Contrarian Utility bets: 4 stocks from natural gas sector with upside potential of up to 20%

In 2008, the IPO of a power company got subscribed in less than a minute of its opening and the size of that issue was Rs 11,563 crore. This just shows the desire to own power sector stocks at that point of time. From those days of frenzy to the nadir in 2014, when power companies were on the top of the list of NPA of the banks. Power companies have seen both the extreme of valuations. It is a sector where after many failures and to some extent a consolidation, some companies have emerged which know how to deal with all kinds of economic and industry cycles. That is probably the reason why a number of companies from the power sector have seen a sharp re-rating in the last one year. Hoping the survivors have learnt their lessons.

Gas stocks have been underperforming the market for quite some time. The argument against them has been multifold, right from stagnation in terms of volume growth, companies not being able to expand in newer areas and the latest one being the threat from EV. Couple of months back, an announcement about pushing the electric vehicle (EV) more aggressively in Delhi, brought pressure on the stocks like IGL. While there is no doubt that over a period of time, EV will dominate, does it mean the end of the business of the gas companies? The answer is probably no, there are many other use cases and narrative about negative impact might be over stretched. Also the street might be ignoring the fact that these companies have enough cash on the balance sheet and also cash flows from existing lines of business to move into new areas which are part of the EV eco system.

While the recent performance of stocks like REC, PFC and recently listed IRDEA has brought focus back to one segment of power companies. But the fact is that in the last few years, the sector has been going through a consolidation. Some of it was forced by the banks due to many companies going under the IBC and some due to the fact that any industry which has gone through a troubled phase of almost a decade, the players who are able to survive tend to get more attention because they have learnt the art of surviving a tough phase which is one most important feature for long term survival. Power sector stocks are now catching up with what the market has witnessed in the last few years.

Capital good companies had faced tough times for many years. Given the fact that hardly any capacity buildup was taking place in any industry, a number had to change their product portfolio and had to live with very low margins. But all the efforts have now started to show some results. Given the performance of the stock, a large majority of these stocks have hold recommendations from the analysts.

As a sector, metal is one of the most challenging ones, not only for investors but even for the promoters running it. Right from the demand matrix of the actual product, another big part of the equation is currency. Right from how the US dollar will pans out to how other cross currencies equations impact the bottomline. Last but not least, metal stocks have a strange relationship with financial ratios, when they appear cheap based on some ratios they are actually expensive and vice-versa. At this point of time, if one looks at the news flow, it is largely negative for the sector. Probably a time for contrarian bet with a hedge.

If one looks at how the policies have panned in the last nine years. It is clear that one by one every sector has been looked upon and if that sector has been getting government subsidies in any form, the government has tried to improve the delivery mechanism of that subsidy by plugging leakage in a manner that the right person gets the subsidy and the government gets the intended result. In the case of the fertilizer industry, it started with urea getting coated with neem which was not a financial measure but had a financial impact. Similarly, there were some measures which in the short term impacted some fertilizer companies but over a period, there has been a clean up going in the industry. Will the street be having a re-look at them ?

Cement has been a sector where most of the analysts have been caught off guards. The stocks have done well and a large number of analysts have been sticking to their stands that pricing and capacity utilization is an issue. What they probably ignored was the fact that any industry which has been facing headwinds for a long time tends to sort the issues and few players are able to make a comeback as consolidation takes place. Pretty much what we have seen in power.

Every business has its own capital requirement matrix and this is what makes them prone to risks of interest rate cycle. Of all the stocks, which our algorithms come up with, we took companies from three sectors. On the list, there is one of the biggest wealth creators from the specialty chemical space. ET screener powered by Refinitiv’s Stock Report Plus lists stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy .

Among many industries which have seen a strong transformation in the last nine years due to policy initiatives has been the sugar industry. This is despite the fact that sugar is a state subject where central policies can only play a limited role. If one looks at the balance sheet of a large number of them, they are far better placed than they were six years ago and to some extent in the last two years even the institutional investors have started to take exposure in this sector which they have avoided for more than three decades.