Will just products relocation up now? Tibrewal responses

Will just products relocation up now? Tibrewal responses

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Synopsis

“From a medium-term pointofview, these raised product costs will lead to need damage and that will bring down the product costs lower. It might be greater than the last 5 years average however such high product rates might not be sustainable over longer durations of time. But in the brief term, the chances might stay raised.”

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“Barring the near term, the structure of the cement market is rather good. Consolidation has played out rather perfectly over the last 5, 6 years and there does not appear to be too much of supply coming into the sector. That is providing us a favorable outlook from a medium to long term,” states Pankaj Tibrewal, Senior EVP & Fund Manager (Equity), Kotak Mutual Fund.

What do you make of the Holcim exit strategy and selloff of ACC and Ambuja Cements? How are you looking at the cement pack provided there is a really uniformly wellbalanced quantity of headwinds and tailwinds that the sector is dealingwith?
So on the cement side, let us break the conversation into 2 parts; one, let us talk about the sector and our view; and secondofall, the buzz of the offer going through or not going through. We will invest some time there. On the veryfirst part on the cement side, we are favorable on the sector as a entire and we think that when you appearance at it from a somewhat medium-term viewpoint of the next 2 to 3 years, the supply side is constrained. Not too lotsof capabilities are coming on the cement side and we think that the need would at least relocation inbetween 5 to 7% generally led by genuine estate and facilities.

If that is the case, the rates will be rather strong disallowing the near term volatility where raw product costs haveactually gone through the roofing. Coal rates are in excess of $300 and that is putting pressure on the margins of the cement business. So disallowing the near term, the structure of the market is rather excellent, combination has played out rather perfectly over the last 5, 6 years and there does not appear to be too much of supply coming into the sector. That is providing us a favorable outlook from a medium to long term.

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Now appearance at the rumours about a big group leaving India on the cement side. The method I appearance at it, that is from a favorable pointofview. Think about it, about 12-14% of India’s capability will modification hands. Earlier, the group had set up the plant at Rs 2,000-3,000 per load. Anybody who purchases it will purchase in excess of Rs 10,000 to 15,000 per load and the individual who invests such big swimmingpool of capital will appearance to buy or appearance for returns at least 10-15% return on capital and that suggests a lot of prices discipline would be there in the market for whoever prepares to buy 12-14% of India’s capability.

I believe it will bring a lot of discipline. We do not understand whether any such offers are takingplace. We are simply reading the exactsame media reports which you are reading however in case such a offer occurs, it will be favorable from a rates discipline pointofview duetothefactthat 12-14% of India’s capability would modification hands at a greater rate. I presume the purchaser would believe about a 10-15% return on the capital invested over longer durations of time and that will bring a lot of discipline in the market.

Today’s top 2 gainers are the underlying product plays, Coal India as well as Reliance Industries which has hit a fresh high today at Rs 2,764. Is product one sector which still has some steam left to relocation on the upside?
We cannot talk stock particular however our sense is that product costs are really extremely raised and that is increasing the threat of a international shock in our view.The worldwide GDP is approximately about $100 trillion, the oil market today is about $4.5 trillion which is 4.5% of worldwide GDP; include to that natural gas, include to that metals and include to that food – the soft products you are talking about.

The contribution of all these is now in excess of 15% which is more than $15 trillion to the worldwide GDP. Do not forget any incremental modification which implies that the incremental surplus is moving to the manufacturers and someone has to pay the expense either the federalgovernment or the customers so that surplus is getting reduced and moving to the manufacturer surplus.

My sense is that there are supply side problems on the crude side; no incremental brand-new discoveries have come in over the last 3, 4 years; no brand-new capabilities on steel, aluminium, copper big capabilities have come in and as a result, there is an intermediate need supply inequality which is leading to raised rates.

But at some point of time, from a medium-term viewpoint, these raised product rates will lead to need damage and that will bring down the product rates lower. It might be greater than the last 5 years average however such high product costs might not be sustainable in our view over longer durations of time. But in the brief term, the chances might stay raised duetothefactthat of geopolitical and supply side problems however from a medium to long-lasting pointofview, they requirement to goback back to indicate, otherwise there will be need concerns worldwide and we are currently seeing early indications of that.

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