Do you think that this entire fear of EV which may be a reality in 2024, 2025 or 2026 is slightly overdone? Markets are comparing what is happening in the developed world versus what will happen in India. Is that a fair comparison or will the terminal value of auto companies remain under pressure?
Even in the developed market most of the traditional auto companies are not getting sold out as is happening in India. So there are two things out here. One is that in the near term, there are supply constraints because of chip shortage and there are demand issues especially in the two-wheeler side because of a huge inventory in the system and demand suddenly coming off.
These are the two factors which people need to take into account and secondly, once volume falls and there is significant raw material price pressure, then it has an impact on profitability also. So despite being so much concerned purely on the EV threat, I do not think it is the right way to look at them at this stage because the EV becoming a threat is many years away.
But purely on the supply and demand issues, the story for autos in the near term is not there. That is the reason we should be avoiding autos. Some companies are obviously cheap, like M&M with its new product range. Typically they do very well at that time and outperform when new products are launched. As the corrective move plays out, that could be one stock which we should look at because it is very cheap now.
You have a tilt towards and Ahluwalia. Why do you like them? These are ultimately low margin businesses, highly cyclical. There could be working capital challenges, there could be challenges in terms of managing their balance sheet because frankly this is one space which has not really created a lot of wealth.
That is true and that was also true for commodity stocks a year back. No one wanted to buy Tata Steel at Rs 250-300 but now all brokerages have a buy at Rs 1400. In cyclical sectors this happens and we cannot buy them like long-term growth stories. We cannot compare these stocks to consumer names which will keep on growing over a period of time. Their valuations today are obnoxiously high in my view and cannot sustain.
Cyclical companies have to be bought when everyone has a lot of concerns around them regarding growth, margins and working capital. That is when they are available cheap. But in my view, we are at the cusp of an upcycle because their order books are growing much more rapidly than what people expected and execution will be faster going forward as most of the constraints on execution gets cleared. When the overall market is in a selloff mode, these stocks will also show some correction, but this is the space where I am looking to increase exposure at this stage after a very long time.
How excited are you about what is happening in the PSU energy space minus the OMCs — GAIL or ONGC. How excited are you about owning some of these stocks?
I am never excited about owning PSU stocks because we never know what is going to hit us from the government’s policy side. These are cyclicals which one needs to play when the cycle plays out. They have underperformed so much that if the oil and gas price value sustains, they might hold on for some time. But it is very tough for them to generate any long-term sustainable wealth and that is what an investor should consider.