Metal stocks to remain range-bound; sector might see some margin improvement in H2: Rakesh Arora

What do you make out of the overall Credit Suisse liquidity concern? Bigger balance sheet, more interconnectedness, as compared to SVB, or do you think markets can weather this storm as well?

We are not very sure how far this contagion would go, given that interest rate hikes have been very sharp and the quantum of increase is also quite large as compared to what we've seen historically. So it remains to be seen what would be the contagion impact. But the world has already seen one such crisis in 2008 (Lehman Brothers collapse).

So, I'm pretty sure that central banks now have some experience in dealing with these kinds of situations and they are moving very fast. So, hopefully, things will be contained and we won't really see a repeat of 2008.

Also read: Closing Bell: Market ends with modest gains amid volatility; metals drag, realty gains

Are you drawing any parallel when it comes to the 2008 crisis, in terms of the FIIs, in terms of the economic situation? Do you think any of that is actually playing out now? First, we saw SVB. Now we're seeing more concerns emerging out of Credit Suisse? What do you make out of it?

I think that central banks and governments would try to support these banks, like what happened during the Lehman Brother crisis. So, that could contain the spread of this disease. Number two, if we look at the bond yields, they have crashed in the last 3-4 days. So no one is expecting interest rate hikes to continue from here on, and probably central banks might cut if the situation becomes worse. So there's already an indication from the bond market that there are expectations on the policy front from the central banks.

Coming to FII inflows and the impact on the Indian market, I think FII inflows would remain muted for some time, meaning it's such a situation right now and emerging markets are seen as a risk-on trade. So I don't think money is going to flow into India anytime soon. We are into a kind of a consolidation zone. I think the Nifty should consolidate between 16,800 and 18,000. That's a kind of a 1,000-1,200 range, where it should remain for some time till there is some clarity on the global macro situation.

Do you think there are more skeletons in the closet? We have witnessed an impact on the banking and the IT space. How do you look at these two individual sectors? More sectors to be impacted?

So, there are two impacts on the IT sector. One is that some of the companies have deposits with SVB, and the US government has assured that depositors’ money is safe. So, I think that worry is out of the way. The bigger worry is that the FIIs are a big component of the demand driver for IT companies.

And, if globally, banks are under duress, the demand situation for IT companies would remain a little bit soft. That would mean that while stocks have corrected, they're still not very cheap, historically. They are still like one standard deviation above. So probably there could be some more correction in the IT stocks, given the weak demand outlook and not really to do anything with some of the guys having deposited SVB or other banks.

A lot of volatility witnessed in the metal pack? What do you make out of it? We've seen too much optimism coming out of the China reopening, but are the trends really encouraging for the sector right now? Would your preference still remain in favour of the non-ferrous space?

As you know, China is the main driver for commodities and the reopening of China is a big, big positive, meaning that is the momentum, which has carried stocks slightly higher in 2023 as compared to the second half of 2022.

However, China itself was trying to support the economy even during the lockdown, and they were spending huge amounts of money on infrastructure.

So, even after reopening, the uptick in spending on infrastructure is hardly anything. That's why demand is not really coming through.

The second big driver beyond infrastructure is housing, where again the support is not really coming in because the real demand for housing units in China is around 0.6 to 0.7 billion units a year, whereas they are still building like 1.2 billion units. So there's a huge oversupply. And if you note that the Chinese government has fixed a GDP target of 5 percent, which is below what people were expecting despite the reopening.

So clearly, the Chinese government is in no hurry to push or pump the economy. So things are going to be a little bit of drag. The metal sector looks slightly better as compared to the second half of 2022 and there's a mean reversion happening in margins.

There's no big rally or any kind of upmove we're expecting. I think metal stocks will remain range-bound and trade along with Indian markets. Coming to ferrous, non-ferrous, meaning obviously, longer term non-ferrous has a better scope, given that renewable capex is going to need copper, aluminum, etc., in a much bigger way as compared to, say, steel.

That way, I think from a medium-term perspective, non-ferrous looks better placed.

Let’s talk about the cement sector. News reports suggest that Adani might just sell out some 4-5 percent stake in the cement business, overall. What do you make out of it? Any slow expansion, or, say, plans by Adani will benefit the cement sector in the space, overall?

Yeah, I mean slightly subdued. Adani is better for the sector, given that they will not be so aggressive in their capex plan, though Ambuja and ACC are well-funded and they have huge cash balances.

So they'll continue to grow around 8-10 percent, which is the industry growth. They will not really push the pedal on going very aggressively, which they were probably planning earlier.

I think it's a good sign for the sector, which is seeing cost pressure a bit, and coal prices have come off. Now, crude oil prices are also falling. Cement prices normally tend to stick. Cement prices have already gone up because of cost pressures. Now, you will see continuous margin expansion for cement companies. So Q4 will be better than Q3 by Rs 250-300 per ton on the margin.
I think in Q1 you will see further margin improvement. So signs are good for the cement sector. There's nothing to worry and the Indian government is doing so much on infrastructure. Demand should also remain pretty stable.