Steel stocks are moving higher. Which way would you lean – specialised steel companies like Jindal Essar, a PSU like SAIL or just go for simple ?
There is across-the-board demand as far as the steel sector is concerned. On the long side, there is demand from the housing infrastructure side. There is the automobile sector which is showing distinct signs of higher consumption of steel including in areas like container manufacturing facilities. It is not a question of who should be chosen at this point of time. The companies with capacity in respective categories will definitely have the benefits. Having said that, most of the companies have factored in next one year’s bull run as far as the underlying commodity price is concerned into the stock prices.
On one hand, the demand conditions remain very strong but on the other hand, if the crude oil prices soften, then it would possibly be a good time to look at some of the steel companies during a period of price correction. As of now, they are already one year forward discounted.
What did you last buy in March as the market has given a window of opportunity?
In the current fall, we are looking at the companies in the housing finance (HFC) space and
where they have got the housing finance as a subsidiary. The current fall is also giving an opportunity to buy into consumer lending companies like ICICI Bank. At the same time, we are waiting for the correction to deepen a little bit more in the life insurance segment, particularly in HDFC Life and again Bajaj Finserv. We like to have these kinds of companies in the portfolio on correction.
Also stocks of companies like Divi’s Laboratories or Laurus Labs can be bought on dips. Sterlite Technology is another stock where a higher amount of demand traction is emerging. Some of the tech companies in the midcap space like Happiest Minds can also be bought.
Following the Covid resurgence, what would be the strategy you would recommend for something like Maruti which was otherwise looking to step up production?
Auto will remain a favourite as far as the consumption space is concerned and is likely to remain stronger going forward as well. Every one kilometre of new road getting constructed, generates a significantly higher demand for auto — be it commercial or personal. So that particular trend continues as far as auto demand is concerned. There is an inflationary pressure currently wherein the input cost is going up for OEMs and they are required to pass it on but fortunately, we have a strong market currently.
The cost pressure is going to get passed on to the end consumer. On the other side, the cost of credit is remaining reasonably under control and that is again giving consumers an advantage to absorb a relatively higher amount of cost increase.
Apart from Maruti, the other stock that looks better is
. That company probably should be relatively better off going forward in the current financial year as well.
What about the ancillary plays? Do you see merit there?
Auto and auto ancillary will travel together and I guess that is going to continue as far as the outlook on the auto remains stronger, which is likely to be so. We have been observing that the government after initiating the freight corridor project in western India, has now already moved to southern and eastern India for implementation of these freight corridors to bid.
It does mean that the industrial activity in those areas will pick up and as that happens, it will create larger growth for the auto sector. We are likely to see this trend for the next four, five years at least. Maybe it has just started and from that perspective, the auto commercial vehicle space remains relatively stronger at this point of time. Having said that, in metros and other places, we are likely to see the emergence of the new generation of two-wheelers, particularly the electric two-wheelers which are gaining a significant amount of traction even though that market is relatively small. One needs to watch out that space.
Where would you like to place your bets in cement stocks?
Cement remains a very strong play because of the fact that on one side, we are getting new roads, finance and new freight corridors, Obviously, a lot of construction activities are happening. The government through its various schemes, has given a fillip to industrial activities and companies have already started expanding their capacities. Maybe in some of the cases, a larger amount of thrust is still on the brownfield projects, but some greenfield projects are also coming up in eastern India.
Put together, cement as a consumption space for the infrastructure activities is going to have larger traction and better capacity utilisation. The important play would be the pan India players because they are the ones who are having capacity across and should get more benefits. The larger ones will demand a higher amount of capacity and at the same time they would be in a much better position to utilise their plant which will create better profit-making opportunities.
However, the second-tier companies with equally large capacities like Shree Cement, Ramco Cement or Dalmia Cement remain equally strong. So apart from ACC, Ambuja on one side and UltraTech on the other side, these companies look equally interesting from the point of view of investors. Correction would give a good opportunity to add them into the portfolios.
Are the financial heavyweights set for a rebound?
Select financials definitely will gain like the housing finance business, the consumer finance business. Other than that, the insurance space is appealing. This is a good time to get into some of the quality names. The larger the size of the balance sheet, greater would be the opportunity for some of the larger banks like HDFC Bank, which continues to have AUM growth of around 20%. It has more than Rs 11 lakh crore of AUM. It makes more sense to stay with the larger players. As long funds are available at a cheaper level and they are in a position to lend it at a reasonably good spread, the banks would continue to be a favourable play. So stay with some of the quality financial space.
