Where to do bottom fishing in volatile market?

Gurmeet Chadha, Managing Partner, Complete Circle Consultants, says “you can do some bit of bottom fishing in the mid and smallcaps space in railway, defence stocks and some of the auto ancillary stocks. There have been very good corrections there but be a little more patient. It may not just come up the way you are used to seeing it last year.”

Let us talk about chemicals. Do you think now these chemical stocks, the sector as a whole, could see a turnaround coming in in a slow and steady way?

Gurmeet Chadha: Business performance wise, you probably will have another quarter or two. I think most of the inventory destocking has happened. It is a very cyclical sector for most chemicals except for a few certain chemistries and there is the factor of China dumping. I think in a few spaces you will find government intervention as well. But I also think that the bad news is in the price in most such names. We saw Aarti moving up when post earnings came in last month in February. One has to be selective here. You can also look at agrochemicals with now election season coming. So, we are looking at something like Tata Chemicals.

We are also tracking something like Apcotex with marquee promoters, which is the former Asian Paints promoter family and we are also looking at some more names in this space. So, you got to be selective. If you have a little patience for a quarter or two, there could be better risk-reward. But I would not say just play the entire sector in entirety. I think that may not be a good call. Play it chemistry wise. It is a very technical sector and maybe it makes sense to be a little counter cyclical in this space.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
Indian School of Business ISB Chief Digital Officer Visit
IIM Lucknow IIML Chief Operations Officer Programme Visit
IIM Lucknow IIML Chief Executive Officer Programme Visit

What is your view on the metal pack? How do you see yourself playing this story? Obviously, right now, iron ore prices are falling. Benefits will start coming in from FY25 second half is what we are understanding as well. Would you be looking at any of these names?

Gurmeet Chadha: It is part of our satellite portfolio, which is the tactical side. You cannot hold metal stocks for a very long term. So, you got to be a buyer when the prices correct and then at the same time have an exit strategy in place. We are looking at Tata Steel, for example. I think the key parameters are the closure of the UK blast furnace, which is a TSUK business. They are setting up more capacity, including one at Kalinganagar. Good bit of de-leverage has happened over the last two-three years. The debt reduction is down.

So, a bit of financial leverage also will play out. So, tactically looking at that. We also have Mukand in our portfolio, where Bajaj is now the majority owner with almost 72% share. We expect more fund infusion and maybe some land sale to de-leverage the company more. They got the Jindal Stainless guy as the CEO now. It is a very small business currently at about Rs 2,500 crore market cap. I think this has potential to be a larger player in speciality steels and alloy steels. So, we are looking at, as I said, tactically here. It does not figure in the core part of the portfolio.

We have not had the chance to talk about the rough week that was last one. What is it that you are making of the shake-off that we are coming out of, both in the mid and the smallcap space especially in particular?

Gurmeet Chadha: That is the nature of the beast in this space. If you have seen 70% return one year in the index alone in smallcap and about 55-58% in the midcap, it was looking for triggers. So, the multiple triggers came in. One was the news on some operators fuelling a few stocks. Then, was the stress test for mutual funds. Most of the funds would have rotated some of the liquid holdings and raised cash as well. I think it was looking for reasons, but that is how it is. You can lose 10%, 15%, 20% in a matter of a few trading sessions and gain that also.

My sense is they might be from a flows perspective out of favour for some time, maybe in lead up to the elections as SEBI has raised concerns and red flags on some froth building up, especially small and microcaps and liquidity might chase more largecaps and large liquid midcaps in the near term. But that is only a small factor in my view. So, a lot of quality names have also come down because the entire space has fallen. So, you can do some bit of bottom fishing in that space in railway names, in defence names, in some of the auto ancillary names. There have been very good corrections there but be a little more patient. It may not just come up the way you are used to seeing it last year.

Wanted to understand what your portfolio strategy has been last month or so far this month itself and are you tactically moving or gravitating more towards largecaps if that was not already the case?

Gurmeet Chadha: Selectively, yes. I think the financials have been a little out of favour especially NBFCs post RBI going strong. First on small ticket personal loans, then on cash disbursement in gold financing, then IPO financing and so I think some of the quality names have fallen.

Today, you just mentioned about Arvind Kapil joining Poonawalla. Arvind is a big name in working capital and unsecured mortgage in HDFC and now obviously was spearheading a lot of initiatives post-merger, that is a good addition there. We are looking at some names in home finance like Home First, Poonawalla, Chola. Even in Bajaj Finance, there has been a 50% EPS growth and stock is down 20-25%. Once the liquidity eases, the rate cut cycle turns, financials will come back.

Also, the treasury gains will support near-term compression in NIMs. Adding some chemical names as I discussed with you, be slightly counter cyclical. We added some IT also. Typically, when there is a bit of a turmoil, the market tends to be a little defensive towards IT, FMCG, pharma names. I was speaking to a few headhunters. Hiring is coming back in IT. It is an early trends yet and I do not want to draw a conclusion. So, selectively looking at IT names and doing bottom fishing there as well.

What do you think about the real estate sector now? We had seen all these names buzzing in trade for some time. But in the last couple of weeks, a bit of a subduedness is coming in and there’s not that much of a run-up. Is it time to just wait now to enter into the real estate sector? Do you want to talk about DLF, Godrej Properties? What is your view there?

Gurmeet Chadha: Again, got to be more selective. But yes, it has been a sharp run-up in this space and the sector was out of favour for a long time. In DLF in particular, the balance sheet is completely de-leveraged. We are also looking at the rental portfolio getting monetised through one of the REITs coming in. The higher end, they probably will beat this year’s guidance as well with the launch in both ultra-luxury as well as the mid-affluent segment.

So, the balance sheet is shaping up well. So, that is something we look at any dip obviously is welcome. My sense is that once the rate cut starts, once the mortgage yields ease slightly, that is when probably the bigger move will come because the lower end housing has not really participated. If you want to go for mass builders and retail builders, it will take a little more time. Till then, you can probably look at something like DLF or Lodha and select maybe a few selective names down south.

Related post