What did you make of Tata Steel’s earnings? While the net debt reduction has been large, the Q2 numbers are largely in line in the backdrop of extremely elevated consensus earnings. But in terms of a stock price return, is the best behind us or is this a multi-year cycle and one needs to stay invested?
There are two things. One, commodity stocks move more on the movement of the underlying commodity price rather than the reported earnings. Reported earnings come later, the underlying commodity price changes first. What we have seen is that steel prices seem to have topped out and in China, the prices have crashed big time and the same thing will be followed all over the world over the next few months.
I would think that this is not the time to get into steel irrespective of what the reported earnings are because the earnings seem to have peaked out. The second point was about the commodity super cycle. I frankly do not believe in that because I believe China as an economy is slowing down rapidly and it constitutes 50-60% of the consumption of most commodities. This commodity super cycle thing is not going to play out. There was a sharp up move and now we could see a possible downturn on a prolonged basis over the next couple of years.
Zomato is diversifying. Many people are drawing a parallel to what Info Edge did. The major difference is Info Edge did the diversification and the stake buys from its profits. Zomato is using the cash that it raised from the IPO to try and buy new businesses. How should one look at these diversifications?
The comparisons are not very good simply because of the fact that when Info Edge decided to make those investments, the valuations in the startup space were not so high. So, they got into either startups or reasonably established businesses which had still a long way to go for the public markets at valuations which were much below the current market valuations. The current market valuations even in the private space are not really cheap. So I am not sure what this strategy will lead to because I have not studied individual companies they are investing into deeply.
I would not say that it is good or bad but when we look at it from a macro perspective, I do not think they will be getting it cheap. Second, there is the IPO with some specific purposes in mind. We need to go and look at the IPO prospectus. If one of the aims was to buy into startups instead of expanding businesses, then it is fine but if that was not the purpose of the IPO, then that is a question mark which investors as well as possibly regulators need to raise as to the end purpose of the IPO funds.
If the private sector capex has started, the cycle has reversed for the equipment manufacturers. Thermax came out with a good set of numbers. Would the same apply for other equipment manufacturers like Tata Honeywell, Crompton Greaves and the entire capital goods space is now riveting?
Yes, that is the space where there is a clear resurgence. It is not only Thermax. Look at smaller companies in the sector; many of them are announcing a lot of order book increases and there is a clear investment cycle. Steel and chemical companies are expanding and even pharma companies are expanding to some extent.
Many of the commodity companies are investing and these are the companies from where the maximum amount of investments come. Plus there is the entire move towards pollution reduction and so a lot of those kinds of equipment are coming through. This is a real cycle which has started. Thermax is the bellwether as it gives an indication of where the cycle is going. Their results and commentaries seem to clearly point towards that.
I would think that this is one space where we have to look for opportunities. Some of the stocks have run up also. It is a small issue with the markets today that there is no real undervalued space on a broader basis, but given that these stocks are hardly owned by anyone, just that under ownership could make them outperform.
But that is the case with any bull market, you do not get what you want or if you are buying something you will not get it at the price at which you want. The option, I guess, for an investor is that you buy where the margin of safety is relatively higher because you will not get gold at the price of silver in this market now?
The comment should be you would not get gold at the price of gold; you will get gold at the price of maybe platinum or something higher than that. So relative value plays out and companies which are entering into new cycles of growth where new products are doing well. For example, in the large cap universe, we have started accumulating M&M from Rs 750-780 onwards and even after the results, it has an upside potential of 20-30%.
Same is the case with something on the infra side which is still undervalued. We have bought into Ahluwalia Contractors. I bought into it quite early but it is one of the stocks which we had earlier. When it did not perform, we exited it but now it could be entering into a new cycle. It is the same with NCC, one of the largest construction companies. It is reasonably well placed being valued at seven times next year earnings. Many of these companies could come through over the next one year. Same is the case with real estate. No one wanted to touch real estate stocks last year at the same time. Everyone wants to buy them now. Maybe a similar cycle would play out in some of those stocks.
