How to make BIG MONEY with cyclicals stocks? | Niteen Dharmawat

ELI5/TLDR

Cyclical businesses — steel, cement, sugar, banks, hotels — go through long booms and busts, and the trap is that they look cheapest exactly when you should run. At the top of a cycle a steel company earns so much that its P/E falls to 3 or 4, which feels like a bargain, but those are peak earnings that are about to collapse. Niteen Dharmawat buys these industries when everyone is embarrassed to own them and the only news is bad — as long as the damage is temporary and not a typewriter-style death — and waits for the cycle to turn. He pairs this with a forensic habit: trust cash flow, not profit, because profit can be invented and cash cannot.

The Full Story

The inversion that traps everyone

The whole game with cyclical companies rests on one counterintuitive fact: the cheaper they look, the more dangerous they are.

“When the cycle is at peak, your company is making lots of profits and at the peak of the cycle you don’t make money. Always at the bottom you make money.”

Here’s the mechanism. A normal company gets expensive (high P/E) when it’s doing well and cheap (low P/E) when it’s struggling. A commodity cyclical does the opposite. When steel prices are at the top, a steel company earns a fortune, so its price-to-earnings ratio drops to 5, or 3, or even 2. The instinct screams bargain. But that earnings number is a peak about to revert. You’re paying a low multiple on the highest profit the company will ever make. As the cycle rolls over, profits crater and so does the price.

So the signal to avoid an industry is euphoria. When the WhatsApp groups are buzzing about a sector, when every YouTube transcript and TV segment is about it, when you start feeling the specific ache of I don’t own this and everyone else is getting rich — that fear of missing out is the tell.

“If you feel like ‘these industry shares are not with me and I’m missing out’ — then definitely you are heading for problems. Such times must be avoided.”

His investing philosophy is deliberately unambitious, which is the point: avoid losses, make reasonable profits, and above all don’t get destroyed by entering a cycle at the wrong time. He frames the visual as a painting (which he commissioned): wherever the market is green and bullish, see red — danger. The bull’s shadow is a bear and the bear’s shadow is a bull. The whole thing is gray, because the turn always comes.

The permanent-damage test

Buying pessimism only works if the pessimism is temporary. The one filter that separates a buying opportunity from a value trap is whether the industry has suffered permanent destruction.

“If you look at the typewriter industry — that became permanent damage. Permanent destruction will not work at all.”

Steel isn’t going away. Cement isn’t going away. People will keep travelling, so hotels aren’t going away. Those are cyclical lows, not deaths. Typewriters, on the other hand, were killed by the computer and never came back. So the question on any beaten-down sector is simply: is this a cycle, or a funeral? If it’s a cycle, the pessimism is your friend.

Godawari and the steel turnaround

His textbook case is a steel-related company (Godawari Power), bought around 2017–18 when the entire steel sector was going bankrupt and companies were headed into India’s bankruptcy courts (NCLT). The company made an industrial input called pellets (referred to throughout as “pet”). The break-even pellet price was around ₹3,400 a tonne. Drop ₹100 below that and the company bled.

He even called the promoter, who said the business was about to shut down and asked why on earth he was interested. That’s the kind of moment that confirms peak pessimism.

Then two things changed. China, dealing with a pollution crackdown, shut a lot of its own capacity and switched to higher-grade iron ore — which needs more pellets. Pellet exports opened up and the price ran from ₹3,400 toward ₹20,000.

“First it doubled, then it tripled. So you made a lot of money. That company which was almost on the verge of bankruptcy turned into one of the best investments.”

A stock he and his partner tracked from roughly ₹55 (pre-split, pre-bonus) at a ₹200–250 crore market cap became part of a story that, by the recording, sat near ₹15,000 crore. The lesson he keeps returning to: the investor standing outside the industry sometimes sees the turn more clearly than the operator drowning in daily problems inside it.

Why the leverage makes it explosive

Turnarounds in cyclicals are violent because two kinds of leverage fire at once.

Operating leverage — when capacity has been sitting at 30–40% utilisation and demand returns, every extra unit sold drops almost straight to the bottom line, because the factory and staff are already paid for. Capacity utilisation climbing from 40% to 90% does enormous things to margins without much extra spending.

Financial leverage — these companies carry a lot of debt. He hammers home that you buy a company on its enterprise value (market cap + debt), not just its equity. Imagine a company with ₹3,200 crore of debt and a ₹300 crore market cap — an enterprise value of ₹3,500 crore. As the cycle turns and cash flows return, the company pays down debt first (debt holders stand ahead of you in liquidation). Once the debt shrinks, the same ₹3,500 crore enterprise value now belongs mostly to equity. The equity slice can go from tiny to huge.

“Equity is a small part — so the debt has to be serviced. If you don’t service the debt, he will fly first… from liquidation, first the debt money gets paid back.”

And then a third kicker: once the market believes the recovery is sustainable, the P/E re-rates upward too. Operating leverage lifts profit, debt paydown shifts value to equity, and re-rating multiplies the multiple. Stack all three and a near-bankrupt name becomes a multibagger.

The cash-flow lie detector

Running underneath the cyclical framework is a forensic one. Profit (the P&L) can be engineered; cash flow is much harder to fake.

“Everybody runs behind P&L. The P&L itself tells you the growth. Cash flow will not reveal you the growth — cash flow will tell you the truth.”

His simplest screen: does profit convert into operating cash? If a company shows years of rising profit but the cash never shows up, the difference has to be hiding somewhere on the balance sheet — usually in receivables (money customers supposedly owe but never pay). A fraud pattern looks like this: profits and ROE/ROCE look great, but cash flow is absent, debt keeps rising, equity gets diluted, the promoter’s stake is low or pledged, and the company makes endless acquisitions (especially overseas, where overbilling a related entity quietly cycles cash back to the promoter).

He walks through Opto Circuits as the classic case — constant “profit” and acquisitions, near-zero cash flow, foreign-institutional holding of 37%, and then zero. The receivables that never converted to cash eventually have to be written off, and the loss lands years later.

“Where do the receivable numbers sit? They don’t fit in the P&L, they don’t fit in cash flow. They sit on your balance sheet. You will take it out someday — in a year, two, three — and when you take it out, it reverses your profit into a loss.”

He also recounts getting thrown off a company’s conference call for pressing management on a structure that pushed promoter holding from 57% to over 74% without paying any new money — financial engineering that was technically legal. His framing of that promoter’s choice is the moral of the whole forensic section: they saved roughly ₹175 crore personally and lost about ₹15,000 crore of market value by torching trust. Serious money never comes back to a company that takes shortcuts.

A tour of the cycles

Banks (the BOI case). Public-sector banks, he argues, are repeating the year-2001 cycle almost exactly. Bad loans (NPAs) stayed hidden, then the government forced recognition, then a clean-up, then re-capitalisation, then growth. The 2017–18 clean-up was the same script; Covid delayed the recovery that should have begun around 2020. Now credit growth is up, NPAs are low, recoveries are flowing back (Bank of India writing back ~₹1,500 crore a year), and — crucially — PSU banks have cut headcount as they finally deployed technology, leapfrogging on the private banks’ earlier lessons. With clean books and low price-to-book, valuations sit comfortable.

Cement. A deeply regional business, because logistics kills you — you can ship cement maybe 300–400 km, so capacity in your region is what matters, not pan-India totals. After years of flat prices and consolidation (small players merged or went through bankruptcy), capacity left the system. Now even a small price delta on a high-fixed-cost plant drops huge money to the bottom line. He values cement on replacement cost (what it would cost to build the capacity, including the mines) versus enterprise value — buy below replacement cost and you have a margin of safety. North and West India worked; the South lagged on prices.

Telecom (Airtel). Recommended early on a dead-simple thesis: per-user monthly bills were quietly climbing (₹100 → 150 → 200 → 300), the spend is now a non-negotiable necessity, and the industry had consolidated to two or three players. A ₹100/month increase across ~500 million subscribers is ₹1,200 a year times 500 million — a staggering delta that lands as near-pure profit.

Sugar. Out of favour because government hasn’t raised the support/MRP price and ethanol procurement has stayed soft, squeezing margins. Weak operators will close; stress will build; and the survivors with strong balance sheets get the eventual opportunity.

Infrastructure / roads. Out of favour because the order pipeline from the national highway authority dried up as government focus shifted. Not permanent. He watches for the inflection: order books bottoming, and companies pivoting — a road builder starting to build railway bridges or canals signals margin-profile change before the numbers fully show it.

Hotels (the Covid trade). His sharpest pessimism buy. During the brutal second wave, the entire hotel industry was shut. He reasoned the destruction was temporary — “what doesn’t kill you makes you stronger” — and that you don’t need to pick the single survivor; buy a basket of the top ~10 names with strong balance sheets and good assets. He valued them on hard assets: a five-star room costs ~₹2 crore to build, so 1,000 rooms is a ₹1,000 crore asset that the market was pricing at a fraction of replacement, before even counting restaurants and amusement parks. IHCL’s enterprise value, he notes, went from ~₹29,000 crore to over ₹2 lakh crore in about four years.

What he stays away from, and the two deadliest words

He avoids businesses where input and output are out of his control — hotels in normal times, and especially airlines, where competition can return at any moment and crush margins, and where the current single-dominant-player euphoria has pushed valuations past comfort. Optimism doesn’t mean he turns negative on the future — he insists you must be extremely positive about the long run while buying the things people have given up on.

The two most dangerous phrases in markets, he says, are “this time it’s different” and “next.” Every peak optimism — the Y2K/dot-com boom, the Zoom-and-work-from-home surge, and now AI — comes wrapped in “this time is different.” Sometimes the technology genuinely is sustainable (computers were, software was, AI probably is) and yet the companies at those valuations still don’t make money for investors. Infosys in 2000 was a great company; people who bought at that price waited a decade-plus to break even. The technology surviving and your investment making money are two completely separate questions.

The discipline of low expectations

He buys every position assuming it can fall another 15–50%, and he wants the capacity to buy more on the way down. The moment you label something a “multibagger” in your head, you’ve built a bias that deafens you to bad news — you start discounting every negative because you’ve already decided. So keep expectations on the floor.

“The day you know you are buying a multibagger stock, it is never going to be a multibagger… your ears get banned to the negative part.”

His own origin story: he entered the market in 1992, lost money, nearly quit, and was handed three books in 2001 — Security Analysis, The Intelligent Investor, and a biography of Buffett (Of Permanent Value) — at a time he hadn’t even heard Buffett’s name. He then ran free monthly value-investing sessions in Pune for a decade (2008–2018), which sharpened his understanding of how ordinary investors actually think and behave, and connected him to his eventual partner, who first introduced him to the systematic study of cyclicals.

Key Takeaways

Cyclical P/E inverts the normal rule: at the cycle peak earnings are maximal, so P/E looks tiny — that’s the most dangerous moment to buy, not the cheapest.
Buy at the bottom, when an industry is so out of favour that owning it is socially embarrassing and the only news is bad.
The make-or-break filter is permanent vs temporary damage. Steel/cement/hotels = cyclical lows. Typewriters = permanent death. Only buy temporary.
Turnarounds are violent because operating leverage (idle capacity refilling) and financial leverage (debt paying down, shifting enterprise value to equity) fire together — plus a later P/E re-rating.
Buy a company on enterprise value (market cap + debt), not market cap. As debt is repaid, the same EV accrues to a tiny equity base, which is where the multibagger math lives.
Cash flow is the truth serum: profit can be manufactured, cash cannot (or only once, unsustainably). Always start by checking if profit converts to operating cash.
Fraud fingerprint: rising profit + rising debt + great ROE/ROCE + equity dilution + low/pledged promoter stake + serial (often overseas) acquisitions + missing cash flow.
Receivables are where fake profit hides. Receivables growing faster than revenue/profit, especially the >180-days bucket, is a red flag; the write-off arrives years later as a sudden loss.
For commodity producers, value on replacement cost (cost to rebuild capacity + mines) vs enterprise value; buy below replacement cost for margin of safety.
Cement is regional — logistics caps shipping at ~300–400 km, so local capacity and demand matter more than national totals.
A small price delta on a high-fixed-cost asset (cement plant, telecom network) is enormous because volume rides on already-paid-for capacity.
For uncertain survivors (e.g. Covid-era hotels), buy a basket of the strongest balance sheets rather than betting on one name.
The cycle-turn signals to watch: valuations compressed after 3–5 years of low prices, order books bottoming, rising inquiries/exports, and companies pivoting into adjacent work (roads → railway bridges → canals) shifting their margin profile.
“This time it’s different” and “next” are the two most dangerous phrases in markets — a sustainable technology can still leave investors with no return if bought at peak valuations.
Naming a stock a “multibagger” creates a bias that deafens you to bad news; keep expectations on the floor and assume a 15–50% further drop you can buy into.
Promoters who genuinely care about minority shareholders and their community signal good intent — and a CFO/security guard who never leaves the company (zero attrition) is a tell about culture.

Claude’s Take

This is a genuinely good distillation of cyclical and commodity investing, and it earns its length. The core insight — that commodity P/E is upside-down and the cheap-looking peak is the trap — is well-known in theory but Dharmawat makes it visceral with real numbers (the ₹3,400 → ₹20,000 pellet run, the enterprise-value arithmetic, the replacement-cost screen for cement). The enterprise-value-and-leverage walkthrough is the most useful part: it’s the actual why behind why beaten-down levered cyclicals turn into multibaggers, explained mechanically rather than mystically.

The forensic-accounting section is solid and concrete — receivables outrunning profit, cash-flow-vs-P&L divergence, the overseas-acquisition overbilling trick. None of it is novel (it’s standard Howard Marks / Aswath Damodaran / forensic-accounting territory), but it’s correctly stated and grounded in specific blow-ups (Opto Circuits).

Where to keep a hand on your wallet: the cases are survivorship-curated. We hear about Godawari and IHCL and Airtel because they worked; the framework’s own honesty (“it can turn out to be a loss-making strategy”) is buried in one line near the end. Buying falling knives in distressed sectors is exactly where most retail investors get destroyed, and the difference between him and them is mostly the cash-flow forensics, the balance-sheet survival check, and the patience to sit through years of further pain — none of which are easy to replicate. The “this time is different” point on AI is sensible and well-timed. The Gita-as-equivalent-to-Security-Analysis material at the end is personal colour, not investing content.

Score 8. Rich, concrete, mechanically honest about why cyclicals work, with a real forensic toolkit attached. Docked from higher because it’s anecdote-led and soft on base rates and failure cases, and the transcript’s auto-translation makes some passages genuinely hard to parse.