Stock Portfolio: Overweight on auto; wary about corporate capex driven banks: Nilesh Shetty

“I will be careful. I don’t think great value has emerged in that bucket as yet. As they had a massive rally, now they are looking for a correction and investors are still in need of that bucket, ”says Nilesh ShettyPortfolio Manager, Quantum Advisors.

How are you positioned in deep cyclicals like the auto and auto ancillary segment in your portfolio? Have you started raising your weights here?
We believe in value style and auto is one of the deepest value pockets available. The valuations there are close to the bottom of their valuation bands and we actually continue to have a great weight there especially in the two-wheeler space. We have a great outsized position.

Again, the numbers are back to a decade ago when the market had to digest the price hikes that had happened over the last three or four years. We’re sort of at the cusp of upturning the volumes out there and picking up your volumes. One of the big drivers is the replacement cycle which has been elongated because of the shocks to the economy.

Maybe we’ll see some of those buyers sitting on the sidelines jumping back and replacing some of their old vehicles. And of course, a lot of the offices are still hybrid and the colleges are still not 100% back. Once that need for mobility kicks in, a combination of factors will make auto demand pick up, especially where valuations are. We expect that bucket to do really well over the next two, three years. So we have a fairly large overweight position.

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What about capital goods, especially the mid-tier capital goods, the bearing companies? , and all these midcap engineering companies are capital good feeders to a larger capex cycle. How do you like this universe

Unfortunately, a lot of them don’t meet our liquidity criteria. We have minimum liquidity criteria and most of these companies tend to trade below our filters. But there is a cyclical upturn and we will see that bucket really well.

One has to choose and choose the quality of management because it is filled with companies that are not that great management quality. One has to be very careful who buys that. I believe that there is an economic upward cycle in India which we believe to be a sharp pickup in infrastructure spends and capex cycle. I expect capital goods as well as ancillaries to do those capital goods a lot better.

The MD was referring to the credit cycle coming back. He was saying that the capacity utilization in the system has gone up to 75% and inquiries on the new capex related loans have gone up. Is it your PSU or private?

We do have some allocation but we have to be careful about the price inflation that you have been looking for over the last two years. Just the replenishment of working capital itself will drive credit growth. So it may not be a real reflection of the underlying demand for capex spending but just the inflation-led replenishment of working capital which is the credit growth number.

But we do expect that over the next 12 to 18 months, at some point, the companies will get serious about capex. We are seeing anecdotal evidence of one or two sectors but when I have met banks, there is no broad-based need for corporate India to show a sharp improvement in capex. They are still very careful and watchful and sitting on the sidelines but I expect that over the next 12 to 18 months once utilization levels hit some threshold.

We do own banks but most of them are on the retail side. There are a lot of corporate capex driven banks out there that are highly suspicious of service backed and quality management. We tend to stick to the moment more at the private side.

GRMs went to record highs and now have refining stocks. The Commodity Cycle has a multi-week low to peaked and lead, zinc, and copper all. Are you looking for a rebound and an average realization to be healthy and therefore holding them?

Somewhere near the end of last year we started trimming a lot of these holdings. We don’t have a lot of commodities but whatever we have, we have trimmed a significant portion of their weights over valuations in cyclical upturns, and their valuations have begun to compare to premium valuations at trading.

We have trimmed that and we are waiting patiently. They have corrected quite sharply and even in a lot of the companies, even though the price correction is not exactly the kind of share price correction we have seen. If the price is sustainable and there are some opportunities for us to add more, we will have to wait and watch where the commodity prices end up. If they end up lower, you might see a bit more pain in that bucket but we have trimmed our positions in the commodity space.

We know that small and midcaps are more of a bottom-up kind of opportunity but the average valuation of that universe is correlated enough to be worth looking for?
We have a big challenge for corporate governance and valuations at quality management. So even after the corrections, the better run companies, the great franchises or the quality of the business to keep up with the premium valuations.

We will get the value in the company where the quality of management is suspect or the business models are not that great and that the space we want to own. So I will be careful. I don’t think great value has emerged in that bucket. As they had a massive rally, now they are looking for a correction and investors are still in need of that bucket.


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