Daljeet Singh Kohli on why he is overweight on metals

Daljeet Singh Kohli, Head, Research & Strategy, Vasuki India Fund, says: “Right now, we believe there is a lot of potential there mainly because valuation-wise they are not obscenely high. Second, the way the Indian government is putting focus on infrastructure development and especially after the elections, we expect a lot more push coming on to the infrastructure, so the demand from our side will remain very strong and currency, local as well as international, is in favour. All these factors make a conducive environment for metal stocks and therefore we are exposed to them.”

One section of the market believes that the US economy may not be doing that badly. The macro data from China is also supportive. So, metal is the place to be. They are beaten down. There is also a view that if the slowdown continues in these two economies, this metal long trade may be very short lived. Do you believe in this trade or is it just a point A to point B and not worth making it a large part of the portfolio yet?

Daljeet Singh Kohli: See, we are right now very much overweight on metals. As of now, almost 8% to 10% of our portfolio is exposed to metals and normally metals is a technical call. So, metal is never a three-year, five-year lock-in story that you buy and forget and your next generation will look at it like that. We do not buy metal stock like that because there are so many things which work. There are so many moving parts there.

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Either it is global macros, it is local macros, then company specific issues. So, metals normally are a trading opportunity only and we have also taken that view. Right now, we believe there is a lot of potential there mainly because one is that valuation-wise they are not obscenely high. Second, the way the Indian government is putting focus on infrastructure development and especially after the elections, we expect a lot more push coming on to the infrastructure, so the demand from our side will remain very strong and currency, local as well as international, is in favour. All these factors make a conducive environment for metal stocks and therefore we are exposed to them.

I want to draw your attention to Reliance Industries because even in the recovery that played out post Wednesday, Reliance had a big contribution. What do you think is fuelling the move on Reliance?

Daljeet Singh Kohli: This is the rotation towards largecaps basically. If you have to take money out and there is so much talk about froth being built up in various segments. So, if the institutions are forced to or if they have to get out of certain smaller and mid stocks, then where does that money go? The natural progression is that it has to go to some largecap and within the largecap, probably Reliance is the first choice because it is valuation-wise not very costly.

There are a lot of trigger points for the stock to perform. After quite a few months of consolidation, the stock had come out of that phase and started moving to the new highs. So, normally, people would want to go with a stronger stock when they are rotating out of some stocks and especially locking out their profit from those stocks. It is just that rotation which is happening. Trigger points for Reliance remain as it is. The new energy initiatives that they are taking, is a three-four years kind of call. It is not immediate that the profitability will start flowing in, but these days just a hint is enough. Semiconductor stocks are trading at 100 multiples. So yes. At least these guys are spending Rs 75,000 crore on new energy. The market is willing to give them that benefit.

How would you play the capex theme right now? What are your favourite capital goods stocks or engineering ones that you have in your portfolio?

Daljeet Singh Kohli: We are adding some of them. As of now, I do not think we have any capex stock right now. Infrastructure, we have added two-three months back, some road project companies and those we have added. But machinery or cap goods per se, now we are evaluating three-four ideas there. Basically, we tend to go to the mid-end, the smaller ones, instead of just going to the L&Ts of the world and we try to find the niche areas. So, I think there are a couple of ideas which we are working on, maybe in the next one month or so we will be adding some.

What about hospital stocks? There is the entire story brewing on how treatments would be regulated and it will be at par with the public sector hospitals. The entire space went through a correction and some of them started trading at 60-70-time one-year forward, still way off the mark from recent peaks. Would you be comfortable getting back there?

Daljeet Singh Kohli: I am very bullish on the sector as such because this is a place where we see a lot of potential for many years to go. We have such a huge population, penetration levels are so low and there is a huge scope for expansion for all these companies. Now of course you have to be mindful of valuations. Incidentally, in the last two-three years this sector has seen a lot of PE investments, a lot of private investments coming in which have just inflated the valuation to a very large extent.

So, probably this Supreme Court ruling actually become a trigger point for people to take some profit out and bring back some sanity in the valuation. I think still valuations are on the frothy side. So, we will have to be very choosy amongst all these stocks. I am very bullish as I said on the sector, but one has to be very choosy while selecting the stock where at least some kind of valuation comfort would be there.

Now, where will that come from? That will come from either the expansion plans that these companies have and if somebody has land bank available or somebody is doing technical expansion, like joint venture with some already existing hospital, so then because 40-50% cost is the land cost, so if you can save on that, then your return ratios will be much better. So, if you can find some stocks where there is some potential like that, then probably one should look at it, but the sector has a lot more potential, no doubt about it.

Surprisingly, IT has made a comeback and the market was focusing on the capex, the infra theme, the PSU pack. But that said, some of these stocks have not done badly. We all know Persistent, KPIT have been some of the great performers of the year gone by. TCS, etc, also scaling at their lifetime highs. Today may be a one-off day but what is the take on IT?

Daljeet Singh Kohli: IT has become a mystery. Someday you feel it is so good, valuations are in your favour, then if you take a top-down call and if you hear all this recession looming, large problems at macro level all over the world, then you understand that probably there is not too much scope for these guys. But somehow, the stock valuations are also working in that fashion, that most of these stocks had come to a good valuation point if not very attractive, but at least they are reasonable valuation.

If somebody has cash instead of keeping cash, fund managers like us, we would have cash, I would not want to keep it cash as such, instead I can use these largecaps and the front liners. So, to that extent we were using IT, but we are out of IT as of now. We have one or two stocks, that too a very small portion, only as a proxy to cash.

What about private banks? They have not quite played out as one would have thought they would? Yes, HDFC Bank is touted as the comfort trade right now, but even at Rs 1,450, it is not a whole lot up from its 52-week lows.

Daljeet Singh Kohli: In simpler terms, it is just testing the patience. If you are really a long-term investor, this is the time to accumulate such stocks. Of course, we know that for HDFC Bank, it will take at least one year to come back to some proper shape because they have done a such a large merger. All these ratios get haywire and things will take their time. So, for a small company to get merged into another company, it takes one, one-and-a-half year, two years. In this case, we are talking of a big behemoth. So, I think it is just a matter of patience.

It is a matter of conviction that ultimately at the end the result will be in your favour. Now, if you are impatient and if you want to see the result every quarter or just two months down the line, when I buy, after my buying immediately I should see something there, that is not going to happen. If one is of the very clear view that, yes, I am accumulating with the view that after one year, one-and-a-half years, this will be a big thing, then one can look at this stock.

As of now, we have not invested as a disclosure in HDFC Bank or any of these private banks right now because we are already very well invested in BFSI space as such. So, there are two-three NBFCs. There are two-three PSU banks already there. One private bank is also there, a smaller midcap private bank. So, we do not have space for BFSI, that is why we have not just added. But yes, it is one of the potential candidates for addition at some point of time.

Have you looked at the news announcement from Coforge saying that they want to raise almost 3200 crore via QIP and this is not today’s fall alone, if you look at the last one month from 7000 upwards, the stock has been sliding lower. What is the fear or concern of the market in your view? Some of the brokerages are saying that they may actually bite much more than they can chew via this QIP. Did you read this entire thing or observe it?

Daljeet Singh Kohli: I think they have gone a little bit more aggressive on fundraising. Market was expecting that they will do fundraising, but our analyst was expecting something like Rs 1100-1200 crore kind of number. But they have gone to Rs 3,200 crore. That has raised the doubts in mind that when you are flushed with too much money, either you overpay or you do an acquisition which is more than what you can digest.

All those doubts are coming right now, although management has been very good. They had a very good track record. They have been delivering very well. So, there is no cause for so much worry. It is just that the expectations were much lesser for fundraising that is why the stock is correcting too much.

We were not looking for adding it to our portfolio, so we did not go to that depth that whether at what price will it become attractive for us because as I said, from the top-down approach we have just taken the call that we are away from IT. So, we have not gone to the extent of calculating that price where it will become very attractive to enter. But there is doubt in the minds of investors right now and this fall is for somebody who is taking a call on IT. This is a good stock to look at.

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