Reliance’s earnings engine set to rev up after years of heavy capex: Sandip Sabharwal

Synopsis

Sandip Sabharwal discusses the compelling nature of gold due to global uncertainties and monetary policy issues, while the outlook for silver is less clear, despite a historical correlation between the two. China's rare earth magnet supply restrictions are impacting various industries, particularly autos, creating near-term uncertainty.

"So, the story for gold has been more compelling because it is a play on global uncertainties and the monetary policy dysfunctionality, etc. This play on silver is less clearer but then there always used to be a correlation between gold and silver which broke out, like we broke," says Sandip Sabharwal, asksandipsabharwal.com.

I know we were talking about this yesterday as well and how this artificial ban if you will from China stopping the supply of rare earth magnets. But the fact that China produces 60% of rare earths and processes 90% of them, the bigger ramification is not just for automobiles but even for say petroleum refining, for chemical processing, electronics, optical glass, clean energy, display screens, wastewater treatment, radiation, steel additives. But you think the harder hit would be autos clearly?
Sandip Sabharwal: In the near term yes, if this issue is not resolved, because most of the companies, so two-wheeler companies have indicated less amount of inventory, some of the four-wheeler companies like M&M, Maruti have indicated they still have inventory for two months plus.

And it is a global thing what they have done. So, their supply restrictions are impacting companies worldwide not only in India. So, let us see how it gets resolved because ultimately they also need to sell. So, they are not selling at all does not help them also in any way. So, we need to see how it goes out. So, let us say there is a disruption, auto production stalls, then for a month or so maybe the auto sales or auto production could get impacted significantly and eventually, the supply has to come back, so that is the challenge which investors have to evaluate today that whether there will be a disruption and if there is a disruption, how long the disruption will be for. So, near-term it creates uncertainty and now the news flow also has become significant, most policymakers also are becoming cognizant of this. So, let us watch out whether it gets resolved or not, with China we can never be sure what happens.

You think finally, Reliance could perhaps wake up and participate because it is really not in the last leg of the market rebound.
Sandip Sabharwal: Last few months it has obviously outperformed the markets. If we see the returns which the rally it started from around 1200 levels to the current levels and I would think that all indicators are there that it should outperform for the next two years also given the fact that it will come out from a huge investment cycle into those investments actually starting to generate returns and a lot of the subdued parts of the earning growth picture could actually pick up this year and next year. So, I would agree with the recent brokerage reports which have been coming out calling for an uptick in earnings and uptick in return ratios and in turn the stock being better.

Some more to silver in one's portfolio. I know you have always propagated that gold should also be part of your portfolio. You think silver also should be added now given the kind of stark divergence between what gold has done and silver and the fact that silver uptick now seems to be beginning with silver hitting an all-time high on the MCX just yesterday.
Sandip Sabharwal: So, the story for gold has been more compelling because it is a play on global uncertainties and the monetary policy dysfunctionality, etc. This play on silver is less clearer but then there always used to be a correlation between gold and silver which broke out, like we broke. Now, if that correlation again is going to play out and given the fact that silver assets could have been underinvested by a lot of funds and investors, there is a realistic possibility that we could see double-digit gains from the current breakout level like Kunal said because it is a multi-year breakout. So, typically if it sustains, so sustenance has to be seen for a few days but if it sustains, then we could be in for double-digit returns from here also.

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