Last time we talked, you spoke about cyclicals and how you had gotten early into it. Being someone who looks for value at a reasonable price in unloved areas of the market, which are those areas where you have hunted for value in the last 6-8 months?
The sectors which we like currently and where we have made some bets are capital goods, hotels, paper. We have been investing over the last eight months on paper.
What kind of growth do you see ahead in the areas you like?
The capital goods sector has been in a long downcycle and that was primarily because of the economic slowdown and the excesses of the previous cycle. This sector has faced seven-eight years of downturn. In the last Budget, the government has put the focus on infra and that will percolate down to the economy. Private capex is also starting. Talking with the managements of these companies, we have found that they are seeing increased enquiries and increased orders.
We are also looking at export plays in that sector. These are companies with significant exports because economies abroad are bouncing faster.
As the domestic economy rebounds with gradual easing of restrictions and unlocking, the one space which got badly bruised was leisure travel and allied industries. Have you looked at some of these areas and do they merit investment? If yes, where exactly?
We have looked primarily at hotels. This sector has been affected for more than a year due to the pandemic. A lot of these companies have put cost controls in place. Their employee cost to hotel rooms has been coming down. A lot of small hotels are closing down and there are enough plays available in the hotel sector which good companies are available at very good valuations.
We took a call in April and May to invest in this sector when the second wave was on. We were anticipating that the Covid wave would come down. As people come out of isolation, there is growth of “revenge travel”. Hotels are booked since the middle of this month and I think this sector will do well. We just are making sure that the hotels are strong financially with a good balance sheet. These stocks will do very well.
Are you still holding on to south-based realty companies or even some of the ancillary companies for manufacturing or engine oil companies or refractory or input providers to metal cycle?
Our way of investing is contrarian and we look for value. Some of these like metals have seen a fantastic run up. We would divide metals into ferrous and nonferrous sectors. Ferrous is where a lot of action has happened and a lot of runup has happened as well. Non-ferrous metals have also seen some runup but as far as the cycle goes, we have a longer view here. As for ferrous, we are not sure how long the rally will last. So, in metals, we have fully booked out of ferrous.
Midcap cement is something which we had liked and this continues to do well. We will continue to hold on to it.
What are your thoughts on the sugar cycle? Even the capital good providers to that cycle have rallied. Also what about infrastructure stocks?
We continue to like infrastructure stocks. We have investments in that space. We have gone with better companies and it has paid off quite well for us. We will continue to hold. I think there is a long runway for infra and so the better managed companies will do very well.
As far as sugar goes, we took a call in February to invest in sugar. In the pure play sugar we have booked out recently because it turned out to be very sweet in the short term and we believe the risk reward might not be in favour currently. The ethanol story is there definitely and sugar has become less cyclical, but the narrative that it is not cyclical may not be true. Sugar production is increasing and some of it may be diverted to ethanol but still there would be a huge surplus. We do not see a case for too much export at current prices and so we will be left with inventory.
Some of the companies are better managed and here a significant amount of revenue will come through ethanol and they might be interesting to hold on to but coming to fresh capital allocation in sugar, we don’t think the risk reward is in favour. We are playing it through companies which supply capital goods to that sector.
