On market
Market seems to be oblivious of all that is happening — be it the pandemic which is taking a toll on the health of the nation or the lockdown which is economically impacting us. Managements of most companies have given muted commentaries. Everybody would like to see how things pick up in July. So, the market wants to ignore everything at the moment and it must be said without any doubt that despite the FII selling as well as on-and-off DII selling, the markets have shown tremendous resilience in terms of holding on and moving ahead.
There is a message out there — market wants to move ahead is what we understand but, of course, the prices are significantly ahead of the intrinsic fundamentals without any doubt at the moment. Are we over the hump as far as the second wave of the pandemic is concerned? Possibly yes. That is what it looks like from all the statistics and all the commentaries that we hear from some of the medical experts and at the same time, everybody is warning us to be careful about the third wave. There is still a lot of uncertainty out over there.
If the government has experienced success in most of the states in terms of the lockdown, there is every chance that this lockdown may get extended. This time around, nobody wants to be caught on the wrong foot if the third wave starts surfacing. Having said all this, markets should respond to some of these at least and in my opinion markets can move sideways from here on. The bias remains on the upside but it will spend some time consolidating around this level. It is very surprising that the market has not given away anything as such at the moment.
On what could derail market recovery
The pandemic is not just in India but across the world. The printing of notes continues unabated, in turn creating a case for inflation surging to all-time high. If that happens, it will put everybody in the dock and one has to see what kind of policies and strategies are adopted to tame the inflation. This inflation fear and the risks in the emerging market may come about because inflation is threatening developed and developing economies alike.
Also, this time around in the budget, the finance minister has taken a very calculated gamble of high fiscal deficit, the trade-off being there is going to be good growth. Now if there is a question mark over growth, then all other things around that become very vulnerable and that can pose a serious threat to the market.
On metal stocks
In commodities, particularly metals, the cycles are not too long, they are short. Surprisingly, this time around, many analysts are of the opinion that commodities cycle will be extended for the next couple of years. Our interaction with a lot of management indicates that demand is going to be good and that in turn means metal prices are also going to be very good. That is what we have seen in the last one year.
We all know that the stock prices will be closely tracking the commodity prices and in my opinion there is still a window of six to eight months where we feel that the commodity prices can keep on climbing and that should give a good tailwind to the stock prices also.
Within the metal pack, both ferrous and the non-ferrous stocks look good. SAIL, JSW and even
look pretty interesting. In the primary metals and minerals, NMDC looks pretty solid at this particular level. The increase in iron ore prices has resulted in EBITDA per ton climbing up. As the commodity prices continue to scale higher, we will see very strong EBITDA growth, reduction of debt and possibly a huge dividend outflow also.
In that sense, NMDC looks pretty good in ferrous metal space. Among non-ferrous stocks, Nalco and
occupy the pride of the place.
On cement stocks
Well yes. Q4 results show realisation and the EBITDA per ton for cement has been pretty robust. The current lockdown can be interpreted as some kind of an aberration but otherwise, the demand for cement continues to be pretty good and in realisation terms, it is holding on very well. Cement as a sector still offers good investment opportunities though none of them are really very cheap.
In the pecking order, we still like
quite a bit. Bharat Dalmia is another one that looks pretty interesting and Ambuja is one of the stocks that one should have on their radar for buying on a slightly longer term basis. But cement as a sector should do well unless and until the lockdown gets extended further into the second quarter of the current financial year.
On midcap and smallcap space
There is phenomenal hope in this particular space. We have seen in the past how vulnerable this particular space is. But we have also often seen that as the market heads to a new high and remains very strong with frontline stocks getting more than the valuation, it spills onto the midcap and the smaller cap space, particularly with the retail and the HNIs accounting for more than 60% of the total market turnover. That broadly explains the larger interest in this particular space but some of them have already run up quite a bit.
The unfortunate part is a lot of the results are being extrapolated for next two to three years and that is what has been the weakness of this particular sector that one or two results gets extrapolated as what is going to happen over next two to three years and that is where pick and choose is going to matter quite a bit. I am afraid that this particular sector will increasingly become narrower as the midcaps start climbing to further highs.
