Steel and metal stocks are a sell-on-rise for me: Dhananjay Sinha

“The metal space actually did very well last year, from an Indian player standpoint they benefited a lot through a large amount of exports and stuff. Right now what is happening is that since the prices have corrected we have imposed a 15% export duty on steel,” says Dhananjay Sinha, Director & Head of Strategy Research and Chief Economist, Systematix Shares and Stock

What is your view on the long-term trajectory for IT?
The IT pack has undergone a considerable correction. Over the last year, the IT sector has been the worst performing after a very good run. So the IT sector has come down quite a bit and it has absorbed a lot of negative news. The key concern out here is with respect to the impending recession and the slowdown in the US and Europe.

People have raised concern about their sales growth, etc. As of now, the IT companies, be it largecaps or midcaps, have not really sounded alarm with respect to their outlook. They appear to be fairly resilient. But the market is concerned about the outlook with respect to revenue growth. Of course, there is an issue with respect to margins. which is largely a factor of the boom that we saw last year.

That is broadly in the price but on a relative basis, the valuations have come down quite a bit. Large names have corrected from a PE valuation with a forward standpoint from something like 30-34 levels to currently about 24-23 levels. It has come down. There is still some amount of downside in valuation that is there. So maybe a 5-10% downside is possible but it is approaching a value zone as far as the IT sector is concerned. One should look at the largecaps.

How would you approach metals now given that on one side, there is a demand challenge and on the other side, there is a recession fear?
With respect to metals, I have been an underweight for the last one year. We are looking at deceleration in the manufacturing sector across the world. If you look at the PMIs in developed markets, in Europe, the US and China, there has been significant deceleration and a marked contraction as well in major countries.

So the demand for metal is likely to be under pressure. If you look at various markets, there has been almost like a 40-50% correction in steel prices. Also with respect to aluminium, zinc, etc, there has been a considerable contraction. So I think metal space actually did very well last year, from an Indian player standpoint they benefited a lot through a large amount of exports and stuff. Right now what is happening is that since the prices have corrected we have imposed a 15% export duty on steel. There is a glut in the domestic market and we are seeing that steel imports are also happening from China.

There is intense competition and I have been a sell on steel and metal companies. I would continue to be so going forward because when central banks the world over are fighting inflation, commodities would not do well. For me, commodities in general and metals are underweight. So on any rise in steel and other metal stocks, I would sell.

The big macro concern, what is happening to the pound? How is the UK economy becoming topsy-turvy? What happens to companies which are dependent on the UK like Mastek, HCL Tech, TCS, Tata Motors?
What we have to really put into context is that post Covid, Indian manufacturers actually enjoyed quite a bit of export exposure, especially given the context that there were fairly tight supply issues in the US, Europe and UK. There was a huge amount of fiscal stimulus. The volume growth for Indian manufacturers actually went up disproportionately.

ET Now: How would you view a business like Paytm? Purely the business, forget where the stock is headed?
Dhananjay Sinha: I think the Paytm business may do well. The best of volume growth is behind us, given the digitisation theme that was evident post Covid. A lot of that was being valued. Going forward, is this going to repeat the kind of buoyancy that we have seen earlier? I do not think so. Increasingly, the business model will have to be a function of what it does through the transactions, the buffer that it creates through transactions etc.

There are limitations with respect to what it can do. There are financial regulations that it will be subject to. So value creation from here on can be very limited.

What do you want to buy in a market decline?
The risk of the market being on the downside is definitely there. We are looking at earnings cuts. In the first quarter, we have seen a 3.5% cut for Nifty earnings. We are looking at something like a 15% odd cut for the full year. So there is a downside as far as the market is concerned.

Secondly, given the context that the risk free rate is actually rising and more rate hikes will happen, the valuations might also be a challenge. Overall it would be relevant to be more defensive as far as the market is concerned. High beta sector such as metals, capital goods, industrials, mid and smallcaps are the things that will be relatively lower in my pecking order.

I have been somewhat positive on urban consumption themes in autos, discretionary. Staples has done well, ITC continues to be a good value stock and continues to do well. Autos have done phenomenally well. Over the last year, I have reduced some overweight there.

I would say that I am looking at pharma stocks at this juncture. There is a reasonable amount of visibility as far as the earnings are concerned and there are certain stocks which are available at good value and the sector has not done much over the last one year it comes at a good value. Sun Pharma, Cipla, Dr Reddy, Ajanta and Indoco Remedies are some of the stocks that have come from our sort of pick. That is broadly the profile of things that we have in our portfolio.

Would you bet into oil consumers like Indigo?
One should be looking at something like Asian Paints or Berger Paints because they have oil intermediates as inputs. They have a monopolistic market presence and pricing power etc. One should really look at such things. Asian Paints is something that I like in terms of valuations. Also, if you look at the market cap to sales ratio, what I look for has come down quite a bit over the last six odd months.

So one would rarely get a chance in 20-30 years when we may see a sharp correction in such stocks. Any correction out here should be bought I would say so that is what you know I would play this oil with actually.