic story than an export story?

Yes, it will be well balanced. In most of the cases there is a significant domestic base. Now, the completely built autos are going to be exported from Maruti Udyog, Tata Motors, Mahindra and Mahindra and all these companies.

So clearly the high quality components will be needed within the country. They are, of course, supplying to all the biggies like Fiat, General Motors, Ford or Chrysler. So, there is a good balance.

You just concluded a conference on auto ancillaries. What sort of interest and appetite did you see and what are the big positives for this segment in the midcap universe?

The interest was pretty good; the market sentiment has improved significantly. Also, the sector has a lot of players and a variety of players- small, big and fast growing with lot of foreign corporates. So investment opportunities are varied in this sector.

We had six companies presenting. Apollo Tyres has outstanding possibility right now. This is because of the change in the cost structure for the raw materials, they use rubber and other petroleum based products.

But there were so many other good companies, which presented like Sona Koyo, Bharat Forge, Amtek Auto, MSAT (Mahindra Systems and Automotive Technologies) from Mahindra's. We had variety of presentations and the story looks exciting going forward.

Talking about tyres, we have been speaking to MRF and JK just a couple of days ago and they were telling us that despite the fall in the rubber prices unless they allow to raise tyre prices by about at least 6% they are going to find it difficult to sustain even last years margins. Do you think they are just bargaining with tyre buyers or are they facing dual pressure on margins?

The rubber prices and the crude prices slump is only 10-15 days old. That's not very old. Typically the raw material cycle is about 60 days for all these tyre companies because rubber is typically a 'buy on spot and hold for thirty-forty days' type of commodity.

So even now if you do your accounting, most of these companies would not be making much money, at least till September end or so. But what you are buying today at lower prices will enter the production system next month.

If the current prices, which are pegged at much higher levels, stay on or get marginally increased in the secondary market, they should go back from 6-7% EBITDA margins to at least 10-12% EBITDA margins.

Are there any concerns in terms of valuations for some of these auto ancillaries' stories?

There

is too much volatility in this raw material price story. Today you are down 15% and 15 days later you will be up 15%. It is too erratic right now to conclusively say that aluminium has come down from 2500 to 2000 or rubber has come down from 100 to 80.

These are all volatile right now. But for auto components, things are more contract oriented. I don't think that the prices of the special steels or alloys that they use fluctuate. They are more stable. So I don't think their raw material prices would have changed so much in the short run.

Do you see more traction within the auto industry itself in terms of the way vehicle demand has been picking up and hence auto ancillaries, as a byproduct will also be moving?

With fantastic monsoon that we had in last three-four months, agricultural production will pick up to about 2.5-3%. We can very well close the year with 8.5% kind of growth, which will be the fourth year of 8% plus growth.

So obviously the demand in all segments of the automotive sector will be booming. That is what we have been seeing in first four months performance. With the exception of Hero Honda's last month's performance, automotive demand is very good.

Since you spoke about Hero Honda and it's been one of the best wealth creators for the past so many years, is the pressure we are seeing there slightly long-term? Do you think it can come out of it because in the last quarter we saw that realizations have dropped by almost Rs 900 per motorcycle?

My sense is that in the last two-three years Bajaj Auto and TVS Motors have caught up with the product gap that Hero Honda had built up over a period of time. When they saw Bajaj Auto coming in, Honda tried to catch up with their product offerings.

In the current year's balance sheet they have written that they are going to launch seven products in the current year. Whereas the competition is not going to launch as many products.

So my sense is that now Hero Honda will try to prove that they can be as good or better in new product launches and customer offerings than Bajaj has been in the last two-three years. So we have to watch what these seven products are and whether customers will like them or not.

For some analysts, the concern was that in terms of volume growth the autos might have seen their best this year; do you disagree with that?

I completely do. Look at our consumption level- we have 7-8 million bikes and just about a million cars in a country of thousand million population. Consumption is constrained by purchasing power, but with purchasing power building up very rapidly your consumer confidence will be at the peak.

The funds are available, of course, little more expensive than what it was twelve months back, but single digit interest rates do not sound psychologically very expensive for Indians. So I don't think that we are anywhere close to the peak. We have not even done 10% of what is the potential of the industry going into the future.

Where did you see the highest interest in terms of all the companies that you were showcasing and what is Motilal Oswal's favourite now from the auto ancillary segment?

From the companies that presented yesterday, if you combine size and the valuation, then, of course, Amtek Auto is reasonably large. Second would be Apollo Tyres. That looks to be in an interesting phase at this juncture, with about Rs 1300-1400 crore of marketcap, and a billion dollar kind of turnover.

We are standing at the crossroads again staring at that 12000 mark. How are you feeling about the markets and where do you expect them to move?

I am feeling much more relived as I said earlier I am always 100% invested, even now I am invested. So when the market turned back it was a good feeling.

My sense is that markets are in a buoyant condition and volumes are also showing that. The general interest will revive in no time with this kind of a growth in the economy.

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