Sandip Sabharwal would rather avoid Zomato and LIC. Here’s why

“The Adani overhang is for real in LIC. Despite having a good quarter, LIC has an ostrich-like approach of not recognising incoming information and just sticking to what information was available earlier and not taking any decision. As per whatever data I read in the papers a few days back, it was 8% of their total equity exposure, although just less than 1% of the total exposure. It is not small and would have hurt their overall equity returns significantly,” says Sandip Sabharwal, asksandipsabharwal.com

The talk this morning is all about Zomato. The management is saying they should be reviewed ex-Blinkit. But why would you do that considering it is very much part of the business. How have you dissected the numbers?
The job of the management is to be bullish and the job of all of us is to analyse the results as they come and based on whatever we see around us and how we see the company performing. Obviously the Blinkit acquisition was a hasty one and that is hurting the company now. If that had not happened, the company could have been in a better state. There is no case for anyone to look at the company ex of Blinkit because it is finally a part of the company.

Now the core payments business, like we saw in the case of Paytm, has been slowing down and in the case of Zomato, the core food delivery business is slowing down. It has been even more drastic. As growth slows down, many of these companies will face issues which will get more apparent going forward. Just coming out and making a statement after reporting a higher loss that we will turn profitable makes no sense. It can excite the analysts but investors have to be dispassionate.

After getting thrashed out in the last one week or so, ever since Paytm's numbers are out, seeing a big turnaround in these names. In the last four trading sessions, we have seen the stocks jump up almost about 35% in a few odd cases. What do you do if you want to invest in these names? Is it still a no-no?
For people who were stuck somehow and you get a big up move, I think it is more opportunity to exit than get into these names because for loss-making companies. Historically it has been proven that in a rising interest rate environment, it is tough for them to perform. I would think that any big rally should be used for people to actually exit or something like in a Zomato. Maybe if you have a three, five-year horizon you might not exit and see if things actually improve.

But the results give actually no confidence to come in and buy. It is just that it has got from being heavily overowned to not so owned and to that extent, some people get excited based on management commentary. There could be an up move but it will be very tough to sustain.

For LIC, the profit has zoomed multi-fold. Premium income as well has come in higher. What do you do with LIC?
The results of insurance companies are very difficult to decipher. I find it very tough to analyse them because of so many moving pieces but clearly LIC was one of the companies which will get most hit because of the measures which were announced in the Budget because LIC policies are most miss-sold. There is no big story in LIC per se. So I am not investing at this stage.

Till the time Adani stocks do not settle, LIC overhang will be there. It could be psychological but this overhang is real.
The overhang is real and it is more due to having an ostrich-like approach of not recognising incoming information and just sticking to what information was available earlier and not taking any decision. But that is fine. That is their call because it is a big portion of their overall equity exposure. As per whatever data I read in the papers a few days back, it was 8% of their total equity exposure, although just less than 1% of the total exposure. So it is not small and it would have hurt their overall equity returns significantly. But that said, overall, post listing its performance and the Union Budget provisions as it is, the attractiveness of LIC is not very great.

Voltas is a Tata Group company which has not structurally surprised anybody. Its engineering services business is not growing. Electromechanical business is not growing. While India is going through a capex boom, this Tata company is nicely positioned with a great brand, unique talent, but they have not capitalised.
The main issue with Voltas is that they bid for projects and then realise that they have bid wrong and need to take extraordinary losses because of that. If you open up last 10-15 years’ results, there will be 5-6 incidents when that would have happened and I think that is what has been the biggest issue with Voltas.

In fact, yesterday only I was comparing the performance of Blue Star with Voltas over the last one year. Blue Star is up 30%, the company has done extraordinarily operationally and also Voltas is down 30% over the last one year. That reflects some confused thinking in the management in the past. But now they are getting things in hand.

Their unitary cooling business has no issue. It is just that the market was bad, they did badly. They are the market leaders and if last two years’ sales have been bad, the probability that this summer sales will be good is very high. So to that extent, they should do well. Although the conference call is still to happen, what I saw in their result release was that they have won big orders in the electromechanical projects business where the order book has moved up sharply to around Rs 7,500 crore from Rs 5,400 crore. That is a positive and if that comes in with improved margins, it could help the company turn around.

The stock is down a lot and if because of these results, etc, if it cools off further, I would be interested in actually buying the stock. I am looking at it from the perspective of looking to buy rather than turning negative when the stock has fallen so much. We do not own it at this point of time.

Rubber prices are inching higher. Crude prices have gone higher. Is that big trade which made a lot of money for you and your clients and your subscribers in 2022? Go long Apollo, go long Ceat, go long MRF, is that trade over?
No, in fact, the top we hold is Apollo right now. I would think that the company will continue to do well because of various factors. One, they have cut down on capex significantly, in the next two years, we will see deleveraging in the balance sheet.

Secondly, as per the company conference call, their raw material product basket will fall another 5% in the fourth quarter because typically they hold inventories for six months. So, rubber prices are in fact down significantly and crude derivatives have also fallen as supply has increased. So, profitability will keep on improving. Demand is subdued but in these kinds of industries, sometimes you have huge volume growth but profits decline.

That does not create any wealth for shareholders. We need profitability growth. I think profit growth will be strong and going forward, if the demand also revives, then that could be an added benefit. So, we continue to hold Apollo tyres.

What is your take away then when it comes to Cummins India? We did see the stock hit a 52-week high. There were Q3 results playing out. Within this space, will something like Cummins catch your eye or do you have any other preferred bets?
All these capex-oriented companies are doing well. Some of them across various industries. So, Cummins is doing very well, all its businesses are firing. The only issue which comes up in many of these companies like Cummins, ABB, etc, is the way they are moved up and the valuations now, so the valuations are stretched so investors need to wait for opportunities if there is overall market correction or they weaken and that will be the time to actually buy rather than buy after a straight line moves.