Capex theme to outperform rest of the sectors in 2023: Sandip Sabharwal

"In the IPO market my view is that let the IPO happen, let the stocks settle down and then evaluate whether you want to buy them or not," says Sandip Sabharwal, asksandipsabharwal.com.

If you had to pick one theme which you believe will clearly outperform rest of the benchmark indices in 2023 what would that space be?
That has to be essentially companies related to may be the capital expenditure space. I think some of these companies could do well this year because their valuations are still low as compared to historical valuations at which they used to trade a few years back. When these sectors were infancy, relative to the market also they are cheap. So there has been a recognition of these sectors this year but still many of the large mutual funds etc. have been reluctant to buy into the current move which has been largely led by some HNI retail or some PMS kind of buying. So I would think that many of these themes could become mainstream going forward as one year prior to the elections also the government would be more interested in completing some of their developmental projects.

If we are looking at the year gone by in terms of primary market action there has not been too much but coming up next year there is expected to be a lot of fervour for 2023. With a lot of listings that are panned out anything that you are looking forward to on that front?
Unfortunately most of the IPOs I would say come at a premium to listed companies. They are very very highly valued and because of the fact that the merchant bankers and promoters are sure that the issue will get subscribed even if it is scrapes through. Even if it gets over subscribed one time their job is done. So the pricing is not coming down despite the dismal performance of a majority of IPOs. To that extent in the IPO market my view is that let the IPO happen, let the stocks settle down and then evaluate whether you want to buy them or not.

Are you looking at the infra side of business let us say L&T etc? Is it more towards defence, is it industrials those expensive names ABB, Siemens which side should investors really look for?
I think majority of them will do well. L&T being the largest player is still undervalued relative to its growth prospects, the kind of changes which have happened on its balance sheet and the deleveraging they have been able to do and the fact that they have been able to get very strong order flows across the board.

Although the stocks have done well in the near term I would still think there are potential companies like ABB, Siemens had a lot going for them. For example Siemens won such a huge order from the railways. But these stocks are expensive at this stage so at some stage they will become buyers but as a theme they look good. Then the entire railway capex theme is also very strong because railways is putting in a lot of money and they are investing across the board be it in building, infrastructure, station revamps or Vande Mataram trains or coaches etc. So there are lot of things happening there.

On the infrastructure side also like you said there is activity on the defence side. So many companies are benefiting because of that. I think it is all a question of relative valuation when we get hot stocks cheap many of them have good themes going for them. But in the short term some stocks zoom up too much so then we have to wait and buy at the right levels.

Just wanted to get in your take as to when it comes to the midcaps are there any specific themes or areas say new age tech that you would say I do not want to touch these stocks through with the bargepole?
Not at this stage because if we look at even the NASDAQ or companies in this segment overseas many of them have actually fallen at par or more than these companies when some of them are actually making profits out there. The challenge is that these companies have been talking of coming to profits but in terms of a strategy to come to profit when they cannot raise more money in the equity markets it is tough for some of these companies to become buyers at some stage. But we need to wait patiently for that. There is no hurry we should not look at historical prices that oh! Paytm traded at 2000 now it is at 550 that is why it is cheap that is not how we need to look at it. It is just that they were so overly expensive that now they may be not so expensive but they are not still cheap.


What is the perspective on the auto pack going into the next year? Names like M&M have done exceptionally well, two wheeler names like TVS has done well but on the other hand Maruti has not done that well, a lot of other auto two wheeler companies have not done well, how would you look at the sector?
I believe M&M will continue to do well because of the fact that its SUV portfolio is doing well, it is investing decently on EV platform vehicle which could hold it in good stead going forward. And the tractor segment is coming back for it which is normally a higher profit margin business with the increase in rural incomes and the kind of crop prices we see now and expected winter crop. I believe that valuations of M&M are still not as high and the markets are not giving it full credit for the kind of work they are doing.

Maruti also I believe is in decent value zone at these prices. It came out with good results last quarter and after that the stock is actually down 14-15% and going forward the volume growth picture looks better.

Two wheelers is something we need to watch out for even now. The demand trends seem to be muted because of various reasons, because the increase in interest rates impacts two wheelers much more than four wheelers and as it is the demand has been muted. That's one segment we need to watch out for at this point of time but I do not see value there.

Just to circle back sort of that capex theme, in a couple of months we are only going to be talking about one thing and that is going to be the union budget. It is definitely going to stand out this time because it is the first full year budget before the election in 2024. What do you believe is going to be some of the overarching themes? Do you think there will be a lot of focus on railways, defence, the make in India, PLI scheme, a lot more thrust on some of those announcements that have already been made?
I think that is one part of the speech but much of the action in that is happening outside the budget. So announcements on them keep on happening so to that extent I think that will continue. What I am looking for in the budget is tax relief for individual investors as was promised when corporate rate tax were done because this is the last budget prior to 2024 elections and if some tax reliefs come in for individual investors that could actually boost the consumption side of the economy.

So that will be the theme which could possibly play out whether they will be able to do it or not I am not sure because Covid put the fiscal deficit stress on a different plane as was envisaged earlier. Whether they will be able to do that or not that is something to see otherwise I do not think there will be much of tweaking this time because it should be a low risk budget per se.

What is your outlook when it comes to the big underperformers in the year gone by, for instance pharmaceuticals or even IT for that matter what is the outlook going into 2023?
IT will present opportunities sometime in the first quarter most probably when companies recognise the impact of inflation and potential falling growth. Analysts will fall in line and we will see downgrade in earnings estimates. And once that happens I think we will see opportunities so it is not a sector where we need to put on the side and forget.
But we need to time it because this will be a steady growth sector. It is a 12-15% kind of return sector and not a sector where one makes huge returns and to that extent you have to time it well.

In terms of pharmaceuticals it is very stock specific. We have to focus on the right kind of companies. It is not a full sectoral move. So a few companies will do well, few would not do well so you need to be very careful where you are investing.