metal stocks: Harish Krishnan bullish on metals; sees long-term upside amid global reindustrialisation and weakening dollar

But the other sector that you have flagged off is the metal basket. Well, of course, the biggest trigger is the kind of tariff and the trade deals that have been announced, that actually lifts up the global sentiment as well. But in the past one year if we see the index that has done absolutely nothing. But my question is that when this sector comes on a roll and starts to shine, there is no stopping because from the past, barring the last one year if I see the previous four years return, that is almost a 400% jump. What kind of a return expectation you have within the metal basket? How well it can do? And within that which are the pockets that are you bullish on?
Harish Krishnan: So, from a fundamental standpoint, we are going to see a reasonable amount of re-industrialisation back in the developed world and that is what this entire geopolitical narrative is speaking about.

I mean, this entire spending of defence by say Germany is going to lead to some kind of re-industrialisation of Europe. We are talking about getting some amount of jobs, of course, not the entire amount, but to get back manufacturing back in US, that is also going to require a reasonable amount of hard assets in the developed world.

So, while there is going to be a balance of trade, etc, we think that there is going to be a greater demand from the developed world which is going to come through, which is over the course of the last maybe two-three-four decades has been on a structural decline, so I think that is one key variable.

The second key variable is that of the dollar index itself, which has kind of cooled off from its highs and as many of us know especially because they are priced in dollar terms, the real value of these commodities typically tend to appreciate in a weakening dollar regime, so that is the second point.

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But the third and the most striking point for us is that if we were to plot the profit pool share of the metal companies, what do I mean by that? I take the entire metal sector profits divide by the top thousand companies profit pools and we plot this for the last 25 years. It might surprise you and your viewers that the metal sector profits are today back at 2001 levels, so that is the level of the profit pool share that has kind of eroded from metals. Again, these are extremely cyclical sectors. Sectoral profits vary from 2% to 17% of profit pools. So, you would ideally want to buy these sectors when they are at the lowest end of the profit pool share in a cyclical sector and which is what we think that there is a potential trade which could last maybe another two-three-four years if any of these kind of things, the narrative starts coming true. So, like I said, our focus is on identifying margin of safety pockets where there is very low ownership, where cyclically things are very-very poor and where there is a potential for a catalyst to play out over the course of the next one, two, three years. So, you have told us what could do well. Now, let us understand that if something has to do well, something either has to remain flat or something will not do well again relatively not absolutely. Where do you think there is a reason to believe that there would be an absolute and a relative underperformance if you compare that with the benchmark?
Harish Krishnan: So, I mean we focus on relative not so much on absolute, so absolute they could still do well. The sector that we think is going to face some amount of headwinds is going to be the real estate sector. Now, this is a sector that has done very well. We have been bullish on real estate for a long period of time.

The cycle turned up very-very favourably. But this is a phase where there has been a significant ownership and a lot of supply of paper that came through over the course of the last two-three years. So, this could be a sector where there is a lot of positives already being priced in.

So, even as people focus on inventory levels and say that the cycle can still last another one, two, three years, the point is that how much of that good news is already priced in a cyclical sector which has really exploded its market cap anywhere between say 5 to 15 times over the course of the last three-five years, so I would say that that would be one sector.

Similarly, if you were to look at the hospitality sector. This is again a sector which has done everything right. So, it is not that we are saying that businesses are doing something wrong. It is just that what is being built into these businesses and the supply of paper, the number of listings that we have seen in the hospitality segment over the course of the last two-three years has been significant and therefore, we believe that all good things, it is effectively a law of gravity everything that goes to the sky eventually has to come off, and therefore we believe that the margin of safety in many of these spaces which are reasonably priced to perfection is very high.

Just to give you a sense, the total hotel sector market cap is close to about 2,50,000 crores with a revenue pool of about 25,000 crores.

Now in a sector where margins have gone up more than 1500 basis points and rightfully so given the strong demand that came through, one really has to see what is the scope for further surprise in such a significantly overvalued, over owned sector at this point of time and therefore, it is not that we do not own hotels in our portfolios, the point really is that we want to sell on rises out here rather than commit more capital into the space at this point of time. So, there will be many such sectors where we think that relatively things are still priced to perfection from a business cycle point of view.