Home > Finance > investment strategy: Go for sell-and-buy approach in cyclicals: Deven Choksey

investment strategy: Go for sell-and-buy approach in cyclicals: Deven Choksey


Both the demand and the prices are on the stronger side as far as the ferrous and non-ferrous metals are concerned, says Deven R Choksey, MD, KR Choksey Investment Managers

What does one do when markets are looking a little jittery?
Overall, the banking sector remains scary. While retail credit and growth remain steady, the kind of a situation in which we are currently in, is likely to see some amount of reaction and slow growth in NBFCs and banks, particularly on the retail credit side.

I do not see a majority of things changing compared to last year when the entire country was under lockdown. This time around, the situation is quite different. In many states, the Covid situation is relatively positive but larger states Maharashtra are facing partial lockdowns.

I think the NBFCs and the retail credit banks would be more careful about lending but I do not think that business will come down drastically for them. They would be a little bit more cautious.

On the commodity front, how much more strength do you see in steel majors?
On one side, we are seeing a higher amount of demand offtakes in Asia, fuelling higher growth as far as industrial commodity is concerned. So the demand scenario remains quite strong. On the other hand, the pricing scenario also remains quite strong because of the higher demand and higher input costs. All in all, both the demand and the prices are on the stronger side as far as the ferrous and non-ferrous metals are concerned.

Given the fact that there are no greenfield projects coming up in the near future and a larger amount of demand is seen on the infrastructure side, the price scenario would remain stronger. However, one cannot remain complacent as far as the trend is concerned but some corrections in between would give an opportunity for traders to buy into this sector. For investors, cyclicals are relatively unsafe.

If you have to sell and create cash to buy lower, what would you sell right now?
Probably one will have to keep an eye on some of the cyclicals for generating cash because overall the demand scenario is strong and at the same time you are getting the opportunity at a higher price. Many of the cyclicals, commodity companies are fetching better valuations now. I think the sell and buy approach should be there in some of the cyclicals where you can generate cash and sit on that cash and once again re-enter at a lower price. This is probably the best approach that one can have. I am not advocating any kind of a sell in some of the good quality stocks where the fundamentals of businesses are good. But since cyclicals have gone up, some money can be taken out and one can sit on cash.

What have you made of Bajaj Finance’s Q4 commentary in light of the huge correction that panned out on the stock yesterday?
This company is moving more cautiously in current times and they are not becoming very aggressive in extending credits to the customers. Maybe for Bajaj Finance, FY2021 has been more of a year of consolidation and they probably were cautious, particularly on the loan growth side. So I think they have corrected themselves. It will be interesting to watch out for FY22 where I see moderately better growth coming in as far as I think their loan book is concerned.

On the other side, the housing finance business which is a part of Bajaj Finance’s subsidiary, is facing a little high cost of funds compared to banks. That is where they are facing a little bit margin pressure. On the whole, in consumer retail credit, they are getting more cautious and they are seeing relatively muted loan growth at this point of time.

I was just looking at the data in the morning and the PE multiples of a Coforge or Mphasis and Mindtree now are equivalent to that of large cap IT companies. Is it time to take some chips off the table, especially in midcap IT stocks?
On the valuation side, they have become slightly more expensive. In the midcap IT space, I am more comfortable with companies like Happiest Minds which we believe have got the ability to work on the digital side and are pure focussed companies. This is one area which is likely to grow at a rate of growth of companies like Infosys, TCS — larger companies with higher growth rate in digital verticals.

Growth would be slightly better in midcap companies and so my take would be that if one wants to buy a little bit expensive IT companies then probably the inclination should be towards the digital side of the business and that is where the likes of Happiest Minds would work better. Otherwise, larger companies like Infosys works really better because the digital business is already 45-50% of their total business and growing rapidly.

When it comes to some of the FMCG or consumer names, is there really much of an expectation this time around?
Fortunately, we have got a relatively steady set of numbers coming in quarter-on-quarter basis. Unlike last year’s situation, this year, the country as a whole is working quite normally. I do not think that you are going to see similar numbers from the FMCG companies in the current year’s first quarter. Maybe relatively moderate growth would continue for them and if most of the FMCG companies are growing 12-15% that would be good to follow. I do not think that everybody can be brought into the same kind of a ranking as far as the growth rate is concerned, but in general companies with 12-15% growth would be relatively better off in the FMCG space.

One can probably keep an eye on such companies during the correction, if they are available 10-15% lower, That would be a good time to enter them into the portfolio.

What about something like ? What do you read into some of these numbers that are coming in?
Yes, I think the numbers are quite steady. I do not see much of a problem. Considering that last year we had a rough time as far as the economy is concerned, still at the full year-end, the numbers are steady as far as DMart is concerned. That is a positive thing. However, in the current situation, we are likely to see some amount of moderation in sales because when the weekends are not allowed to go out at the same time, particularly the grocery stores normally attract more footfalls in the weekend in states like Maharashtra. So from that point of view, they might face a challenge as far as coming one or two months are concerned.

But I do not know whether it would be a bigger fall in the sales revenue. I would rather like to believe that given the new stores that they have added, probably they would have relatively stable growth continuing on an year on year basis as far as the revenue is concerned.

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