How do you think investors should be approaching metals?
We do not invest in commodities because we look for consistency in earnings. Commodities are, by definition, cyclical in nature and dependent on the global demand and supply dynamics. But having said that, from a macro standpoint we are watching the inflation scenario play out globally. There are demand tailwinds coming through particularly in the US where both monetary policy and fiscal policy are in sync. For the first time in 10 years, you have had consumers with money in their hands. There is a case to be made that the world’s largest economy is on a tearaway recovery mode and that should augur well for commodities in general.
However, we are also seeing the other side of the argument that a large part of the rise in commodity prices are being driven by certain supply constraints, particularly in China. In India, the latest quarterly results are clearly demonstrative of the fact that demand is not that strong because a lot of companies have reported margin compression sighting raw material price increases. So if demand does not recover, sooner or later that should start getting reflected in metal prices. As supply constraints ease post Covid, there should be a cooling off in metal prices.
How you are looking at the overall earnings season? Will we see further acceleration in earnings growth?
On the demand side, Q1 will be a subdued quarter because of the lockdowns. The Q4 results also benefited from the base effect. We had about 15-20 days of shutdown in Q4 of last year and so a lot of the numbers look really good. However, there was indeed some recovery in January and February of this year. In April, May and June, there is no doubt that the demand will be subdued. But what we have seen last year as well as in historical periods of crisis going all the way back to World War-II and other crises, consumption roars back pretty strongly.
We suggest investors to focus on companies which have gone into the crisis with a very strong position either in terms of balance sheet or a competitive position. Such companies will be able to weather the crisis much better. On the other side of the crisis, they have gained disproportionate benefit of seeing both demand recovery as well as relatively less competition.
What kind of opportunities are you sensing in the broader market?
We are more bottom-up investors. We are looking for companies which can withstand adverse external economic conditions. As Covid has proven to us, it is very difficult to invest top-down. Over the last five years, we have seen several such unanticipated disruptions in the economic environment, whether it is demonetisation or introduction of GST or NBFC crisis in 2019. Who knows what will hit us tomorrow? Therefore, our investment philosophy is more about being prepared for the worst. If you invest in companies which are fundamentally strong from a bottom-up perspective, they will be able to ride out the crisis much better with very little drawdowns. And more importantly, if you are able to survive a crisis then these companies tend to give you that double benefit of a super demand recovery alongside market share gains. Therefore, we do not think about it from a thematic perspective or a secular perspective.
However, if you take a longer term view for the country as a whole I think there are two or three bright spots. Financials across banks, NBFCs, insurance companies, etc are ripe consolidation. We will see the big becoming bigger. The ones with poorer balance sheets will give away market share to better-run companies. We are also seeing a structural trend in speciality chemicals. Another sector which is benefitting from structural changes in the supply environment, particularly in China. India is taking a significant share of the exodus from China. And that perhaps extends into pharmaceuticals as well.
