Covid-proof stocks: 2 sectors that could prove to be Covid-proof this year


There could be earnings upside in metals and cement and IT stocks, but not so much in FMCG, says Chakri Lokapriya, CIO & MD, TCG AMC

There is a concern that the cyclical momentum we were seeing may come to a standstill as the sentiment becomes a little risk averse. Are there any pockets which will warrant some activity or do you see the sentiment getting further affected?
The second Covid wave will impact sentiment but clearly the vaccination drive will improve that sentiment. One of the things that India faces unlike other countries is the sheer number of vaccinations required. While about 7 crore vaccinations have already been done, that is a miniscule percentage of the overall population. The numbers vaccinated is equal to the UK’s population. That means developed economies with lower populations will get over with vaccination far faster and the bounceback will also be far faster than India. In India, achieving 30-40% vaccination will take several more months.

Meanwhile, in the US, there is a huge stimulus plan, an infrastructure boost is coming up which will continue to stoke the demand for metals and commodities. That will help Indian metal companies as well. So

, SAIL, JSPL will all benefit. We are also seeing the domestic numbers.

Second pocket to do well will be industrials. In India, in spite of the lockdowns, the infra activity will continue unlike last year when everything came to a standstill. This year construction workers will continue to work and that means the valuations are still on your side. Plus there is a government budgetary push.

So these are the two sectors which will be in greater demand unlike last year.

What about some of the pockets like real estate?
Real estate falls in the same bracket as EPC companies. Last year, real estate companies were nowhere. Buyers could not go and see in order to buy a home. This year, lockdown notwithstanding, the curfew times are only in the evening. Also, the interest rates are low and people are more used to the Covid situation. All will lead to continued activity in the real estate sector. There is bound to be some weakness but they will do far better than last year.

Do you believe there are more legs to the metal rally?
Absolutely yes. From a fundamental perspective also these companies are very well placed. The kind of stimulus packages that are being announced both in the US and in Europe will keep the demand and volumes up. During the lockdown, JSP had turned towards the export markets rather than the domestic market but after the lockdowns opened, their domestic volumes have also picked up. Now both the engines are firing — domestic and exports.

Their sales numbers are also very good and metal is a theme which will repeat itself. Even a very small price hike translates into a very big delta shift in their EBITDA margins. That will also support the valuations.

Why are cement stocks trading at such a premium vis-a-vis the steel companies?
I think one is because A) it is connected to infrastructure. B) They support a far higher EBITDA margin versus the steel companies; and C) all the metal companies have a relatively higher level of debt. So the agency cost in the case of the metal companies is far higher — be it JSW Steel, Tata Steel or Hindalco. Hindalco has about Rs one lakh crore worth of debt. So they all have a debt deleveraging plan and very credible plans.

While metals look attractive, the cement companies have far stronger balance sheets and despite the Competition Commission every once in a while rumblings about price hikes, the actual price hikes have been in line or lower than inflation and that is helping them in volume growth. In addition to that, a price hike does wonders for their valuation.

Finally the cost of setting up a new cement plant — be it brownfield or greenfield — has shot up tremendously over the last three, four or five years. A company like JK Lakshmi Cement for instance, is trading at about $70-80 as a replacement cost whereas today replacement cost is more like Rs $150. Therefore, cement will continue to do well.

The Mahindra Group would go out for a banking licence. Of course there is Kotak Mahindra Bank as well. Do you think this diversification would be liked by the market?
Two or three things; the RBI is today far more open to corporate groups having a banking license. Second, it is not a new thing. In the past also, corporate groups have had banking licences. So now companies like Mahindra and Mahindra Financial Services, their NBFC arm, could become a bank. That will help reduce their cost of funds.

Of course, RBI has set up a clear list of do’s and don’ts of how much group borrowing, how much third party lending needs to be done if they get a banking license. So there is far more clarity and M&M has a separate financial services arm. From that perspective, I do not think the market will look at it negatively because it depends on which entity of the group acquires the banking license and probably this is the time when expectations are low, credit growth is low and if it does get a license, it gives the group sufficient time to grow its deposit base over the next few years.

The earnings season will start soon, is there a pre earnings season trade in any of the sectors where markets could be surprised?
There could be earnings surprise upside in metals and cement. FMCG really not so much. IT is another sector which looks to be favourably well positioned in terms of earnings. So while overall estimates are likely to move up for the market, these sectors will see stronger upgrades and that will help support the current valuations as well.


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