Time to sell metal stocks? Siddhartha Khemka has an answer

There is a strong interest in some of these public sector enterprises, there are several reasons for that -- a) the focus of the government on increasing the spending, which is led to a sharp rise in order books for some of these players be it in the railway PSUs, be it in the defence PSUs or the banks per se overall are also witnessing a strong uptick in the credit because of the capex plans that we are seeing after a very long time.

We would suggest exiting any positions or any holdings within the metals space if there is any bounce on the back of this China news, it would be a good opportunity for investors to lighten up their positions in the metal space, says Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services Ltd

ETNOW: Can money be made in rural plays ex-FMCG space?
Siddhartha Khemka: So if you look at the broader spectrum, auto is another sector or space, directly linked to the rural sector, but some of these OEMs have a mixed kind of outlook in the near term. So, there is an indirect play on the auto tyres.

Apollo Tyres is something that we like. Brent crude has almost corrected 20% on a monthly basis and below $80/barrel. We are seeing good demand, at least in the replacement segment for the India business, which is picking up. Apollo should also be helped by the improvement in rural demand where you have a lot of two-wheelers, four wheelers but the replacement demand comes up when they see some good income. Apollo Tyres sits perfectly to play both the auto segment as well as the benefit of the lower commodity prices.

ET Now: Just wanted your take on the realty sector, and I mean materially on the ground, do interest rates going higher have an impact at all? We see buyers come into the market when they know an uptick or some revival is happening in the realty market, and given the kind of stamp duty collections you are seeing, at least in the state of Maharashtra, there does not seem to be any slowdown but what about realty stocks?
Siddhartha Khemka: Definitely there is some impact at the margin with the interest rate movement, so at the peak of the pandemic lockdown, when we had seen record low-interest rates in India plus, on top of that several state governments had lowered the stamp duty registration charges, we had seen a sharp uptick in the demand. Now, with the interest rates going up from what we have seen in the last couple of months and with RBI again hiking the policy rates by 35 basis points today, the overall lending rates for housing loans are definitely set to go up, and at the margin, it will have an impact.

But the ground situation is that some regions, some pockets are definitely seeing a strong demand which is visible in the record presales booking data that some of these real estate companies announced on a monthly and a quarterly basis and also the state registration data corroborates the fact that there is a strong demand.

Nonetheless, I think it is sentimental today that interest rates have gone up, plus the news of ED attaching some land bank with one of the real estate players has also added to the near-term negative sentiments for real estate, but if you look at over the longer term picture we believe that the housing demand is set to improve and it is a cycle that has just started.

We are one to two years into the cycle, and this upcycle for real estate could continue for another 3-5. Some of these players will definitely benefit due to the consolidation that has happened, the RERA being implemented, and now we have much more transparency in terms of transactions so, in the near term, there could be some weakness because of the interest rate, but I think the overall trend looks really positive for the real estate segment.

ET Now: As far as the entire metal space is concerned, what kind of read-through should we expect with China reopening? What kind of impact should we expect back home?
Siddhartha Khemka: If you look at the metal space, I think they are largely globally linked with the economic outlook. On one hand, there is a positive news coming in from China cutting down on its restrictions and reopening theme, but if you look at globally, the recessionary fears are only increasing, and that would keep the demand as well as the metal prices softer for at least one to two quarters, so, our outlook is not that positive.

We would suggest exiting any positions or any holdings within the metals space if there is any bounce on the back of this China news, it would be a good opportunity for investors to lighten up their positions in the metal space because these companies have been sitting on a very high base where they were reported record profits, the margins have been pretty high, and from there we have seen commodity prices have come down so it will definitely impact the margins for sure, but the volume outlook also kind of softened from the previous quarters so, I think we are not that constructively positive on metals at least for the next few quarters.

ET Now: The one pocket which has done extremely well year to date has been PSUs, including banks and other PSU names from defence, railways and all others. Do you find comfort to buy afresh in this market, including banks.
Siddhartha Khemka: There is a strong interest in some of these public sector enterprises, there are several reasons for that -- a) the focus of the government on increasing the spending, which is led to a sharp rise in order books for some of these players be it in the railway PSUs, be it in the defence PSUs or the banks per se overall are also witnessing a strong uptick in the credit because of the capex plans that we are seeing after a very long time.
But having said that, coming back to the public sector enterprises as a whole, valuations were very undemanding, and they were grossly under-owned. Again at this level of markets where we have already seen that the index has reached the 19000 kinds of levels and people are looking to find value.

So this is a space where people found value, and because they were under-owned, there was a large flow of funds towards these stocks, and some of them have definitely moved up. If your sake where positive view continues, I think defence is a space we like from a long-term perspective. We see that the order book consistently has gone up, and the delivery has also improved with the order book, which has been a cause of worry, especially for some of these public enterprises on the defence side.

HAL and BEL are some of the top defence government PSUs, which have a very strong order book. Plus, they are seeing good execution in terms of delivery, and some of these players are also increasingly looking at exports as a key market from the days when we used to depend on foreign companies to import our defence requirement, we have come to a space where we are looking to export made in India defence equipment, so that is a huge turnaround in the way these companies have been operating. I think this is a space where we still feel that really wealth can be made over the long term.