Falling oil price? Time to bet on cement, tyres: Chakri Lokapriya

"The recession that the Fed wanted, is probably going to happen in an unruly way if they cannot get the regional banks to lend to the small and medium businesses across the country. This issue is not yet resolved. It is not bailing out of one or two banks. That is what clarity is needed before this market can rally," says Chakri Lokapriya, CIO & MD, TCG AMC

What will happen to the US banking system because of the SVB and Credit Suisse issues if at all? Will it have a domino impact on the global financial market? Both those concerns are getting addressed by local authorities. Yet there is nervousness in the market. Why is that?
Yes, indeed. If you look at the previous crisis, the fashionable word in the US and the West was taper tantrum. I guess the word everybody's waiting for is whether the Fed pivots away from raising rates to either holding or cutting rates. And that is important because we have seen the example of the Silicon Valley Bank.

Silicon Valley Bank is not a small bank. Its asset base was as big as HDFC Bank's base. It is small in the context of the US economy. Now, regional banks play a very important role in the SME lending of the US. In essence, what is likely to happen is all those companies are going to see a credit crunch. Their businesses are going to slow down.

So the recession that the US, the Fed wanted, is probably going to happen in an unruly way if they cannot get the regional banks to lend to the small and medium businesses across the country. This issue is not yet resolved. It is not bailing out of one or two banks. That is what clarity is needed before this market can rally.

Let us say we get no clarity. In the next 8-10 days, what will happen to markets? Will they fall more or is this a good time to buy into markets?
There the valuations are still looking okay but they are not screaming buys yet. Here and there you might find pockets. From that perspective, at best it moves up and down, like the way it is moving today. But we are not finding stocks which are good to buy in a crisis mode. If it was a regular market, then you can buy it. But in this kind of market, if you apply through multiples, we are not there yet.

What is your outlook on some of those companies that could potentially benefit from the lower crude oil prices and how do you see that theme really playing out?
Cement is one sector. It does not have pricing power but they are making up for it in volume growth. And now with the crude having corrected, the input costs for this pet coke or coal and other petroleum-related raw materials all have come down by 30%, 40%, 50% depending on the raw material. So that provides them the margin impact. It’s across the board for the industry, depending on the company, it raises it by Rs 1,000 a ton.

So what they lack in pricing power, they can make up for in volume and low cost. The second one is Ceat Tyres, Apollo Tyres, it has also corrected quite a lot valuation-wise and fundamentals look strong.

How many of these commodity beneficiaries or commodity consumers will automatically start becoming part of your portfolio? Would you be playing this reverse of 2022 and 2023 trade, betting on consumers instead of commodity producers?
In the case of India, the GDP is still growing. Post all these shocks some amount of moderating downwards of growth rate is likely to happen but still demand is in the positive territory. If you take for example cement and the valuations have corrected a fair bit, because high crude, high inflation all are coming down, those will provide valuation comfort. Now, among the users of commodities, in an election year between 23 and 24, usually infra spend, roads, highways require cement. So there is a beneficiary.

In automobiles, commercial vehicles are going strong. Some of the two-wheelers are doing strong and tyres are the beneficiary. Due to the G20 summit, hotels will be the beneficiary. So, there are a number of pockets we can look at.

Have you added any of these stocks from these sectors that you just highlighted in the recent fall?
We are looking at Ultratech. We have added Ultratech and we have added JK Lakshmi one of our favourites, keep buying it. And I think these are two stocks. And second is looking at Ceat. Ceat also has corrected quite a lot and trades in single-digit multiples now. Banks are beginning to look very attractive but we are still waiting because if the economy slows down even further which means credit growth in India is likely to come down. The growth rates that are built into these stocks are likely to come down. That is uncertain yet so that is one space which we are really watching very closely.