shares to buy | investment strategy: favor metals but limit exposure: Sunil Singhania
What about metals? Is the sector’s sensitivity and correlation to what’s happening around the world making you rethink your investments in metals? They’ve had a long spell in the sun since the 2020 lows.
Our view on metals remains positive. We have exposure to the steel sector, but we’ve always been aware of the fact that you can’t have very large exposure to metals because they are deep cyclical stocks and so we limit that exposure to maybe 5 to 7 %.
With regard to steel, balance sheets have never been healthier than they are today and from six times debt to EBITDA (Rs 3 lakh crore debt for the sector and Rs 50,000 crore EBITDA) we moved to single debt to EBITDA (debt is Rs 1.50,000 crore and EBITDA is also Rs 1.50,000 crore). In the short term, some companies are facing headwinds from rising input costs, particularly coal. But despite this, the impact of the PBT is not significant because the main component of the cost, which is the interest cost, has decreased quite significantly.
Going forward, over the next two or three years, balance sheets will only improve and therefore any correction in this segment should be used as an opportunity. Globally, every country is considering spending money on infrastructure. In this kind of scenario, demand is going to be quite robust. New supplies are not available for at least the next two to three years.
Also read: Core portfolio unchanged but now focused on capital spending and domestic consumption
All of this means that the environment is pretty decent. We must be aware that obscene margins can never continue in any commodity and the same goes for metals. But even with decent margins due to a very neat and decent balance sheet, earnings growth for many of these companies will be pretty decent. We will be optimistic and positive but at the same time, being deeply cyclical, we advise investors to have a limit on their exposure to the sector.
During the December quarter, you took 12 stocks and reduced your stake in nine companies. The one where you really increased your stake is Sarda Energy & Minerals. Why?
It is of little consequence and you should ignore it. Normal position fine-tuning is an ongoing process for any fund manager. I don’t think we’ve changed our exposure significantly and anyway, it’s our job to keep looking at new titles. I don’t like talking about individual stocks and even if you ignore it, you won’t lose anything.
What’s your take on one of the main themes we’ve been hearing about lately? We don’t know when the US Fed will raise rates and how that will impact the banking landscape at home. How would you play this theme?
We are quite bullish on financials and it is both fund-based financials and normal fund-based financials. In this debate about public sector versus private sector banks, one has to bear in mind that a private company would have certain advantages over a government owned company and therefore their valuations to that extent are also better.
The other thing we basically need to consider is not just the absolute price to book or PE, but also the growth and return on equity behind it. Wherever, even on the public sector side, these matrices perform better, investor interest is also quite high. So for 2021, many of the so-called very good private sector banks hardly performed. There were a few so-called corporate private banks that gave you great returns, and then a whole host of public sector banks that gave you fabulous returns because, out of utter ignorance and apathy towards them, these banks performed much better than expected.
We have come to a semblance regarding their valuations. So as an investor you have to keep your eyes and ears open and keep watching but it makes sense to say that the private sector would trade at a slight premium or a decent premium over public sector companies because of the freedom they enjoy.
We have a small exposure to a few public sector banks, but our financial services exposure is mainly to a few so-called corporate banks, a few NBFCs and many non-fund based financial services including insurance and some brokerage firms.
The big IPO of LIC is approaching and Rs 50,000 to 60,000 crores will be raised. Do you see this having a short-term impact on market liquidity and the dynamism of flows?
Yes. This is 4 times the largest previous IPO and to that extent it is obvious that liquidity will be sucked in the short term. But in the past we’ve seen that – I’m talking about the 25 to 30 year history – bigger floats attract bigger investors and so it’s possible that new investors of the type that we haven’t seen before be drawn to the country because of the opportunity to invest like a billion or two in a single company. So we don’t know.
I think it will also depend on the valuation of the IPO and the prevailing environment at that time. Right now we are facing headwinds related to inflation, interest rate fears as well as the Russian-Ukrainian issue. Investors’ recent past experience in IPOs, especially in the last three or four months, hasn’t been great, but things can change quite dramatically. We’ll take it as it comes.
Right now we are worried about inflation, but at some point inflation will start to peak or reverse. The beauty of the market is that you have to plan investments before the event happens. Is it time to get back to inflation consumers instead of partnering with producers because every time inflation turns the margin picture will change so will the pricing of momentum. Is it time, say, to buy automobiles, paint companies, cement plants?
We do not see a scenario where commodity prices would fall very sharply. Certain raw materials such as oil. which have increased dramatically. could return to $70 levels, but the normalization of inflation will largely be a base effect scenario. I think economics to that extent is pretty funny. If something goes from 80 to 90, we have a 12% increase and then when 90 stays at 90, inflation becomes zero despite the fact that prices have not fallen.
I think the future should also be positive for consumers. That said, we are quite positive on domestically oriented sectors, perhaps cement which is impacted due to higher coke prices; steel, at least in the December quarter and possibly in the March quarter, will also be impacted by higher coke prices and will begin to normalize. As for other sectors. I’m sure their margins will also increase.
In the case of paints, this sector has a price beyond perfection and Grasim has already announced its foray into paints. JSW Group is already present in the paints segment. I learned yesterday that the JK Cement group was also looking to get into paints. When valuations are so high, many companies will want to launch their own paint variants. It won’t be very easy, but given the valuations and the headwinds in terms of increased competition, we would stay out of this sector.