stocks to buy now: how to play falling commodity prices? Pawan Parakh on where to find the best bets

“The best way to play Commodity Consumers is to play it through the Building Materials space or the Capital Goods space. FMCGs and QSRs can also be played, but they are more expensive,” declared Pawan ParakhPortfolio Manager, Renaissance Investment

What sense do you get in terms of bottom-up ideas in the market? After the recent rally, do you think a lot of mid-cap companies, a lot of so-called industry leaders are the ones to focus on? Is this also the style followed by the Renaissance?
For the past six to nine months, we have been very positive on the markets and we believe that the sectors linked to the heart of the economy should do well. Thus, sectors such as banks, capital goods, chemicals and automobiles are sectors in which we have positioned ourselves. We believe the national economy post Covid has recovered well and as things go our confidence is only growing.

On capitalization, we’re clear that we want to invest in quality names across market caps – whether that’s largecaps or midcaps and if you look at long-term history, it is stocks and sectors that have leadership skills. These sectors tend to perform better over a long period of time.

Let’s talk about banks in particular. This area is very broad and there are many when it comes to banking. There are private sector banks, PSU banks, largecaps, midcaps. All look good. Where is your goal?
We focus more on the private side. Our public sector exposure is largely limited to the one or two big names and in the private sector as well our exposure is generally to the big banks that have a very strong liability franchise and I think that’s even more important in the current scenario where the cost of deposits are increasing and the ability of the bank to pass on its asset to the client side is very important. When it comes to mid-sized banks, we generally focus on banks that have higher exposure to secured wallets, as we believe this is safer than venturing into high-growth unsecured wallets.

How are banks taking advantage of the economy and the triggers you mentioned? Many of these companies are exposed to commodities. But now commodity prices are falling and the overall cost of production is expected to fall. How should we play it? Should we look at FMCG or QSR names?
The best way to play commodities is some of the commodity users or some of these FMCG or QSR stocks. The only problem is that these are quite expensive. The whole bunch of actions that fall into this category are very expensive, and you can play them in a building materials space or a capital goods space instead.

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These are commodity-intensive sectors but they are companies with multi-year growth visibility and as far as valuations go, we think valuations are quite reasonable at the moment. More importantly, some of these sectors claim, for example, that building materials in particular are also benefiting from the recovery in real estate and infrastructure. It is therefore these sectors that should be favored to play on the fall in commodity prices.

What’s your take on new-age tech companies? Do you have coverage on them and what companies do you like in that particular industry?
We monitor all companies and don’t invest in them the most because, as far as our philosophy goes, we like companies with strong cash flow and ROE and unfortunately none of these companies have these characteristics.

More importantly, the biggest concern we have is that some of these companies are cutting their losses, but we still don’t know when they will be profitable and what the prospects for growth will be. Merely being profitable does not justify the multi-billion dollar valuations they currently command.

We stay away from them, we only have exposure to one or two names but these are companies that are profitable, leaders in their field and have high cash flow.

A space that we all talk about in terms of raw materials, maybe like a steel company, a metallurgical company or a paper company. How would you look at it?
If you look at the sugar companies in particular, they had a good cycle three or four years ago and most of the companies have paid their debts and are currently sitting on comfortable balance sheets. Steel also goes through a similar cycle. Over the next three to four years, despite their capacity expansion plans, these companies will be able to reduce their leverage to comfortable levels. Steel is a very cyclical sector. When you have leverage, it makes it even more of a deep cyclic. This deeply cyclical nature of this sector will fade and that is a good thing for us as investors.

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