“Indian markets have held up, but given the overall result construct as well as the valuations at this stage, this is a time to be cautious in the markets. I would think that markets need to give up some gains for them to come to levels where fresh money can be put to work,” says Sandip Sabharwal, asksandipsabharwal.com.
How you have read into the week gone by, the fact that we had a big event, the expiry, the market is clearly climbing the wall of worry and emerging a pretty strong in light of even global nervousness. What is in store for us for the coming month?
Sandip Sabharwal: So, the markets have held up very well and surprisingly so given the turmoil in the global markets where we have seen deep sell-offs in the tech side in the US, some sell-offs in all other the emerging markets, which have been weak for the last couple of weeks. Indian markets have held up, but given the overall result construct as well as the valuations at this stage, this is a time to be cautious in the markets. I would think that markets need to give up some gains for them to come to levels where fresh money can be put to work.
How would you read into what is going on within the entire banking space because as compared to what the frontliners did, that underperformance has been a little bit evident although we did have individual movers. What is the outlook on some of the largecap banks?
Sandip Sabharwal: So, largecap banks are facing earnings headwind at least for this year, given the fact that NIMs are slightly under pressure, credit growth is moderating given that RBI is keeping liquidity tight, so to that extent most banks are having to converge their credit growth to deposit growth which itself means at least 2% to 4% lower growth than what were there in the previous year or previous two years.
On top of that, the asset quality cycle seems to have peaked out in the sense that I think from here on, it can only deteriorate.
If further improvements are not possible, most of the large banks are standing at 0.3% to 0.5% net NPAs.
And so, unless and until banks see improvement in their operating expenses, which some banks have shown, the profit growth for this year at least will be very moderate and I think that is what is creating some nervousness in the banking space and leading to underperformance of this sector.
I do not know how closely you have been tracking Mankind, but it is a sizable acquisition that they have made of Bharat Serums, Rs 13,630 crore. Although the street is saying that, the deal is unlikely to be EPS accretive before FY28, a long gestation period, but a very material and significant acquisition with the kind of portfolio that Bharat Serums has.
Sandip Sabharwal: That is true and I think such large acquisitions at sort of peak valuations will not in my view create value for minority shareholders at least for the next two years and we have seen in the past that large company integrations have their own issues.
It has not been easy. In the pharma front, we have seen many acquisitions that have been very tough to integrate. So, what the internals are exactly I am not sure, but I think in the immediate term from whatever reports I have read for the next three years at least it would not be EPS accretive. So, if it is not going to be EPS accretive for at least three years, then it cannot be positive in the near term.
So, given how fabulous the returns on Mankind Pharma already have been, the fact that it is already scaling around that 2140 odd level post its very recent listing, would you say any dips in the stock should be bought into?
Sandip Sabharwal: Not really, because this acquisition is so huge that it creates cashflow uncertainty in the near term and then typically post acquisition integration is a tough ask, especially if you are acquiring a large company. So, we are in for some muted returns for some time.
Is IT at that turn where one should say that, okay, I need to start looking at it. There have been initial sparks of trends which indicate that the worst is behind us and when you have to buy a stock or a sector, you have to buy it just when the turn has started. Has the turn started for IT where now it will outperform the Nifty at least?
Sandip Sabharwal: So, I think IT is in a sort of a J-curve where it is at the flat line at the bottom, but that flat line gets extended, so it is more like a L before it converts into a J. I would think that as of now most companies are looking at zero to 5% growth, so at zero to 5% growth for this year and potentially next year also what kind of price earning ratios we want to give these companies is the question mark.
So, I think the contrarian trade has played out. Most of these stocks have rallied 20% to 25% over the last few months and from here on upside in my view looks limited in the context of the fact that we could potentially be seeing some slowdown coming into the US economy going forward as the high interest rates finally start to take a bite and typically we have also seen that in the run-up to presidential elections, like we saw in the case of Indian elections, decision making stalls for some time, so that could also impact growth as we go into the last quarter of this calendar year.
Do you own any PSU stocks?
Sandip Sabharwal: Not at this stage, no.
Would you buy on a 10% decline?
Sandip Sabharwal: Not on a 10% decline, maybe a 30% decline.
Could it be this contra bet for couple of quarters, do not buy HDFC Bank, do not buy Kotak Mahindra Bank, everyone knows that, look at insurance.
Sandip Sabharwal: That is possible because insurance as a sector overall has disappointed like you rightly said because there were sporadic performances, then sell-offs on disappointing results, etc.
Last couple of quarters, we have seen improvement coming through in the performance of insurance company. This quarter results especially, we have seen most companies do well and I think that is getting reflected in the stock price movements also.
So, from being very fancied over and over-owned two-three years back, now it is under-owned sector. So, if the performance continues, then we could see the stocks actually perform and especially on the general insurance side, actually the performance has been quite good like ICICI Lombard is the only listed player there, but they have been doing quite well.
Should one revisit some of these brokerage stocks also — Angel One, Motilal Oswal? Whatever had to be done on futures and options has already been done, I mean, markets were afraid that okay, this tax, that tax, you pretty much know that the cat is out of the bag. Directionally, yes, you want volumes to come down, but I mean, the tweaking has been done.
Sandip Sabharwal: Not really. I think the main restrictions have to come from the regulator side. So, there have been just some small tax increases which have been announced. I would think that this will lead to a significant dent in the profitability of most of the companies who rely largely on brokerage as the income. So, on the brokerage oriented stocks we should still be very careful.
