How to play metals, auto going ahead

“We are probably in the middle of the metal cycle and so from here on, the stock market performance will be a little more muted than we have seen in the past. Some corrections are likely but I do not see any reason to be significantly underweight on that sector,” says independent market analyst Anand Tandon.

How are you looking at the entire metals universe in light of what has been going on with respect to cyclicality and the China factors? What are you pencilling in for the metals basket and which are your favourites?
The metals have done very well in the recent past and in terms of performance, if one was to look at the earnings for both this year and the next, they would be large contributors to the Nifty. The expectation that Nifty will grow by close to 30% and maybe mid 20s next year is actually dependent on performance of metals and public sector banks to a large extent. Those are major contributors to the earnings growth.

So from an earnings perspective, I do not see that there are significant issues. That said, most of the metal companies have also performed exceedingly well in terms of the stock market prices and consequently one will have to take a view on how long that kind of price increase can last and how long the cycle is.

I would argue that we are probably in the middle of the cycle and so from here on, the stock market performance will be a little more muted than we have seen in the past. Some corrections are likely but I do not see any reason to be significantly underweight on that sector as such.

What is your view on the auto space vis-a-vis the EVs?
The EV is obviously here to stay and over the next 10 years, one would expect to see a significant replacement for engines into the EV kind of paradigm. That said, there are two major issues here. One, it is not as if the ICE engines are going away any time soon. It is not as if they will vanish immediately and the second thing is we still have to figure out how long the EV batteries actually last.

There are only that many cycles over which the batteries can sustain and that is a significant cost in the overall EV space. So if one is to look at replacement of batteries over the entire life cycle, the costs are probably more than what people are expecting right now. So what appears to be a lower cost of fuel today must also be set off against the cost of building up the batteries and therefore it is not that much lower.

From the point of consumer preference, there is no question that we will be moving more and more towards EVs but we will have to see whether the charging stations catch up and stay in place. From the point of view of the automakers, those companies which do not have a significant strategy towards getting into EVs are going to have to suffer. But those that are, we still have to see how the competition is going to play out.

Many of the new players that are coming in are not traditional auto companies and therefore we are likely to see new players getting in and the market getting further fragmented. It is early days yet to figure out the ability of companies to make money on it and scope out the winners. Only the winners will be able to make significant money out of it because a lot more research and costs are up ahead.

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