How do you see the big drop in commodity-related stocks? Stocks are down 8-10% and people thought commodities were in a multi-decade bull run! Has that argument hit a slowdown brick wall?
You hit the nail on the head. One has to get in and out of the cyclicals at the right time. In commodities, by the time you realize something is wrong, stock prices are already down 10, 15, 20, 30%.
Every commodity bull run creates a narrative that this time is different, this time we will see the X, Y, Z ratio. China is slowing down and therefore steel will continue to boom or something. But history has taught us that this is never the case because in commodities, demand and supply coincide at some point. Rising prices will reduce demand and that is always the case.
The slide in IT-related technology stocks seems to have stopped not only here, but even in the US, the main market. Nasdaw stopped falling after a 35% drop. Of course today, and some of the selected tech stocks are doing well. Do you think the argument that growth will be greatly affected is largely based on TI stock price or not yet?
There are two parts to your question. One is IT services. There will be a significant amount of success if the US slows down significantly, which seems likely from all data points. It is already slowing down and could enter a recession. If that happens, many IT service companies will be affected.
What usually happens is that we will see a certain number of projects continue, but the new big projects stop because people start questioning the ROI. What tends to continue to perform well are sectors or industries that are affected by regulatory hurdles, and therefore financial companies, banks, etc., where the regulator requires changes to IT systems, and sectors and the companies that support those sectors tend to do well. We will have to be very stock specific in terms of which company caters to which particular market and take that accordingly.
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The last time we spoke, you had started to be positive about certain car accessories. They are also a heavy user of the commodity complex. On the one hand, there is talk of numbers that return. he is talking about big numbers and Mahindra about unmet demand. and on the other hand, its margins are cushioned by the drop in commodity prices. How will your portfolio companies benefit because of that?
Autos, auto accessories, industrials, engineering is the space that I’ve been bullish on for the last seven or eight months and they’re doing well. Going back to car accessories, we have probably seen the worst in terms of numbers. Slowly the numbers increase. Hopefully, if the monsoons are good, we’ll see a rural recovery.
Two-wheeler numbers from rural India show a pickup truck. The auto sector will do reasonably well for the next two or three years, maybe a bit longer.
Where else are you looking for value to deploy additional funds? What are you researching these days or have you been reading?
The main thing we need to understand at this point is that we have seen a change in the market regime. What that means is that in the last few years, due to liquidity, it was a phase where momentum trading was doing very well. In the last six or seven months, we have seen a regime change and we have started to see that value factors, as well as mean reversion strategies, work better.
Therefore, the focus should be on those areas where prices are still reasonable. Industrial, capital goods, engineering, real estate and real estate auxiliaries, automobiles and auto auxiliaries are the spaces where prices are still reasonable. The market may go up and down in the next two or three months. In the coming months, things may be difficult, but for the Indian economy, the numbers look very strong.
My feeling is that one tends to do better in sectors where there is fundamental growth and valuation comfort, rather than chasing high-quality, high-priced stocks at the moment.
has announced a capital expenditure of Rs 2.5 billion in Andhra Pradesh, the first in that region. The monsoon is generally a lean period for cement stocks. If they drop another 10-15%, do you think cement stocks will enter an attractive zone?
The top four or five players have been whittled down to pretty attractive valuations. Some of them are closer to replacement cost and it’s actually a decent place to consider considering the fact that there are a lot of infrastructure plans, roads are being built. If that’s going to bounce back, especially post-Covid, cement should do just fine. Valuations have started to look attractive. One can choose decent companies. The caveat, of course, is that they shouldn’t get into a price war because consolidation is happening and competition is increasing.
What about the banking space? Banking sector credit growth is back to a three-year high of 13% and even last quarter PSUs and private banks did quite well on the NIM front and on the growth front in a scenario of rate increase. What financial stocks do you like?
Financials is a place I’ve been tweeting about. Figures that have been coming out for the past few weeks show that credit growth for commercial projects has started to pick up. Credit growth to MSMEs has picked up. So fundamentally things look good. The excesses have almost gone out of the system.
We just have to see what will happen with these last two years of Covid situation. But bank balance sheets are much better than they were five years ago. In banking, we have to be very careful because these are leveraged businesses and one has to look at the larger conservative well-run banks or NBFCs. That’s where I would look: the big private players, the biggest PSUs where there is management comfort and where lending is conservative. It seems to me that in the next five years or so, banking should start to change.
The other commodity user complex is engineering stocks and mid-tier capital goods. They have begun to witness the purchase. Which ones do you like? There are early signs that capital spending is beginning to pick up, aren’t there?
Yes absolutely. PLI schemes will start to pick up now because we are more or less coming out of the Covid situation, fingers crossed. We find that the entire capital goods space is recovering. In that space I like fast moving industrial goods, FMIG if I can call it, where we’re looking at the consumable space or where there are two, three players in a market, whether it’s gearboxes or abrasives or bearings.