Most IT stocks could fall 10-30% as slowdown starts to bite: Sandip Sabharwal

“Once the next quarter earnings commentaries come out and things settle down, that will be the opportunity to buy because longer term, I still think Indian IT is a good story because of the huge cash they generate, the buybacks they do and the dividends they pay. But I do not think that the slowdown that is going to come has got built into the stock prices completely,” says Sandip Sabharwal, asksandipsabharwal.com

What should be the plan for the rest of the year for positional traders and investors? Do you think that in the next couple of months and weeks, markets are likely to consolidate rather than gallop?
December is not usually bad. We are already down 2-25% for this year. The worst in the last 20 years has been 4% down. January is a more tricky month where normally everyone comes back and re-evaluates the situation and sometimes we have got bigger falls in January and that is what we need to be wary of.

Overall, given the valuations, the interest rate paradigm next year should be similar to this year, in terms of a single digit return expectation. It will all depend on sector allocations and specific stocks. This year, if you were in the right stocks, you did very well. If you were in the wrong ones, you did quite badly. A similar thing should repeat next year.

I want to revisit IT and the general view with the majority of the market is that a weak rupee is good for IT. So buy IT when the rupee is weak. The rupee has plunged back to November lows but why should one not buy IT even though rupee is a tailwind?
IT stocks and IT companies did very well when the rupee was in a strong zone. This year, when the rupee has been the weakest in many years but still IT stocks have been the worst performers. The one to one correlation does not work because there are a lot of expenditures they have in forex and a lot of cross currency headwinds hit them.

As a result, we have seen margin declines for IT companies. Incrementally, it does help them because of the bigger offshore element but we have also seen that clients become finicky on giving price hikes when they see the rupee is falling. They do not tend to get price hikes and need to increase employee salaries and to that extent, this one to one correlation argument is not very great.

In my view, most IT stocks could still fall 10 to 30% from the current levels as the slowdown starts to bite and as these companies start talking of slower growth from the next quarter. Once the next quarter earnings commentaries come out and things settle down, that will be the opportunity to buy because longer term, I still think Indian IT is a good story because of the huge cash they generate, the buybacks they do and the dividends they pay. But I do not think that the slowdown that is going to come has got built into the stock prices completely.

What are your thoughts on some of these PSUs with the government on a divestment drive? The latest is IRCTC where they are selling stake via the OFS route. You have never been a fan of this theme. Is anything changing now?
This year, we have seen that many of the PSUs have bounced back and the valuations have increased rapidly for many of the PSU names across the board, especially on the defence and banking side. I do not think the government will sell PSU banks but in other companies, I think there is going to be a series of OFSs till the year end and that will keep the entire basket under pressure.

The best of PSU performance at least till March of next year seems to be behind us and once the OFS comes and the stock cracks and the valuations come down, especially in the defence space, we would again start looking at opportunities.

Let us also talk about the Reliance Industries FMCG foray. It may not be much of a threat to some of the existing FMCG players like D-Mart, given that it is a first of many steps, it is something that they are following through. They have flagged off earlier, your thoughts?
These moves are those which are required and to that extent we have always seen that the retailing companies eventually try to do it but ex of very basic products, private labels tend not to do very well. In the lower margin products, they do well but as soon as you move to soaps, cosmetics or perfumes or higher value items, private labels do not really work. I do not think it makes so much difference.

They are already into BPL and they may buy some more old brands to revive it. Just because Reliance is there, I do not think there is going to be war. If there is a war I will be the happy consumer but it is not like what they did with Jio and disrupted the telecom market. Will they do that to FMCG?
It is very tough because habits are very difficult to break. If someone eats Parle G, irrespective of any other glucose biscuit coming, no one is going to buy that for 50 paisa cheaper or the same happens across the board. The reason why ITC found it so tough and they could build so even now many of the ITC brands on the FMCG side are not very widely accepted. So moving up the value chain is not very easy. It is not like telecom where a cheaper price makes a difference.

Is the risk reward favourable for Yes Bank? Capital infusion has started, NPA cycle is better, SBI is not looking at selling their stake. Between UCO Bank and Yes Bank, does Yes Bank have a much greater franchise value?
It has and the only issue comes up with smaller banks. So to get back the earlier mojo, it will take time but the recent set of investors are strong and to that extent, the brand image should improve.

Eventually, the rerating will happen once a proper private sector CEO is appointed again and it operates like a proper private sector bank and eventually it can give returns. Risk reward in my view should be favourable in the case of Yes Bank for long-term investors. I do not know what will happen in two-three months but over two-three years, people should be able to make money in this. That said, I am not buying but that is my view.

What is your outlook on what it means for some of the cement players in the north? ACC Ambuja is shutting down some of their plants in Himachal. What could be the potential impact of the shutdown?
Short term, there could be some impact but directionally, cement industry is moving to a phase where the capacity additions are picking up significantly. It is a consolidated industry but it is not a consolidated industry where there are just two-three big players.

Now there are four-five big groups and all of them are expanding rapidly to gain market share. My guess is over the next two-three years, the price increases will not keep pace with what most people are expecting because of the continuous increase in capacities and the capacity utilisation of most large players is likely to go down. They benefit because fuel price is coming down but the kind of optimism which most analysts have in terms of what kind of profit growth they will be able to achieve looks tough.

What Brahmastra did not do to INOX and PVR stock, maybe Avatar can do?
There have been a series of successes this quarter and Avatar should be a big one and then there were Rohit Shetty movie coming next week so overall I think things are pretty well placed so yesterday I think their stocks fell because there is this NCLT decision getting postponed or something must be that that is actually an opportunity for long term investors.