Should midcap and smallcap investors tread with caution now or with the broader market continue to do well?
Obviously, this market is expensive. By and large, we know for sure that July-August numbers are not going to give you the good news. We may be perhaps on the exuberant side this time.
How would you approach metals now? Is the best of the rally behind us?
The best is far ahead of us. It is a typical market rotational play. Investment in commodities gave phenomenal returns in the last 3 months when Nifty Bank was sulking. Nifty Bank is now at the level of March 31st. The same rotation play will happen in steel. We know that the demand is going to be lower in May and June as factories, particularly in auto and consumer durables, start to close down.
But in September you will find that this sector will come back in favour again. The good part is that it is the cheapest sector in the market. You can talk of historical PEs and other historical trends, but what most analysts miss out that it is the first time that these companies are coming with a very balanced balance sheet. They were borrowing and expanding in the last 10 years. The market is giving you chance to go at it again.
Some metal stocks are trading at historical highs. How would you defend the China factor and the valuation factor for a metal stock investor?
Let me pick the valuation factor first. In the last 10 years, whether it was Jindal Steel, Jindal Steel & Power or SAIL, they were expanding furiously. The capacity expansion at each one of those companies was four to five times. They borrowed money and did not raise equity. Therefore, they were in a leverage trap. Their balance sheets has changed phenomenally in the last 4 years. So the context of valuation changes dramatically. Most analysts are missing out that their balance sheets have changed dramatically and the context of those valuations is lost. You have to look at the new paradigm. These companies are going to be almost zero debt in two years.
On the China factor, most analysts ignore that this (Indian) government has been very vocal and active in giving tariff protections. Where did the steel turnaround story start? It started with tariff protection a year-and-a-half ago. That was the trigger and not demand. Global prices came later. The government did a major tariff protection when the global prices were worst. The real ground story is that if there is no new supply coming in and the economy may grow by 4-5%, money will be made by domestic companies. The second factor is that it is a rerating story like cement where 20 companies competed against each other 7-8 years ago. All of them were over-leveraged and look at the cement sector today. There are five companies with beautiful balance sheets and making tons of profit. Steel has gone through the same thing.
