Maruti could touch Rs 12,000; Tata Steel results could remain bad: Sandip Sabharwal

“The management commentary on Maruti after a long time was reasonably bullish and that is what is leading to this upgrade in price targets. I would think that these price targets of Rs 11,500, Rs 12,000 should be achievable because the results will keep on improving going forward,” says Sandip Sabharwal, asksandipsabharwal.com.

Look at the tech selloff that we saw on the Nasdaq. Back home, we have seen the growth stocks take it on the chin. For IT services companies, it has not been the best year as well. However, our markets are not that far from all-time high?
Overall, the market has held up very well, largely driven by stocks in the financial sector. Indian financial companies obviously are placed very well fundamentally given the high capital adequacy of most banks, record low NPA levels and increasing margins as the rate cycle moves up.

I think that is the major reason why India has outperformed so much because in any case, growth like technology stocks weightages or the kind of stocks which got listed in the US, etc, have not been there in India. Secondly, India’s inflation troubles are there but they are not as severe as what we are seeing in Europe and the US where the inflation is way above targets.

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In India, inflation is above target but not so gravely above it. So these have been the major reasons. Plus there is positive news flow on growth, etc. On the other hand, we have seen that this quarter, results have broadly lagged expectations. Earning growth this year for all the companies which have reported so far, is just 5-6% and in that context, earnings need to pick up speed for the markets to have any sustainable move from here on.

What is your take on Maruti because brokerages are talking about 12,000 levels on the counter?
Maruti is one of our key holdings from much lower levels. Whatever thesis has been put out now by most of the analysts is something which had to play out. The margin improvement story was imminent, given the fall in the commodity prices. The revival in volumes also was imminent as the chip shortage is reduced and despite the rate hikes in terms of interest rate hikes which have happened till now, they have not really impacted demand so much.

Till the festival season at least, the demand was strong. Going forward, we need to see how it is. So like you rightly said, the management commentary on Maruti after a long time was reasonably bullish and that is what is leading to this upgrade in price targets. I would think that these price targets of 11,500, 12,000 should be achievable because the results will keep on improving going forward.

Maruti has decisively indicated that they are not in this rat race to regain or retain market share. They want to focus on categories and clusters which are growing and want to vacate the small car segment. What would be the implications of this?
It is a sign of a progressing economy. If you look at the two-wheeler side also, where the entry level bike segment – the 100 cc etc. demand has either been stagnating or falling because consumers no longer want those entry level, low power things or in the case of cars now and small cars in the case of auto.

People want to spend more and that holds in good stead for companies like Maruti because then even with the lesser volume growth, the value growth can be much greater and the profitability in the larger models will be much better than in the smaller ones.

I think it is an industry trend that we have seen on the SUV side. Look at the SUV demand across the board for whatever companies are launching, especially Mahindra & Mahindra. The kind of response all the new models are getting shows it is an industry trend which Maruti is also trying to ride now.

What is the expectation from L&T today?
L&T results are important because the stock held up reasonably well and we need to see whether margin improvement plays out or the margins hold up and how the execution cycle is because this will be a full quarter of normal activity.

So to that extent, it becomes important. I do not think order flow is an issue because they have been continuously announcing new order wins and that could exceed analysts’ expectations or meet them. So the key will be on the profit growth and that will be important for the stock to sustain. But overall, directionally it remains good, like we were discussing earlier. Maruti has upgraded its capex plan and so across the board, we are seeing Indian companies upgrading their capex plans which tends to be positive for large players like L&T.

Tata Steel will be coming out with its numbers. The quarterly numbers are not expected to be encouraging. We have seen steel prices consolidate.
The steel industry has entered into a tough phase and will remain in such a state for the next one or two years simply because the largest producer as well as consumer – China – is going through deep economic troubles which are not going to be easy to come out of and as demand falls there, the rest of the world will not be able to take care of that demand uptick.

Secondly, from Tata Steel’s perspective, given that it is an integrated player, it tends to get hit more when steel prices fall and benefits more when steel prices rise because it is not impacted by raw material inflation or deflation as the other not so integrated players like JSW Steel. I would think that Tata Steel results could be bad and can remain bad for a few more quarters.