Metal stocks have paused, more upside left: Chakri Lokapriya

Do you think metal names can move up from here on? Cycles do not end in 6-12 months, they are long cycles. It took 10 years for the cycle to bottom out. Of course, it may not take 10 years for the cycle to top out but do you think the cycle has just started?
In terms of this cycle, it is still early in the game. The stocks are still not expensive. It is traded at probably 5-6 times EV, EBITDA. Globally, we are on the verge of a very big economic uptake in the developed markets which is the US and EU and on the back of that steel and aluminium prices and the underlying demand for autos and other white goods will pick up fairly strongly. That will also keep prices of steel and other metals fairly strong. These companies have done a phenomenal job of reducing debt over the last 12 months. Balance sheets are far stronger. These stocks might pause a little bit, given the phenomenal run that they have had but there is still a lot more upside left in the stocks.

What is the outlook when it comes to the real estate pocket?
Real estate is divided into two parts — commercial and residential. In the case of commercial real estate, there is still a lot of vacant space and the market has not bottomed out. But the revenue from the lease rentals will start coming back as the economy unlocks and that will provide support.

In residential real estate, on the other hand, the affordable and the mid-price segments have been strong and the luxury segment has been very strong. It is only the in-between upper middle which has not been that strong. So against that backdrop, the stocks have done well. Some of them, like Oberoi, are planning to raise funds. I would not really chase these stocks now.

Would you like to talk about the hard assets companies like ACE Construction, L&T that have been doing well? ACE says they do not have machines to fulfil the orders for the next 6-12 months. L&T is confident that despite the cost increase in capex, they have a 70% pass through and it is not going to impact their margins.
On Friday, RBI Governor Shaktikanta Das in his statement said that expect the best but prepare for the worst. I would add one more line to it, which is to be prepared to be surprised. So expecting the best means hoping the second wave does not continue. You prepare for the worst as the second wave actually continues longer and prepare to be surprised if there is a third wave. So the whole thing which is holding back and execution for these companies is not the order book. The order book is extremely strong. It is only the execution because of lack of workers, the localised and national lockdowns which have held us back.

The key to this whole thing is the vaccination drive. If it picks up pace in coming months, then things will improve and provide margin support to the EPC companies. Execution will provide the upside because they are all trading at very low valuations. L&T is trading at only 16 times. Nagarjuna is probably trading at about 8-9 times. So there is more than enough upside to be made provided the execution begins.

When some of these companies start to move, they become like SBI as their earnings growth can be quite spectacular when operating leverage works in their way?
Yes, indeed. SBI today at about 400 still trades at probably at slightly less than one time book, The books are cleaned, the provisions are strong, they have NPAs under control, the loan growth is reflecting the industry loan growth of about 5-6%. So whenever the unlock happens and the economy starts reviving, this will be the first bank to benefit.

Coming to corporate loans, take all the steel companies and various commodity companies which have all done well. They have all been borrowers from SBI and other PSU banks. So what was feared to be an NPA in the past, is now turning out to be good loans. It is fairly clear that as the economy opens up over the next year or two, the stock can very easily go to Rs 600-700. So, there is more than sufficient upside left in SBI even at this level.

What have you made of the overall earnings season so far?
A couple of things; one companies with an export base — be it IT companies, pharma companies, textiles, chemicals or even auto ancillary companies like Bharat Forge — which have a good chunk of export revenue their outlook will continue to become stronger therefore earnings upgrades will happen to them.

Bharat Forge is now sitting on a verge, a step away from a commercial vehicle recovery outside India in the US and the EU and then subsequently as the economy unlocks in India, it will also benefit from the Indian commercial vehicles surge. That is one trend.

Second, within the domestic market, because of the second Covid wave, the consumer discretionary stocks like Voltas are likely to take a slight pause because consumer confidence is dented this time more than it was in the first wave, at least among the urban population who are the big buyers of the consumer discretionary goods.

Therefore, there is likely to be a pause but on the other hand, some of the domestic companies including hospitals have shown very good results and will continue to do so. The existing set of chronic diseases which they have to treat have taken a back seat. So all those patients will come back. Second, the vaccines also will add that extra fillip. So hospitals like Aster DM which has a foot both in India with 2,000 beds and outside India in the Gulf with another 1,000 beds and have exposure to pharmacy, will grow very fast. That is what we are seeing in the earnings so far.

Anything that you would bet on from the agri, rural space as the monsoons are lined up?
Agri because of the monsoon outlook at least being good, some of the pipe companies like Finolex Industries, Prince Pipes, Astral should do well. Prince Pipes has had a very good run. The stock is still market leader in terms of its agri pipes. Its balance sheet is largely cleaned up. They have done a lot of internal restructuring, the governance is fairly good, now coming out of a patch in the past. Finolex Industries still trades at only about 15-16 times so that is on one hand.

On the other hand, companies like Kaveri Seeds will benefit from a good monsoon and a rural push. The valuations are still very attractive. There is a fair amount of upside still left. Semi rural stocks like Mahindra & Mahindra Financial Services could also do well. They are cutting some rates meant for the MSMEs as well as the borrowers.