GSK Consumer, FMCG, Sugar, Tech

Got out of GSK Consumer, got some more into sugar (Dhampur). GSK at 20x can go to a Colgate at 25x, but 25x can also come down to 20x. Arguing that a stock at 20x becomes 25x is basically a play on momentum, and right now FMCG stocks in India have lost that momentum.

Monsoons are a big issue. Between 2002 and 2004, FMCG growth flattened out as monsoons failed successively. While we are far away from that possibility this time, markets will no longer price these stocks to perfection as it has been doing of late. For food companies (esp. Britannia, whose biggest competitor Parle hasn't raised prices in years) it is a double whammy - growth might slow while raw material costs (esp sugar) go up.

I have traded in and out of sugar over the past few months, this time I will let this one run. My thesis is - all sugar stocks are going to get priced at peak multiples on peak earnings in the next 6-9 months. I did some work on the Indian sugar companies two years back, and from what I recall Dhampur is the most levered on debt/market cap basis. Right now, Dhampur is not more than 8x '10EPS - some will argue it is at 4x-5x '10 EPS. So, there is a potential double here after the double that has already happened.

What I am not sure of is - is it Indian sugar companies or Brazilian sugar companies (Cosan) that benefit the most. The deficit is in India - so the exporters to India (Brazil) should benefit more. That is something we will figure out only as time passes.

If Indian FMCG stocks lose their safe haven status, where will the long-only funds park their money if markets tank? Last year, FMCG stocks had negative beta for a time with the Sensex. My suspicion is - this time it might be tech (Infosys). Again that is something we will figure out only as time passes.

Also got out of Torrent Power when it spiked today. This was an indirect play on Adani Power IPO. This company doesn't talk to investors at all, and its financials look suspiciously clean for a power company that is on a capex spree. Maybe it runs up another 20% if Adani Power opens up with a bang. But the way Adani Enterprises has traded in past 2 weeks, I am not that sure.

Sugar, Inflation

WSJ has an article on spiralling sugar prices today - seems like there is a production drop expected in US too next year.

There is an inflation conundrum in the world today. Pessimists are wondering - how long is it before all the money printing causes prices to explode exponentially. Optimists point out to the excess production capacity in the world and are more worried about deflation. It seems for now that the optimists have the upper hand.

However, the argument of excess capacity is not true across all sectors, industries and countries. Right now in sugar, expected demand is exceeding excess supply. And it is probably in sectors like these that we will see significant price spikes caused by low interest rates and excess liquidity - much more beyond the 94% that sugar has gone up YTD. In other words, we will see very high inflation in areas where demand exceeds supply, and low inflation/deflation in sectors where supply exceeds demand - which is true for the majority of global economy. For commodities like sugar which are traded on exchanges, it is that much more easier for speculators to pile on.

This argument can be presented in another way too. If in commodities where there is a shortage don't see 2x-4x price spikes in record low interest rate environment, then the optimists on inflation are probably right - how will we get price increase in other areas with excess capacity? So more than anything else, I think sugar is a very important case study.

Disclosure: Long Dhampur Sugar

Dhampur Sugar

Sold out Dhampur today when it siked up. Last week I thought I will keep it. But it has already done so well compared to its peers as well as the broader market (it was up today when its peers were down 5% !!) that it makes sense to take money out. Shanghai is down 6% right now - that makes it down 15% in last 2 weeks.

Sugar stocks are favourites of the speculative crowd. So even if earnings are quadrupling next year, it wouldn't matter if people decide to rush to the exits en masse. But still, I think Dhampur hits 150 next year. So hopefully it falls some and a bit more.

Dhampur: Mkt Cap = 450 crore. Debt = 900 crore. EV= 1350 crore. Sep 09 EBITDA = 200 crore. EV/EBITDA = 7x. Debt/Mkt Cap = 2x

Shree Renuka Sugars: Mkt Cap = 4700 crore. Debt = 800 crore. EV= 5500 crore. Sep 09 EBITDA = 500 crore. EV/EBITDA = 11x. Debt/Mkt Cap < 0.2x

Balrampur Chini: Mkt Cap = 2900 crore. Debt = 800 crore. EV= 3700 crore. Sep 09 EBITDA = 375 crore. EV/EBITDA = 10x. Debt/Mkt Cap < 0.3x.

The EBITDA numbers are all approx. Still, the broad argument is - sugar is in a bull market. Dhampur is the most levered. So if these stocks go up - Dhampur will benefit the most. If one makes the argument that Dhampur is cheaper on EV/EBITDA and the gap should narrow, then we get a multi-bagger.

Disclosure: No position, positions might change at any time

ET: Biscuit prices to rise by 10%

ET has an article today on biscuits. Note that Parle - the industry leader - is still not increasing prices. It is the second tier players that are increasing prices. This seems to be a replay of 2007 - when sugar and wheat prices spiraled up - and Britannia's margins halved in a year. You are in a bad industry if the industry leader is not driven by the profit motive. I wouldn't be surprised if Britannia stock takes a heavy knock after next qtr numbers.

Sugar stocks get pounded

Stocks like Shree Renuka and Dhampur have been absolutely crushed. Next time to buy these stocks will be 2014. It is pretty amazing - to say the least.

Adani Power

Adani Power traded flat on listing. Good that I did not invest in it, and got the 10% return instead by playing Torrent Power as a tangential bet on Adani Power.

We need a few successful IPO's to get people really excited. Adani Power unfortunately was not it. And NHPC is also not going to be it. The IPO market might take a back seat for a few months if NHPC doesn't do well. At that time, broking stocks like Kotak might crack up a bit. And then there might be a flood of IPO's. If things play out that way, there might be an entry point into brokerage stocks sometime around Oct-Nov.

ET reports that IPO financing is picking up again. NBFC's have raised almost 10K crore for it. Good for Crisil and ICRA. They need NBFC's.

Also, by the way, it has started raining again - at least in Mumbai. A couple of days it rains more like this, an article here and there that monsoons have picked up, and agri commodities (sugar) cool down a bit. I might get to re-enter Dhampur at lower levels. Nothing ever goes up in a straight line forever - though the stock markets are doing that right now.