Is a re-rating on the cards for housing finance companies?
HFCs are beneficiaries of not only the unlock trade. We know how cash flows develop for these companies over a period of time. They are not as volatile as real estate stocks. Companies like adhesives, electrical goods, ceramics and housing finance companies are being looked at by investors as a proxy play to real estate.
I think this sector is in for a re-rating. A lot of these companies were trading cheaper than HDFC. So there will be a catch-up in valuations.
What is the outlook when it comes to aviation sector. Indigo’s net loss has widened and it seems like COVID disruptions are weighing heavy on this space.
It can be a beneficiary of the unlock trade. In the last couple of weeks, we have seen various states talking about unlocking at different levels. Travel would probably resume in another 3-6 months if the velocity of vaccination remains like this or increases. The downward sloping graph of Covid also gives a lot of confidence to travel again. But a lot of these companies have already rallied in anticipation of the unlock or the economic recovery play. So I do not see a lot of upside in these businesses as balance sheet issues are yet to be resolved.
In the short term, aviation can be a trading play but as an investment it does not qualify as a theme in our portfolios.
What is the best way to bet on the ethanol story? Should you buy sugar stocks, Praj Industries or any other machinery company?
It is very difficult to say because the news is now out and there can be some upside left. Sugar companies tend to benefit. Praj Industries will also benefit. Some other machinery companies might also benefit, but it is more of a trading opportunity. It is very difficult to take them in the portfolio.
Those who are targeting 15-25% returns in the next 6 months or 1 year can buy these stocks on a dip. But we tend to avoid cyclicals. Besides the ethanol story, sugar cycles can be unpredictable for a host of market participants.
Did you not buy commodities like steel or cement and other cyclicals?
We try to create a balanced portfolio. On one hand, we have India’s strengths like IT exporters, pharma and consumption stocks and the second part of the portfolio is more about the capex recovery with capital goods, cements and Indian cyclicals.
Global cyclicals like metals can be played in the 10-15% part of the technical portfolio where you can have something like a Tata Steel which is a leveraging story. Tata Steel is a business which you can probably get at Rs 200-Rs 300 in one cycle and even at Rs 1,300 in another cycle, so you need to be very adaptive to cycles.
Building materials is not a cyclical play in India as it is more of a consumption-related story. Cement has a three-four years of upcycle and then it again bends down. So these are the types of sectors we select, rather than getting into global cyclicals.
