Here's why Alchemy's Hiren Ved is betting big on cyclical stocks

Hiren Ved, chief investment officer of Alchemy Capital.

Cyclical stocks, especially from sectors like industrials, real estate, and utilities, which were largely out of flavor during the recent bull run, are fast gaining popularity and are also seeing an increase in their weightage in the benchmark indices, said Hiren Ved, the director and Chief Investment Officer of Alchemy Capital.

“All the dirty dozens of the previous cycle are now becoming heroes, and all the heroes are struggling,” said Ved at a recent media interaction.

“From 2019-2024, the weight of cyclicals has risen by 24 percent. In contrast, sector weight of financials decreased by 26 percent while consumer gained marginally by 4 percent, and IT reduced by 6 percent,” he added.

Cyclicals, as a sector, had the highest weightage at 66.6 percent in 2007 reflecting strong economic growth and investment in industries sensitive to economic cycles. However, the weightage dropped significantly to 30.9 percent by 2019, clearly indicating a shift in market focus.

Incidentally, cyclical stocks registered a strong performance during 2003-2007 when their weightage in Indian markets increased from 40.7 percent in 2003 to 66.6 percent in 2007 – the weightage of financials, consumers and others fell during the period.

Thereafter, as the weightage shift happened, financials, consumers, IT, and healthcare outperformed the cyclical stocks during 2007-2019.

Alchemy Capital has 73 percent weightage allocated to cyclical stocks as of April 30 – higher than the 42 percent allocation in December 2023. Within cyclicals, the fund house has industrials, real estate, and utilities in its portfolio.

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Real estate

Alok Agarwal, fund manager of Alchemy High Growth PMS believes that the growth trigger for the real estate sector remains intact on account of the increasing demand for larger living spaces post-COVID-19.

He highlights the fact that over the past 15 years, everything associated with home interiors—except the homes themselves—has turned into multi-baggers. He cites examples of companies dealing in air conditioners, furniture, lighting, fans, stoves, chimneys, tiles, paints, and even pipes.
The top two pipe companies in India have a combined market cap of Rs 50,000 crore, whereas there are only four to five real estate companies with a similar market cap, he says.

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He believes that since there has been a huge underperformance in the real estate sector, there is merit in owning them now though he adds that his interest in real estate is not merely because the stocks are undervalued, but also because he expects a strong growth in the sector.

In a similar context, Ved said that while investors are bullish in real estate, they used to play the theme through ancillaries but now the segment is available as a reformed sector for investors.

“Banks weren’t allowed to lend against land, so developers would borrow from the unofficial market and there was a lot of cash flowing around. And hence investors weren’t confident if the numbers shown in the book were real or not,” said Ved while adding that policy changes like RERA and GST have ensured that well-regulated and transparent institutional capital is again flowing into the segment.

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