Is buying sugar stocks for short-term a good idea?
In the near-term, a large part of the positives in the sugar sector seem to be already reflecting in stock prices, says independent market advisor Sandip Sabharwal. Edited excerpts:The run-up in stock prices have been substantial in anticipation of a recovery. The conundrum that all long-term investors in the market face today is: what is factored in the price and what is not. The run-up in stock prices has been ahead of performance.Indian Hotels is doing a lot of positive things and so I am positive in the long-term. The near-term stock price movement is very tough to predict. It also depends on whether foreign tourism opens up during the key winter season this time. A lot of their high-value properties are in locations where a large amount of revenue comes from foreign tourism. That is something which we need to watch out for.Going forward, we will have to see how much the sector opens up, whether tourists get the confidence to start travelling again. But the good part of the downturn is that many companies like Indian Hotels have cut down their fixed costs quite substantially. Whenever the recovery happens, the impact on operating profit will be much better than what it was earlier. I think that explains a part of the stock price movement.March was really a good quarter because lockdowns were over, the economy had opened up and there was huge optimism around. In the near-term, there are challenges in terms of closures, fuel price hike, material price hikes, etc. Ashok Leyland is not a stock which has corrected substantially from the top, despite lockdowns and impact on profitability due to higher raw material prices. So that is the challenge. In the very near-term, the stock will find it tough to perform.Investors need to get into these stocks on dips only now. The sector has become a favourite of traders now. Earlier, it was ignored. There are huge recommendations all over the social media to buy sugar stocks. Everyone seems to be positive on them, but the fact is that the on-ground prices are still stable. Domestic prices have not moved up. There is expectation that production will go up. In that context, although the international developments are supportive a lot of the positives are in the price.In the long-term, I am positive on sugar sector because of the fact that cyclicality is going down given the huge ethanol play that is going to be there. Some companies are diversifying. In the near-term, a large part of the positives seem to have got built in.The valuations of many stocks across sectors are crazy and that includes the diagnostic space as well. Diagnostic stocks have gone up under the assumption that profits are going to balloon somehow and the growth rate is going to go to 20-30%. It is not going to be the case. The huge Covid-induced spike in testing is very profitable for them. This time, a high number of people got impacted and so the follow-up tests were very significant.Going forward a lot of these tests might not be there in the next few quarters. These companies may report a de-growth for a few quarters on a year-on-year basis, contrary to the kind of growth which they are seeing now. And the valuations do not factor that. In the best case scenario, diagnostic stocks may show a huge prolonged period of sideways movement with some correction. In the worst case, they will give up a substantial amount of the gain.Accenture just indicated what many Indian IT companies had indicated earlier that the growth is likely to be good from here on. Now the question is whether the growth will go to only 15%, which will be a huge positive, or will it remain 10-12%.This year's growth will be slightly higher because of the base effect. We have to see the directional growth pattern. There is no doubt that the investment cycle has picked up because of cloud adaptation, movement to digital, etc. That is also reflected in the way the stocks have moved. Most of these stocks have rallied substantially and are trading near their 52-week highs.The one challenge, which happens in such a cycle, is that because of the uptick in growth there is a sudden demand for trained IT professionals. As a result, the salary spike up could happen now. Whether these companies are able to pass on the salary hikes and price hikes to customers or not, that we will have to see. In the near-term, that could be a concern and margins could come under pressure. The sector is well-placed but a large part of the positives are reflected in the stock prices.