Near term, only the government is spending and though the numbers seem to indicate a pick up in demand, I am

struggling to find industries which are expanding capacities, Anand Tandon, Independent Analyst, tells ET Now.

Edited excerpts:

What is the outlook for the metals basket because it seems like a lot of the concerns have not abated and experts across the board are still advising a bit of a wait and watch. What is your assessment?

On metals, my view for a long time now has been that if you do not have action in India, there is very little that you should expect in terms of a price uptick. That view has been pretty much vindicated. Whenever we hear that the Chinese market and the economy are slowing down, the prices have also moved down accordingly, despite the anti-import duties.

Add to that the fact that at least for steel, more capacity would be coming back on stream as some of the mothballed facilities that were operating below their rated capacities were to come back as the NCLT resolutions happened. I do not see a major case for uptick in the sector anytime in the near future. Prices will remain under pressure and I would think margins as well.

If the margins were to improve somewhat because of fall in raw material prices, that is a different issue but it does not look very apparent right now and something similar is working out in terms of aluminium as well. So, at least for these two major metals, there is still some softness left.

In the near term, one is seeing crude spiralling up. It has climbed up all the way to $61 to a barrel. Would you say that the crude sensitive trade is also going to reverse? Some of the aviation stocks are already under pressure and OMCs have taken a wee bit of a knock as well?

OMCs will take a knock largely because of the fact that they will have inventory losses this quarter but other than that, the margins are now probably better than they have been for a long time. To the extent, they will be able to recover and the OMCs will not suffer that much in terms of margins. But there will be a mark-to-market loss in terms of the inventory that they have purchased and which they are having to sell off at a slightly lower price.

But other than that, I do not see a major problem for them. They may be underperforming the market because the government tends to do stupid things like taking cash out of the companies more than they should be doing, but other than that, I do not think the business is any worse or better off.

As far as airlines are concerned, there are specific issues with regard to the companies and anyway that industry is still struggling with its own inability to raise prices for the customers and volumes. It is better to stay away from the cyclical sector unless you are an insider.

Are you okay with what is happening in some of the names like Coal India, NMDC and BHEL, where buybacks and probably hefty dividends are getting announced but stocks are languishing near all-time lows? Any investment idea on those names?

You should largely stay away from the PSUs for the simple reason that the only PSUs that ever make money are the monopoly ones. So oil companies will make some money when and if the money is released for defence for example. The defence PSUs will make some money. They are almost mandated to make money because they have margins that are guaranteed.

But otherwise the main issue is that the PSUs have a social objective or at least the government seems to think that it has a social objective and therefore as an investor, may not want to share the same objectives. You will find that the largest shareholder is not necessarily aligned with you in terms of where you want to go.

Looking at it purely on the basis of valuations has never worked and it not likely to work in the future. At best, they remain the kind of trades you may pick on the basis that there will be a dividend payout and that may give you a high dividend yield.

But immediately after that, you will find that the stock will correct fairly significantly. So if and when they get to a stage where they are operating independently and working as businesses, you could look at them because some of them are very large companies. By and large, my advice would be better to stay away from them and look at the private sector.

What is the expectation when it comes to results within the capital goods space? Are you pencilling in an outperformance here?

Near term, government is the only one that has been actually spending and though the numbers for the last quarter seem to indicate that there is generally a pick up in demand, I am actually struggling to find industries which are expanding capacities.

We seem to be closer to 80% or at least late 70s in terms of capacity utilisation and yet I do not see that happening in most of the industries when you look at it bottom up. The government has been attempting to push the capex cycle up, but that is not enough to make any major dent.

If you want to play the infrastructure sector and industrial sector, the best bet remains L&T. If you are willing to take a three-year view and go against what I just said which is you should not buying public sector companies, then you can buy a BHEL largely because of the assumption that over the next 24 months, the demand-supply situation in the power sector will improve significantly enough that they will be operating in much PLFs and there will be some new project announcements.

More importantly, BHEL will come back to be an engineering company rather than an NBFC which currently because of its balance sheet, has got loaded up with receivables which it is not getting. Once that comes through, then there will be large value in BHEL, at least till the government steps in and messes it up again.

So there will be a short window where you will be able to make some money in BHEL but otherwise, Larsen remains a more secular growth story.


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