4 metal & auto stocks to buy with medium-term view: Chakri Lokapriya

“India’s IT market is probably about $150-170 billion per year. Ukraine’s IT market is probably about $5-6 billion. With the conflict that business can also come towards India. Over and above that, the rupee depreciation over time will also protect margins and the demand remains exceedingly strong and therefore IT will do well even from here on for the medium term investor,” says Chakri Lokapriya, CIO & MD, TCG AMC.

How short lived the rebound in the market was but that said, is the worst behind us? Do you get that feeling purely because of the kind of cooloff that we have seen in crude and for that matter is the FII selloff petering down?

I wish I could say that. It kind of feels that even where we are, this quarter’s earnings will not see any impact of the Russia Ukraine war because it started only in the last two, three weeks and that would not really impact the numbers for the quarter. So it is a question of what is going to happen in the coming quarters and not just the guidance.

For instance, even after oil went up 60%, corrected 50% of that, it is still at $100 mark. Even at the current level, our petrol prices should be about Rs 10-15 higher. During Covid, the government had imposed extra cess. If it removes that, then petrol and diesel prices could be cheaper by another Rs 8-10.

I guess if the government takes that step then it dents the government finances and therefore the rupee takes a knock. This fine balance was not figured out in the Budget because at that point, the Russia Ukraine war was not really on the horizon. So with so many moving parts and today with China increasing lockdowns and thereby impacting metal prices, another export market for India will kind of cool down. So valuations are fine but the longer it persists, the greater the uncertainty.

What is the view on the entire real estate basket? We have got some stocks that have been in focus on the back of news. For example, Godrej Properties has acquired some land in Sonipat. How are you looking at the overall residential and commercial demand picking up?

With the amount of inventory that is out there, it gives an opportunity for the real estate companies to clean out their existing inventory which is at historical cost. Going forward, in terms of the cost of fresh construction – cement, steel costs have again gone up thanks to the Ukraine Russia conflict and because of that, whether they will have the pricing power to pass it on is a debatable issue.

But because their balance sheets have been cleaner, the faster this Ukraine crisis settles down, the better off real estate companies are because their input costs have gone up too.

What is your take on the metal space? Is the best of the rally already behind us or they still make an attractive buying opportunity in medium term?

The metal space looks good. They will be volatile because of the current China lockdown but if one looks at their valuations and mid cycle positioning where like Jindal Steel and Power they are all trading three times EV/EBITDA and Tata Steel probably at about four times EV/EBITDA and Hindalco about five times. These are all very attractive valuations. So, for the medium term investor clearly there is a lot of upside for the metal stocks.

The recovery in auto last year began with rural plays like M&M and given that most of the sectors are testing the time with the market fall right now, it seems that M&M is the safest bet?

Clearly yes. There is a lot going for it plus it has all these EV plans and the tractor season is coming up and that will help the volumes. The new product portfolio is in the UV segment and that has also been getting some amount of market share. The stock itself has not done much over the last one year. Its valuations, sum of the parts, had got a bit side-tracked because of the pandemic, Ukraine crisis etc. But the sum-of-the-parts story really holds value for M&M and it can go much higher over time.

Is there any sector which is looking like a high conviction buy at this point of time given the correction that we have seen in the last one month or so?

IT looks excellent. It contributes about 8-10% to India’s GDP. There are about five-and-a-half million people employed directly. For indirectly employed, multiply that by seven or eight times. Also this sector will continue to grow very fast. India’s IT market is probably about $150-170 billion per year. Ukraine’s IT market is probably about $5-6 billion. With the conflict that business can also come towards India, an additional $5-7 billion.

Over and above that, the rupee depreciation over time will also protect margins and the demand remains exceedingly strong and therefore IT will do well even from here on for the medium term investor.

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