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    Is the rural outperformance story over?

    Synopsis

    The rural story outperformance has more or less played out and one has to evaluate companies on a holistic basis, says Sandip Sabharwal.

    Sandip Sabharwal2-1200ETMarkets.com
    Rural purchasing power may not remain at the same level as government dole-outs reduce, says Sandip Sabharwal, analyst, asksandipsabharwal.com.

    On sustainability of the rural theme
    Rural incomes are largely dependent on agriculture and government dole-outs. The government dole-outs might reduce going forward given the fact that this year we saw unprecedented money flow because of Covid. Also when more money was put in the rural employment guarantee schemes, in giving food to people etc, there was money in the pockets of the rural folk and that got spent. It is obviously not a sustainable trend.

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    I think the rural story outperformance has more or less played out and it is going to be evaluating companies on a holistic basis, how they are doing on an overall basis rather than just the rural theme.

    On Siemens
    Like many of the MNC capital goods stocks, Siemens tends to be a very illiquid stock. Typically, a small positive or negative news flow creates swings in either direction. Therefore, post management commentary, it had a strong run. It is not a cheap stock and is pretty expensive in terms of valuation. A large part of the move has got captured already and from here on, any significant upside is unlikely.

    On fertiliser stocks
    There has been news about the PMO and Niti Aayog discussing the restructuring and merging of loss-making PSUs including those in the fertiliser space. I am pretty intrigued how one-loss making company can combine with another loss-making company and create value. So I really do not know how that is going to happen.

    All these PSUs are coming into light at the fag end of big market up move where PSUs have not participated at all. People who have either participated and cashed out or people who have been on the sidelines are now looking at some stocks where they can have some valuation argument to buy. That is the play in PSUs. Nothing has changed for most of these PSUs. Only the fertiliser, agri input companies have done well.

    Agriculture production will be good in the cropping season. The winter crop is also likely to be good. Some of these stocks might move up because of positive fundamentals but I would not suggest that people buy these stocks on all these M&A news.

    On sugar stocks
    Sugar is a good story. Many of these sugar companies have done well and the rest of the midcaps have cracked a lot. They continued to hold on, did decently well and then they went through a longish phase of consolidation. Now globally also sugar prices are rallying. These companies could start participating in the market rally because the ethanol policy has become stronger, prices have gone up and there is longer-term visibility in volume offtake.

    The best company of course continues to be Balrampur Chini. It still has significant value at the current prices. We also hold Triveni Engineering which is a combination of engineering and sugar. Engineering is taking some time to pick up, but sugar is doing well. But in terms of valuation, it is a cheap stock. These companies should give reasonable returns. I think the cycle is still to play out and in the next couple of years these stocks could perform very well actually.

    On commodity pack & steel majors
    Steel has had a strong run and it is always the strongest commodity. Globally also, there has been an uptick on steel prices and that has also percolated down in India where month on month prices have been increased. Commodities also a play on the dollar and as the dollar index weakens, we are seeing a rally in commodities. Crude has started moving and we could see a trading rally in some stocks like ONGC.

    Overall, the way the scenario is building up, it seems the commodity basket could do better than financials next year because typically in an inflationary environment, as commodity prices pick up, we see financials underperform a bit while commodities tend to outperform. There is no reason to believe that phenomenon will not continue now.

    On mobile tech companies
    There are a few companies which are there. Some are new like Route, Affle. Its is somewhat tough to understand their business models. I think Affle has a good business model and that is the reason it has done well and should continue to do well. Other than that, obviously IndiaMart is doing well and as far as their technology platform goes, I think it will grow even stronger going forward as more and more SMEs join the platform.

    These companies will do well in the long run but the only caveat is that there has been a huge interest in these stocks and they have zoomed up substantially. The valuations are upwards of 80 to 100 times earnings on a forward basis for all these companies. So valuation is an issue and we have to look at them on corrections. We should keep on accumulating these stocks on any significant correction.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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