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Pain in metal stocks to be substantial in near term: Sanjeev Zarbade

Recovery in Chinese demand key factor for metal stocks, says vice president of PCG Research, Kotak Securities.

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Last Updated: Mar 31, 2020, 05.04 PM IST
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Sanjeev Zarbade-Kotak-1200
Our preference in the metal sector would be Hindustan Zinc. It is one of the best in terms of balance sheet.
A good solid rebound coming in but do you find merit in buying metals, which are leading the recovery today?
What we have been seeing is, the fear factor VIX which had gone up to almost 100 level now has come down to 64 for the Indian markets and sector-wise, some of them are doing well. So, metals and to some extent the oil and gas sector are also doing well.

As far as the metal sector is concerned, China is a major factor and recovery in the Chinese demand and production remains the key factor as far as the sustainability of metal stocks are concerned. So in our view, it could still be early days. Metals is a very cyclical sector; so the near-term pain could be quite substantial because of the decline in commodity prices. Our preference in the metal sector would be Hindustan Zinc. It is one of the best in terms of balance sheet and has substantial cash. It is attractive on the dividend yield as well. So, we would rather go with Vedanta or Hindustan Zinc in the metal sector.

What is your take on the power sector? Power generators like Tata Power, Adani seem to be in a bit of a fix. What is your outlook on this space? Is there anything that interests you?
In the power sector, based on the tracking of various websites, what we are seeing is that the demand for power has gone down by almost 20% to as high as 40% in some states. Within the power sector, there are various plays.

Our preference would be with Power Grid primarily because the company is significantly insulated from whatever happens in the power sector. It has nothing to do with the demand because it gets paid on the basis of availability-based tariffs. So that would be one stock that we would be positive on. The other stock is NTPC where we see deep value and thirdly, we would be positive on CESC.

Within the oil marketing sector, we are seeing a lot of traction in HPCL and BPCL. There has been quite a bit of value buying being witnessed within the space. Brokerages too seem to be turning quite positive. What is your take on some of these oil marketing companies because they have been quite brutally beaten out of shape?
We are not very positive on oil marketing companies because the way the global economy is slowing down, the demand for petrochemicals and refined products will be much lower; refining margins were anyway under pressure.

In the oil and gas space, our preference has always been on the gas companies. It could be something like Petronet LNG or Mahanagar Gas because the government’s focus is also to drive higher consumption of gas within the economy and in Petronet LNG, what we are seeing is that the current valuations are not factoring any potential of growth in its gas volumes going forward. Plus the company has a very strong balance sheet to tide over the near-term economic pain and the dividend yield is also very attractive at 5% to 6%. Petronet LNG has been one of the best performers in PSU ever since it has been listed. So we would rather go with Petronet LNG or Mahanagar Gas instead of taking any positions in HPCL or BPCL.

How are you approaching some of the consumer discretionary names? Sectors that are closely linked to high spenders will be at the last leg when the recovery actually starts kicking in; what is the sense that you are getting?
In the consumer discretionary segment, we have several sub segments like travel, hospitality, consumer durables and so on. We believe one of the biggest impact will be on aviation; travel as well as hotels will be the last because in all probability, we believe that income growth for the salary segment will really be in jeopardy and in the next one year, it is possible that most households would like to conserve or go for savings rather than go for discretionary spending. So to that extent, there will be a setback in consumer demand in the coming 12 months.

Having said that, we believe that consumer durables would still perform better because these are largely linked to weather patterns or festivities. So although the summer season sales of room air conditioners would get significantly impacted but when things normalise and the lockdown is removed, festival sales could be much better going into the middle of FY21. In the initial phase, we believe that almost all these segments, including media to some extent, will be impacted.

We have managed a decent amount of recovery; about 15-20% from the lows. What is next for the markets?
The big question for the market remains how long the lockdown will continue. When we spoke to the various corporates as well who are in the infrastructure segment, they are also really worried about how long this lockdown would continue because they are worried about future business, closing of deals, getting labour on time. There could also be some price negotiations from their clients. We are also hoping that this overall situation gets normalised and work could start. Probably only then we can look at economic growth coming back to normal; so that is where I think investors should look at.

Having said that, there are several positives already for the Indian markets. As I said, the VIX index has come down to 64 from as high as 100, crude oil prices are at $23-24 a barrel. The global economy is now awash with liquidity and global investors would look at various investment avenues, including Indian equities; so there are positives as well as negatives.

But in the short term, we are entering into a weak earnings season. When we hear the management commentary regarding the damage to their numbers and earnings, probably then we will get more confidence going ahead. We still do not have any handle on the FY21 numbers and how it will pan out; so the next few days remain crucial and we are continuously monitoring the COVID-19 situation. If there is any slowdown on that that front, it will really be quite positive for the Indian markets.

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