“In every bull run in commodities, a narrative gets created that this time it is different. China is slowing down and hence steel will continue to boom or something or the other. But history has taught us that that is never the case because in commodities, demand supply matches out at some point in time. Prices going up will reduce demand and that is how it is always.” says Abhishek Basumallick, Founder & Chief Equity Advisor, Intelsense Capital.
How are you looking at the big fall in commodity related stocks? The stocks are down 8-10% and people thought that commodities are in a multi-decade super bull run! That argument has hit a brick wall of slowdown?
You hit the nail on the head. One has to get in and get out of cyclicals at the right time. In commodities, by the time you realise that something is going wrong, stock prices are already down 10, 15, 20, 30%.
In every bull run in commodities, a narrative gets created that this time it is different, this time we will see X, Y, Z reason. China is slowing down and hence steel will continue to boom or something or the other. But history has taught us that that is never the case because in commodities, demand supply matches out at some point in time. Prices going up will reduce demand and that is how it is always.
The fall in IT related technology stocks seem to have halted not only here but even in the US, the mother market. Nasdaw stopped falling after a 35% fall. Of course, today, and some of the select technology stocks are doing well. Do you think the argument that growth will get impacted very big time is largely baked into the IT stocks pricing or not yet?
There are two parts to your question. One is IT services. There will be a significant amount of hit if the US slows down significantly which from all data points looks likely. It is already slowing down and might get into a recession. If that happens, a lot of IT service companies are going to get hit.
What typically happens is we will see some amount of projects continuing but new big projects get halted because people then start questioning the ROI. What tends to continue doing well are sectors or industries which are impacted by regulatory hurdles and thus financial companies, banks etc. where changes in IT systems are mandated by the regulator, and sectors and companies which support those sectors tend to do well. We will have to be very stock specific in terms of which company caters to which particular market and take that accordingly.
« Back to recommendation stories
I don’t want to see these stories because
The last time we spoke, you had started to go positive on select auto ancillaries. They are also a big user of the commodity complex. On the one hand, there are talks of numbers coming back. is talking big numbers and Mahindra about unmet demand. and on the other hand, their margins are cushioned because of the fall in commodities prices. How do your portfolio companies stand to benefit because of that?
Autos, auto ancillaries, industrials, engineering is the space I have been bullish on for the last seven-eight months and they are doing well. Coming back to auto ancillaries, we have probably seen the worst in terms of numbers. Slowly the numbers are picking up. Hopefully if monsoons are good, we will see rural pick up.
The two-wheeler numbers from rural India are showing a pickup. The auto sector is going to do reasonably well for the next two-three years, maybe slightly longer.
Where else are you looking for value to deploy additional funds, what are you researching these days or have you been reading?
The main thing that we need to understand right now is that we have seen a market regime change. What that means is that in the last couple of years, due to liquidity, it was a phase where momentum trade was doing very well. In the last six-seven months, we have seen a change in regime and we have started seeing value factors as well as mean reversion strategies play out better.
SO the focus has to be on those areas where prices are still reasonable. Industrials, capital goods, engineering, if real estate and real estate ancillaries, auto and auto ancillaries are the spaces where prices are still reasonable. The market can go up and down in the next two-three months. In the next couple of months, things may be difficult but for the Indian economy, the numbers look very solid.
My sense is that one tends to do better in sectors where there is fundamental growth and valuation comfort, rather than chasing high quality, high priced stocks right now.
has announced a Rs 2,500-crore capex in Andhra Pradesh., the first in that region. The monsoon is generally a lean period for cement stocks. If they fall another 10-15%, do you find cement stocks will coming into an attractive zone?
The top four-five players have come down to fairly attractive valuations. Some of them are closer to replacement cost and so that is actually a decent place to look at considering the fact that a lot of infrastructure plans are there, highways are getting built. If that is to pick up, especially post Covid, cement should do well. Valuations have started looking attractive. One can pick decent companies.The caveat of course is that they should not get into a price war because consolidation is happening and competition is increasing.
What about the banking space? The banking sector credit growth is back at a three-year high of 13% and even in the quarter gone by, PSUs as well as private banks did pretty well on NIM front and growth front in a rising rate scenario. Which financial stocks do you like?
Financials is a place I have been tweeting about. The numbers that have been coming out for the last couple of weeks show credit growth for commercial projects have started going up. MSME credit growth has picked up. So fundamentally things are looking good. The excesses have nearly gotten out of the system.
We need to just see what will happen with these last two years of Covid situation. But bank balance sheets are much better than what they were five years back. In banking, we need to be very careful because these are leveraged businesses and one should be looking at the well managed bigger, more conservative banks or NBFCs. That is where I would look – the large private players, the largest PSUs where there is management comfort and where the lending is conservative. It looks to me that in the next five years or so, banking should start turning around.
The other commodity user complex is the engineering and mid tier capital goods stocks. They have started witnessing buying. Which are the ones you like? There are early signs that capex is starting to chug along, isn’t it?
Yes, absolutely. The PLI schemes will start picking up now because we are more or less getting out of the Covid situation, fingers crossed. We find the entire capital goods space picking up. In that space I like the fast moving industrial goods, FMIG if I may call it, where we are looking at consumables space or where there are two, three players in a market – whether it is gear boxes or abrasives or bearings.