Go for HZL, Tata Steel & JSW in metal basket

If the US dollar starts to depreciate, it is extremely positive for all commodities because they are traded in dollars, says Dipan Mehta, Founder & Director, Elixir Equities.

Global or local --the market seems to have made up its mind to go up.
One major uncertainty is perhaps going to get out of the way and although there were some fears about the US elections but by and large, those have been contained and markets are looking beyond the US elections. Once this event is over and done with, the markets globally will focus on any stimulus package which may come through from the US and that is going to be quite substantial and could have an impact on the global economy as well.

Also, a lot of other countries -- EU, Japan, China and India -- are also looking at stimulus packages. In the initial days of Covid-19, the world was relying on the central bankers to keep the liquidity conditions extremely easy and lower interest rates, and that has played out really well.

The next leg of the up move will come from fiscal concessions and stimulus packages that may come from the government. It is getting reflected in the stock prices. Also, globally we are seeing better than expected corporate numbers coming through, especially in India.

It is the beginning of the earnings season and whatever numbers have come through so far have encouraged a lot of investors waiting on the sidelines. All the effect of the lockdown and Covid-19 and second wave and many other uncertainties are being gradually answered with the numbers which are coming through. It all suggests that apart from a few select industries which depend upon crowds coming in, by and large, it is business as usual. Normalcy has come in better than what a lot of analysts and fund managers were expecting.

How are you looking at the metals basket? Is it prudent to look at this sector as a long-term investment opportunity?
There is no long term about metals. They are commodities and they are susceptible to many global factors and a lot of volatility in the end product prices. Some of them are difficult to calibrate and understand. Metals and other commodities are great trading opportunities at this point of time. If a stimulus package comes through in the US and elsewhere in the world, it is going to be extremely positive for metals because a lot of it would be focussed on rebuilding infrastructure and therefore benefit a lot of industrial metals.

Having said that, a lot of pundits are of the view that the US dollar will start to weaken from this point on, considering all the challenges they have on the fiscal deficit and the trade deficit front and there is a good expectation that if the US dollar starts to depreciate, it is extremely positive for all commodities because they are traded in dollars.

China has rebounded far better than what anybody was expecting and is acting as a major catalyst for higher metal prices. A lot of metal companies are benefiting from lower input costs and volumes have also picked up and in some instances, prices have gone beyond even pre Covid levels.

Metals are a strategic trading position that investors can take at this point of time. But there is no long term in metals. They have not been great value creators historically, but right now they are in a sweet spot with volumes going up and prices holding up pretty well. In a lot of metals, especially steel, the domestic volumes are picking up and that is always more profitable for them.

We are very positive on metals per se and investors should prefer companies which have great backward linkages. Here are a few with usual disclosure that we and our clients are invested in Hindustan Zinc, which is completely integrated and a low cost producer of zinc and then there are Tata Steel and JSW. Tata Steel has got its own mines for iron ore as well as coal and benefit from backward linkage and therefore, input price increases may not impact profit margins as much.

JSW Steel also is getting its raw material security in place gradually. So one should look for integrated players which have mines in their portfolio. This way, even if input prices start to rally, at least their margins are protected.

Some of the metal names, steel majors in particular, are on a roll. What is your view on the steel majors?
We are very positive on steel companies and so far the numbers which have come through are quite interesting. Volumes have picked up, end product prices have held up pretty well and margins have really expanded. These are high operating leverage businesses per se. A lot of the steel majors are taking advantage of this upswing to try and reduce their debt.

The other day JSPL managing director made it clear that over the next 12-24 months, the debt would be significantly reduced. So steel is a good place for investors to be in with auto and appliances doing well. China is also taking a good amount of volumes out from the country in terms of exports. It is a great trading opportunity, but investors should keep in mind that it can do well for a few months or so but these are not secular growth stories. These are not stocks you can hold in your core holdings for three to five years. End of the day, these prices tend to correct because capacities will come into play and initial pent up demand then tries to settle down. So one has to be a bit careful over there. You should trade in them with a 3-6 month outlook.