What is the best way to approach steel stocks now? Everyone seems to be saying that steel stocks are in a good momentum and do not sell them, but it is too late to buy.
The cycle should be slightly longer term and one needs to look at opportunities to buy on deep corrections. Given the way these stocks are moving, the correction also will be very rapid and fast because trader interest is very strong. Last week or the previous week, Tata Steel fell from Rs 820-830 to Rs 700. Now it has gone above Rs 900. Those are the opportunities people have to look for.
Secondly, in any commodity cycle, it is not a straight line up. There will be various measures, like China does not want inflation to pick up and that is the biggest market for steel. As some of these events happen and as some central banks act on inflationary impulses, we will see sell off in commodities and consequently in commodity stocks.
I would think that it is very tough to give a justification to buy these stocks right now given the way they have moved. It is a virtual straight line. People need to wait for an opportunity. It is a patience game. As and when the markets give a correction, these stocks will correct more than the market because they have become traders’ favourites which tend to fall more in any market correction. Those opportunities have to be looked for. I would agree that these might not be good levels to get in.
How about looking at the derivative impact? If steel demand is strong, the demand for the graphite ancillary sector which is a big supplier to the steel sector will also be strong. and have done exceedingly well in the last one month. For those who missed the steel rally, is it time to bet on it via the second derivative route?
Yes, one could play the second derivative route but there also, the move has been very sharp and very secular. These days because information circulation is so fast that the moves tend to be very fast. HEG and Graphite India have also moved up rapidly. Where the stocks might not have moved up would be the iron ore companies. There it is more muted and one could get some opportunities.
Pure coking coal companies are not clearly there in India and we cannot play it that way. So derivative plays are few in India and some of them have already gone up very sharply. It is very tough to play the derivatives and the main cycle differently because many of these stocks tend to move up or down together.
At a time when people are refraining from going to restaurants, why is Barbeque Nation holding up?
Barbeque Nation stock price movement reflects the worst of the speculative activity which is happening in this market. Stocks have just been ramped up because of low liquidity. This has been typical of many IPOs in the past also, where for a few days they just get ramped up because of low liquidity and fewer retail investors buying into these stocks and then these stocks do not perform. Look at what has happened to Burger King. Irrespective of the quality of the company underlying these stocks, it reflects extreme speculative activity.
The hospitality industry, multiplex stocks have corrected over the last 8-10 days. They have not gone up like Barbeque Nation. Most QSR (quick service restaurants) tend to get influenced much more negatively by lockdowns. I would strongly suggest all investors to stay away from the Barbeque Nation stock.
Apart from metals, what is the other way to bet on the inflation-comeback trade? Could it be real estate?
Real estate will do well simply because real estate tends to have a very long cycle like metals. But the cycles are very different. In India, for various reasons, this cycle seems to be converging. And the prices in the real estate side have started to move up in the last one year. This move towards hard assets has come as interest rates are low. As inflation picks up and interest rates do not move up commensurately, we will see more search for yield and that will lead people to hard assets as well as other asset classes.
Real estate is a decent story, given the fact that most central bankers irrespective of the near term inflation are trying to keep rates down because economic recovery is so uneven. I would think that some of the high quality real estate companies will continue to do well. Sobha has moved up 20-25% after the results.
is still very well placed. Other high quality companies in the segment are Godrej Properties and Bangalore based companies like Prestige. We need to time entries into all of them. We have held onto Sobha and DLF and I believe these companies should do well over the next two or three years.
What is your expectation on the IT universe? The Morgan Stanley CIO survey shows that IT budgets are bouncing back to 10-year averages. So is IT still a meaty investment?
IT is sustainable. Next year obviously there will be double digit growth given the fact that the base of the first quarter of last year and the key challenge will be the margin because of the currency movement as well as the cost inflation coming up.
All indications are that wage inflation is picking up quite a bit in this segment given the demand of people unlike in many other industries. But the good part for them is that they still have that cost leverage because the sales and marketing costs will again be subdued given the Covid resurgence. Those costs will continue to remain under control. The margin is what we have to monitor. The growth range will be 8-12% for most of the companies. But if there is a negative surprise on margins and given the way the stocks have been dropped by most investors, then we could see near term underperformance. We will get to know next week as TCS and Infosys report Q4 results.
