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stocks to buy now: How can you play the fall in commodity prices? Pawan Parakh on where to find the best bets


“The best way to play commodity consumers is to play it via building material space or capital goods space. FMCG and QSRs can also be played but they are more expensive,” says Pawan Parakh, Portfolio Manager, Renaissance Investment

What is the sense that you get in terms of bottom up ideas in the market? After the recent rally, do you believe that a lot of midcap companies, a lot of so-called sector leaders are the ones that one should focus on? That has also been the style what Renaissance follows?
For the last six-nine months, we have been very positive on the markets and we believe that sectors which are linked to the core economy should do well. So, sectors like banks, capital goods, chemicals, autos are sectors where we positioned ourselves. We think the domestic economy post Covid has healed well and as things passed, our confidence only keeps on increasing.

As far as the capitalisation is concerned, we are clear that we want to invest into quality names across market caps – be it largecaps or midcaps and if you look at the long-term track record, these are the stocks and sectors which have leadership skills. These sectors tend to deliver superior performance over a long period of time.

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Let’s talk about banks in particular. That area is very vast and there are plenty when it comes to the banking sector. There are private sector banks, PSU banks, the largecaps, the midcaps. All are looking good. Where is your focus?
We are focussed more on the private side. Our exposure on the public sector is largely limited to the top one or two names and in the private sector also our exposure is typically large banks which have got very strong liability franchise and I think that is even more important in current scenario wherein the cost of deposits are increasing and the ability of the banks to pass on to its asset side customer is very important. As for the mid sized banks, we typically focus on banks which have got higher exposure to secured portfolios because we think that is safer versus venturing into high growth unsecured books.

How do banks benefit from the economy and the triggers that you mentioned? A lot of these companies have commodity exposures. But now commodity prices are coming down and overall cost of production should reduce. How should one play it? Should one look at FMCG or QSR names?
The best way to play commodities is some of the users of commodities or some of these FMCG or QSR stocks. The only problem is these are pretty expensive. The entire bouquet of stocks which fall under this category is very expensive and you can rather play it in a building material space or capital goods space.

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These are sectors which are consumers of commodities but these are companies with multi-year growth visibility and as far as valuations are concerned, we think valuations are fairly reasonable as of now. More importantly, some of these sectors say for example building materials in specific also benefit from recovery in real estate plus infrastructure. So these are the sectors which one should rather focus on to play on the falling commodity prices.

What is your view on the new age tech companies? Do you have a coverage on them and which are the companies that you like in this particular sector?
We are monitoring all the companies and not investing most in them because as far as our philosophy is concerned, we like companies with strong cash flows and ROE and unfortunately none of these companies have those features.

More importantly, the bigger concern that we have is that some of these companies are pruning their losses but we still don’t know when they will be profitable and what will be the growth outlook. Just being profitable does not justify the multibillion dollar valuations that they are commanding as of now.

We are staying away from them, we just have exposure to one or two names but, those are companies which are profitable, leaders in their space and have high cash flows.

One space that we all are talking about in terms of commodities, maybe like a steel company or a metal company or a paper company. How would you look at it?
If you look at sugar companies in specific, they had a favourable cycle three-four years back and most of the companies paid their debts and for now are sitting on comfortable balance sheets. Steel is also going through a similar cycle. Over the next three-four years, despite their capacity expansion plans, these companies will be able to reduce their debt to comfortable levels. Steel is a very cyclical sector. When one has leverage, it makes it even more of a deep cyclical. That deep cyclicality nature of that sector will wane away and that is good as far as we as investors are concerned.

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