Right now, we are in the midst of a commodity bull run. It is being compared with 2007-08. How much more room is there for an up move and what would be a sign that these stocks are now petering out?
All markets and all cycles have phases and maybe one phase of the commodity bull market is over but I think it is going to last for many more years. For investors who may have missed out on buying into commodity stocks — ferrous, non-ferrous as well as some of the other soft and hard commodities — such corrections are good opportunities to get neutral weight within the sector and maybe commodities being volatile as one can expect 25-30% correction from the top. Those are the levels to enter because there is some bit of margin safety.
I was negative when the stocks were flying and prices were moving one way. But now correction has taken place and at least the medium-term prospects of commodities, given the way infrastructure spending is increasing globally, especially in the US and other developed markets and in China, are good. From a strategic angle, it is better to just wait and look at buying into some of these ferrous, nonferrous metals or some of the other commodity stocks like copper or even sugar at further declines.
How are you looking at what India Inc has done in Q4 so far? How do you expect corporate India to perform in the first half of the next fiscal?
There is no denying that by and large most sectors will come out with very good set of numbers and of course there is base effect, there is pent up demand and there are also some other explanations but there is no denying the fact that there was an economic recovery underway after the first wave had ended.
Though the second wave is throwing up some challenges, on the whole, we seem to have turned the corner as far as economic activity and industrial activity is concerned. My sense is that maybe we will have a soft quarter-on-quarter for the June ending quarter. Thereafter, with the busy season, we will find that many businesses are doing exceedingly well and a great deal of consolidation has taken place within the key sectors.
The large players who were there certainly will be able to make very good revenues and profits. These are great times to get into equities over a longer period of time and I am pretty certain that we are going to enter into a multi-year phase of very strong earnings growth for many sectors. That is the underpinning reasoning for being bullish on stocks now.
What about the opportunity within the broader markets? Would you compare it to the kind of rally we witnessed in 2017?
Midcaps are set for revival and outperformance compared to the large cap companies. Quality midcaps have been underperforming for the past several years and some of them are at attractive levels. Overall, whenever there is an economic recovery, we have noticed that in every segment whenever there is a bull phase in play, the tier II, tier III players generally give a higher return. So. I am very positive on midcap stocks at this point of time. Whether it is banking, NBFCs, software or pharma, the midcap companies are performing far better. Risk per se for midcaps is lower because midcaps which have survived are in a very strong footing in terms of balance sheet, reach, distribution and now they are all set to take full advantage of the overall growth in these sectors and the economy.
I am very positive generally on midcap stocks and any investment theme which comes to the mind of the investor — be it domestic consumption or exports or the upcycle in the capex spending — can easily be played selectively in midcap stocks. There are quality companies which are available at reasonable valuations but keep in mind that corporate governance standard is always a risk factor in midcap stocks.
We are expecting a normal monsoon. Is agri theme something that you would like to play? Are there any specific names over there?
Yesterday’s government move to increase the subsidy on diammonium phosphate is very positive for
and this is one of the largest fertiliser manufacturers in the country. They also have insecticides or agrochemical business and they also have a good retail distribution chain for agri products. It is a pretty well managed company and they have some backward linkages into phosphoric acid as well. So that is one stock which comes to mind when you want to play the rural theme.
That apart, broadly cement is a good sector which benefits from higher rural spending and one can also look at the kitchen appliances and even consumer appliances companies. They are going deeper and deeper into tier II, tier III areas. So there are a number of companies that benefit from higher rural spending. But direct agri plays would be the insecticide, fertiliser companies like Coromandel International.
Within the insecticide and pesticide space, India came with a very good set of numbers and they are launching a few interesting products as well. They are trying to scale up their CRAMs business or rather the third-party chemical manufacturing business. Being a Tata Group company, it is available at a reasonable valuation. So there are a few winners that one can pick in the agri space and that is a good investment theme because monsoon seems to be good and rural prosperity has been pretty decent because of enhanced government spending.
I know the Covid second wave has spread to the rural areas as well but it is a matter of a few weeks, maybe two-three months and that particular risk factor will also be largely neutralised.
What are your views on Hindalco, JSW Steel?
Earnings will be fantastic for both of these companies. They are coming off a low base and this is the best possible operating environment where costs have not gone up and they have been able to capture the increase in the product prices. But the correction which we are seeing in metal stocks is a global phenomena and these companies, despite good numbers, may see a correction in the next couple of weeks or so. If the correction goes a bit deeper within the metal stocks, then those are good opportunities to trade in the medium term as well as from an investment perspective. The bull market in commodities will last at least two-three more years. There will be cycle within cycles but these companies are there to benefit and profit over the next at least six to eight quarters in a significant manner.