The Uttar Pradesh (UP) government has been sent a letter by the union consumer affairs ministry on scrapping state administrative prices (SAP) for sugarcane and suggesting a move to fair and remunerative prices (FRP) under the Rangarajan formula according to which farmers are to be paid based on revenue realisation by sugar mills. Abinash Verma, director general of Indian SugarMills Association (ISMA), said when the central government advises a state government to give up its powers, it is not a legal battle. In an interview, Verma said this was a clear and specific advisory from central government. “I think that UP government will probably fall in line.” Under the Rangarajan committee formula no farmer is likely to suffer, he added. Some farmers may even gain because of this formula, Verma added. “Yes, it is going to be a win-win situation for both the farmers and the industry,” he said.
We expect that there might not be any cane price arrears in UP, says Abinash Verma, director general of Indian Sugar Mills Association.
Edited excerpts:
What is your sense, it makes a lot of economic and commercial sense to back the Rangarajan formula or the FRP, what are the chances it will be adopted in UP?
If you remember we did speak almost about two-three months back when the Bharatiya Janata Party (BJP) government took over in UP and we discussed that the possibility of a rationalised cane pricing formula or a formula or a system similar to what the central government is having, we can have in UP because there are two issues. When the central government is advising the state government to give up its powers, it is not a legal battle.
If the state government itself decides to give up its powers and decide on a Rangarajan committee formula or a rational formula, it is going to happen.
We did not talk about legal provisions there. So that is number one.
Number two is now that the central government after four years—after 2013 there was no advisory from the central government to any state including UP—so this advisory now coming in from the central government, is a very clear specific advisory if you see the details, then you will see that the UP government will probably fall in line. Thirdly, you need to see whether the farmers will benefit or suffer from the programme. Rangarajan committee formula talks about the revenue realisation of the sugar mills, which is the ex-mill sugar pricemultiplied by the sugar recovery, multiplied by 75% and if you calculate that at even current ex-mill price of Rs38 in UP, you will see that it will work out to around Rs305 of SAP, which is currently there. So no farmer is going to suffer.
In fact, some farmers might get a higher priceif they are attached to sugar mills which are having higher recovery than 10.6, some mills have even reported recoveries of 11.5%.
So some farmers will gain because of this Rangarajan committee formula. Are you saying it could be a win-win for both, companies and farmers? Also, could this be a record year for companies operating out of UP? Yes, it is going to be win-win situation for both the farmers and the industry because the farmers suffer because of delayed payments.
They have sown the crop for almost 10 months and if they get their payments of cane pricebecause the SAP is unreasonable or unreasonably high then obviously they suffer, they have to borrow something from somewhere to meet their ends but if this formula comes in, it is going to ensure that the millers will be able to pay as per their revenue realisation.
Therefore, we expect that there might not be any cane price arrears in UP. So that way the farmers benefit. That is number one.
Number two, this Rangarajan committee formula as per the current prices—and we expect current prices to be stable for the next 12 months if not move up by a rupee or two—then the formula throws up a price of cane price which is going to be very close to SAP and in some cases, it is going to be higher than the SAP in UP.
The Indian market has been witnessing a record run in the past few months, with indices clocking fresh highs in almost every session but concerns related to rich valuations of stocks remain. Franklin Templeton Investments believes that the market is not in bubble territory yet. However, there are pockets of over-valuation in mid-caps and small-caps. But, there are some stocks that are undervalued among them and investors can buy them, said R. Sukumar, managing director and chief investment officer, Asian equities, Franklin Templeton Investments, said in an interview.
On earnings growth, Sukumar highlighted that the consensus view on the growth is that it could be higher compared to the long-term average of 14-15%. There are reasons to expect the margin to be higher as well, he added.
On a sectoral basis, he said that he was happy with the performance of private banks. Sukumar said he is positive on the consumer discretionary space. Edited excerpts:
The market is at all-time highs and we have seen domestic liquidity driving this market. As a mutual fund with so much money pouring in, what is your call now? Are you deploying all the cash that you are getting right now or are you taking some cash call for the market to come down? How are you approaching market right now?
Yes, there are flows into mutual funds. We have individual portfolio managers who manage those portfolios but in general we do not try to time the market unless we feel that the market is overvalued and is in a bubble zone in which case we make specific exemptions and those exemptions are usually approved by the trustees etc. At the current juncture we do not see that situation, so the cash that goes into the funds, would generally go into stocks.
The market is not in a bubble territory but there are a lot of people
who worry about even current valuations.
There are pockets in the market which are overvalued especially in midcap and smallcap space there are concerns where even a majority of the stocks could be overvalued but from our portfolio manager’s point of view, as long as they can find enough ideas which are undervalued, we are happy with the situation. So we do find undervalued ideas at this point of time and so we would use cash to buy those ideas.
Financials have led the rally and are at record levels and peak valuations but so far it has been lead by private sector banks as well as nonbanking financial companies (NBFCs). Will that continue or do you see public sector undertaking (PSU) banks catching up?
I cannot comment from a very short period of time but from three-five year point of view we feel that private sector banks are still going to outperform the state-owned banks but of course there could be specific state-owned banks which could do better compared to the overall banks’ performance. And within the private sector banks there is going to be quite a bit of divergence between the ones which are successful and the ones which are not so successful. So in general I would think that there is going to be quite a bit of dispersion between various banks’ performance and so to that extent stock pickers can generally do better than the overall performance of the bank index.
There is no denying the global tailwind that has also helped us. It has lifted many boats in the emerging market space. Is that likely to be largely in the favour of risk in 2017?
The way I look at the global equity markets is that they are undervalued in relation to most other asset classes. So when you compare equities to bonds, the implied equity risk premium is higher compared to the long-term average. When we look at the implied cost of equity, it is close to the long-term average which means that equities are probably not overvalued compared to where they have been trading in the long-term whereas they are undervalued in relation to bonds and people have allocated much more money to bonds and equities in their portfolio, so it is least risky asset in my view for longer term savers.
What are the risks for this market because we have not seen any correction in this market over the last eight or nine months. I think it is the longest stretch that we have seen for a market without any decent correction?
The market has become more mature. I think the volatility of the market has come down, so, when we look at the absolute performance of the various indices, I think the large-cap indices have moved up slightly more than the cost of equity which means that there has been no excess optimism or pessimism. The views have been similar to what it was a year ago. So, people are not up there longer term. However, as in the case of midcaps, I think the stocks have rallied quite a bit which means that people either have very high expectations or probably just chasing momentum. So, the risk there are much higher.
What will the rally in the Nifty or rather in the big stocks be led by, which sector?
We are bottom-up stock pickers. So, we think that there are going to opportunities across most of the sectors, but when we look at many of our portfolios at this is point of time, the financials have the highest weight and within financials we have the private sector banks as the biggest holdings. Again, within private sector banks we have banks which have generally managed their businesses much better, especially the quality of assets apart from having a very good retail liability franchise.
The performance has been pretty good for the top holdings, not only the stock performance, but when we looked at various metrics on how operationally they have been doing, I think we are pretty happy and strategically they have been making investments in information technology or not routine information technology. There you need information technology to differentiate their business processes leading to better customer satisfaction, leading better marketing to customer and so on. So, we are pretty happy with this part of the portfolio and also we have got a better exposure to consumer discretionary and industrials where we see fairly robust demand growth going forward.
A word on earnings, so far every quarter we have gone into quarter thinking that maybe the worst is over and earnings should start to pick up, but that has not happened. However that has not deterred the market. Do you think the market is pricing in an earnings recovery any time soon over next two or three quarters?
Yes the consensus view is that the earnings growth for the next few years would be higher compared to long term average and long term average has been about 14-15%. Last few years has been below long term average because of margin compression and of course we had quite a bit of extraordinary write offs in the case of banks and some other sectors.
With cyclical improvement and this write off not recurring over a period of time, there is a reason to expect that the margins should be much higher. Also, currently we are much below long term average and there is every reason to expect some mean reversion there.
A final question on insurance companies. In India, the one or two that are listed or one that is listed is getting premium valuations, but at least six are waiting to enter the market. What are your thoughts?
We think it is a good sector. We do not have exposure to the sector in our portfolio. It is not that we think that there is no growth opportunity there, but when we look at whether we have stocks which offer good margin of safety, we don’t find any ideas at this point of time. Of course that could change depending on what happens in terms of the market price of these stocks.