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    Should you continue to ride the metal rally or get out now?

    Synopsis

    “If one got into it sometime back and is now sitting at say 40% return in his metal stocks, one can probably take off 25% of the exposure off the table and bring down his exposure by another 10% on another 10% price rise and repeat that as prices rise, ” says Kunj Bansal.

    Why Kunj Bansal is willing to buy afresh in PolycabETMarkets.com
    We are continuing to see demand. A few years ago, there was an overall trend that overall metal consumption will come down and move towards plastics, fiber, and RFP usage. Suddenly that does not seem to be the case and the demand for metals has been continuing to go up. So, I can’t say whether the peak has come for the prices or not, says Kunj Bansal, CIO, Karvy Capital.

    Auto stocks are getting punched from all directions -- raw material costs, regulatory changes and that it is a discretionary item. Sales have picked up quite a bit in the last couple of months and of course there is the entire emission norm issue. How are you viewing auto stocks?
    Auto stocks have underperformed for almost a year. So while we have seen the market going up, auto OEMs have not participated much in that up move. That was due to three main factors. One, the whole trend towards electrification of vehicles and how much it will happen and when it will happen. All those doubts remain but the number of electrical vehicles sold in the first six or seven months of 2021 has been much higher than that for the full years of 2019 and 2020. So to that extent, it does seem that electrification of vehicles is catching up, products are available in the market and there is demand.

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    Secondly, the shortage of semiconductors has affected production.

    Thirdly, the whole raw material price hike and prices of steel, aluminium, copper -- all those which go into automobile manufacturing -- have increased. We have clearly seen the margins coming under pressure.

    Now, let me add one more cause to this. The retail sales from the two wheelers has not been as per expectations. It seems the expected growth of pent up demand that was there at least in 2020 does not seem to be there in 2021. Going into the festival season, can we see a demand pick up? If yes, then that will be a positive sign. Having said that, what is clearly happening is that some of the auto ancillaries are not reflecting this kind of underperformance. Most of the auto ancillaries are continuing to do well. These are not only those which supply parts to the electric vehicles; even those who supply to the IC engines vehicles are showing growth. That is a dichotomy within the auto space.

    You spoke about increased raw material cost and the key culprit is of course metals. There has been an extremely rapid rally in metals. While a cycle would last three, four, five years, everyone is asking whether we are already at the peak. What is your take?
    I do not know if I have the moral authority to answer this question because I have clearly gone wrong in terms of expectation of metals price cyclical. As an investment philosophy, I do not find myself capable enough to track the commodity cycle, the commodity prices and as a result stay away from investing broadly in the commodity oriented sectors. Having said that, the rise that started last year after the Covid first wave as demand and as a result, prices continues to go up. It was very difficult to predict whether they would rise that fast. As recently as three months ago, in May, we did see an intermittent peak of the commodity prices, especially the steel prices. We saw marginal corrections. But after that, they have again started to rise. May-June was a flattish period for stock price performance, for commodity prices, for steel prices, which give an indication that somewhere the top has been reached. But that was not the case as prices have gone up again.

    So, it is very difficult for me to say but we all know that with every rise of the price, the Brownfield capacities which have been lying idle, will start coming into play. Already, announcements have been made for setting up greenfield capacities. Of course, it takes time to set up the new metal capacities. We are continuing to see demand. A few years ago, there was an overall trend that overall metal consumption will come down and move towards plastics, fibre, and RFP usage. Suddenly that does not seem to be the case and the demand for metals has been continuing to go up. So, I can’t say whether the peak has come for the prices or not.

    Irrespective of whatever price you have bought metal stocks or steel stocks, you are making money. Should one ride the trend or get out now?
    I wish there were easier answers to such simple questions but unfortunately they are not. Having said that, one of the few things one can do is do partial profit booking with every rise. So if one got into it sometime back and is now sitting at say 40% return in his metal stocks, one can probably take off 25% of the exposure off the table and bring down his exposure by another 10% on another 10% price rise and repeat that as prices rise. That is a very simplistic answer assuming that the metal price rally continues as his exposure, profit and value continues to go up, that is one very smart way of doing things.

    If somebody got in very early and was able to time it well and is already sitting at 50% plus profits, there is no harm in taking a large part of the profit off the table and holding on to cash for some time or reorient it to some other stocks. So these are the two strategies one can do. Of course, if somebody has a complete control and understanding of the price movement of the commodities and is able to have a control over how prices will move is in the best position to continue to make money and if he finds that the prices will continue to go up, then obviously one has to remain exposed and in fact, one can take more also.

    At the same time, if he feels that the peak has been reached, prices will continue to come down for him. It is prudent to take 100% profit off the table. But if one is not in these two extreme positions, then simplistically, mathematical strategy is something that one can follow.

    Where do you stand on the disinvestment theme? Are you interested in PSUs?
    We have clearly been seeing interest coming back in PSUs for almost 10 months now. This started pre-budget and then because of the various announcements in the budget, the interest of the market kept coming back.

    Of course, there had come a point wherein the valuations had become really attractive especially for some of the companies which have been reporting reasonably good numbers. Now after the postponement of privatisation of public sector banks, we have suddenly seen the public sector bank participation going away and there is sudden underperformance.

    But otherwise on a net basis, some of those good performing non-banking public sector companies have started to see an underperformance from the sector. If I leave aside the last 10 months’ rise for almost six-seven years, there was consistent underperformance in public sector space. It certainly makes sense to keep looking at the companies which are doing very well in terms of financial performance.

    The commentary from Jubilant Foodworks, Burger King and the other smaller QSR entities seems to be quite encouraging. Irrespective of the peak of the second wave, they have seen some good trends.
    First of all, in terms of performance, all those players who have continued to sell their products through the home delivery mechanism and the takeaways have continued to do well. We have obviously seen this trend of working from home, not going to offices resulting in more and more savings for the people in terms of other spends. Part of that has come into food as a saving because nobody could travel, nobody could have holidays and that has also helped the demand coming up. That is the commentary all these companies are giving. Of course, they have also been affected at the same time by commodity price hikes, mainly the hike in wheat and edible oil prices. But having said that, the market interest in such stocks is likely to continue because that is one space where the demand or growth in the top line will continue which at some point of time will flow into the bottom line growth.

    How are you approaching healthcare? I am not using the word pharma because healthcare has other needs also?
    A few trends have emerged in the recent short term; one, in the June quarter, hospitals have put up a very good performance. That has happened because of last year’s low base due to the Covid first wave,

    Last year in the June quarter hospitals were not operating. They were not taking non Covid patients, they were not taking Covid patients also. Quite a lot of hospitals were closed. But this time, hospitals have made quite a lot of money from Covid treatment and non Covid treatment has also continued. That has been a trend that the hospital numbers have been much better on a year-on-year basis and in some cases, even on a quarter-on-quarter basis. So, that has been one trend. The other trend going to the medicine manufacturing companies is that the US is continuing to see pricing pressure. Any company which is doing business in the US has shown degrowth in sales and pricing pressure.

    The third space which again has benefited are the diagnostic companies, laboratories and the testing companies. They are benefitting mainly out of the Covid tests because we had a second wave in the June quarter. So those have been the clear trends. The problem is in terms of trying to identify the future winners or future investment potential. It is very difficult to see which of these trends will continue.

    The diagnostic trend may not continue unless the third wave comes. Unless that comes, the business for the diagnostic companies will either be flat or may even go down and the share price rise that has come for them may not sustain.

    For hospitals again, if the third wave does not come, the Covid earnings will go down but hopefully their normal earnings from treating patients of all other diseases should come back. So that is sustainable. About the US pricing trends, that could be far away and it will be domestic oriented pharma companies which will benefit.

    If I have to take out two key takeaways about where the investment opportunity can continue, it possibly can continue in the hospitals and in the pharma companies which are more India centric.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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