Earnings to be better in cement and steel sectors in medium term: Pankaj Pandey

Pankaj Pandey, Head Research, ICICIdirect.com, says earnings in the cement and steel sectors are poised for improvement, making them attractive investment options. Cement companies have already shown promising Nifty growth, while the metal sector holds potential for a positive surprise. Price increases of Rs 5,000 to 6,000 across the board are expected to significantly benefit metal companies in the first quarter.

What is your view on the overall earning season? Not many companies have outperformed the estimates. We went into this quarter with very subdued expectations. Do you think going ahead, once the picture gets a bit clearer, earnings will be the key catalyst to drive the markets going ahead?
Pankaj Pandey: You are right that in Q4, the overall anticipation was pretty subdued. From that perspective, earnings are not a big miss. Yes, things could have been better. But our sense is that FY26 looks a lot better. If you look at FY25, we had largely a single digit market appreciation and a similar earning growth. But FY26 looks a lot better, especially from the commodity pack. You are seeing quarter-on-quarter improvement and FY26 looks a lot better and overall sense is that earnings are expected to be in low double digits, about 11-12 odd percent.

From that perspective, a similar market return is expected and from that perspective, the earnings have not been a big disappointment. I would like to highlight that this becomes more of a stock specific scenario. For example, in auto, M&M is delivering high teen volume growth whereas a lot of other players are witnessing degrowth. So, it has become a very stock specific market.

What has been your reading into this? Do you believe this news flow could sentimentally impact the Indian pharma player, especially those who have a large exposure to the US market or do you believe that much is already in the price given the fact that we have been lingering and that overhang has been there for quite some time now?
Pankaj Pandey: Largely, this order pertains to the innovator drug as the destinations mentioned are sources of innovator drugs. So, from that perspective, we do not really see too much of an impact on the markets for us because we are largely a generic supplier and on top of it, we are doing fairly well in terms of negotiation. From that perspective, I do not see more of a knee-jerk reaction. This could have far more implications for Europe or other places from where the US sources bulk of their imports.

The FDA will enforce better API source reporting. Do you believe some of the API players will be the key to watch out for given the fact that the players that you are talking about too are heavily dependent on China for importing these raw materials.
Pankaj Pandey: I do not rule out a scenario where you see higher scrutiny from FDA and that has gone up in the past few years. So, that is very much possible. Relatively our sense is that when you talk of other competitors like China, our sense is that we are relatively better placed, but yes there is still some uncertainty around this news.

It is a sort of a wait and watch situation and on top of it, we are seeing some of the companies looking at having some kind of a satellite manufacturing capacity in the US. That might also mitigate the overall impact.

Yesterday, the OMCs had gains of between 4% and 7%. Following the cool-off in crude oil prices, would OMCs be the best play or is it time to look at some of the other sectors also?
Pankaj Pandey: The good part about crude price is that now major players like Saudi Arabia are looking at increasing their market share. So, gone are the days when they used to ramp down production to maintain crude oil prices. This is structurally very positive for us because we import nearly Rs 10-12 lakh crore crude oil. Any kind of a price decline is a benefit whether it stays with the consumer or stays with the government.

Obviously, OMCs will benefit from this aspect and the other aspect is that in case of a rewiring of the LPG supply chain, this is positive for all the OMCs which is where we feel that things could be better. For a lot of other user industries like FMCG, the benefit will start accruing from Q2 onwards and similarly in a lot of other sectors like cement, where our sense is that even the petcoke prices could soften.

A lot of beneficiaries will emerge over a period of time, but crude oil prices are declining and countries are not really competing and not restricting prices is a big positive for us. It also helps us in case a fiscal side war escalates and something happens, we are fiscally far better positioned to undertake any kind of a financial impact as well.

Which is that one sector which in the medium-term or so, will be a market outperformer to watch out for and lay bets on? It should not be banking.
Pankaj Pandey: I like the commodity pack – both cement and steel. These are the two sectors where the earnings are going to be better and Nifty growth and numbers have come out especially on the cement company side, we are liking that and metal could be another surprise element because we have not seen that much of a price performance. But that is another sector where we sense that much of the benefit has not really flowed in Q4, but Q1 is when we are going to see the benefit of about Rs 5000 to 6,000 increase in the prices across players. So, these are the two pockets that look relatively good to us.