Sandip Sabharwal on TCS, ITC & Rakesh Jhunjhunwala selling Escorts stake

“For Escorts, the tractor business has been under more pressure than even M&M. The figures and the valuations, even after the fall, are much higher than most of the other auto stocks. I would think that near term, there should be more decline in the stock,” says Sandip Sabharwal, analyst, asksandipsabharwal.com.

We are expecting that digital transformation would likely lead the growth in TCS this time around. Deal wins also could be over $8 billion led by the midsized deals. What are you pencilling in for the IT bellwether?
As far as the technology sector goes, it is important for them to do better than what the market expects for the prices to sustain because these stocks are heavily over owned. I think the deal wins will be important and whether they can have it above $8 billion will be important. QoQ growth also will be critical and commentary on the digital order flows will be important because we have seen that many of the digital focussed stocks in the US have fallen significantly.

There is an apprehension that as the opening up plays out, the entire digital transformation could slow down and on top of that there are the margin issues. The critical thing I am watching out for is where the margins are because for the last two-three quarters, most of these companies have been able to hold on to margins pretty well despite inflation and huge attrition in the entire IT industry. So margin performance will be critical for stock price performance. This time, margins will determine how the stocks will move and it will be important for them to meet or exceed the margin expectation of analysts.

Any new idea that you have been looking at or perhaps have bought recently?
Nothing beyond what you talked about over the last two weeks. Among the stocks which we own, VA Tech Wabag is still looking attractively valued. They have got significant order flows. They have also repaid most of their debt and valuations are still below 10 times earnings for next year.

What do you make of the tyre space given the fact that a lot of these stocks flared up quite significantly like Apollo, JK Tyres and Ceat. What is the outlook on the general demand within the auto space driving and fuelling growth within the auto ancillaries?
The tyre stocks are very cheap now, especially Apollo Tyres, with its global presence. It has a manufacturing base in Europe and the fact is the European operation’s profitability tends to be more stable than the Indian market’s profitability. They are facing huge pressures there. These stocks are in a value zone and so it is tough to say when they will perform, given that till last month, input cost pressure continued to be huge.

So even the next two quarter results will not be very great but for value investors, this is a decent sector to look at. Apollo Tyres is quite cheap in historical context and the demand cycle from the tyre side will play out strongly given that replacement demand will be strong as reopening plays out. So, it is an interesting contrarian sector for investors who are patient enough.

Ruchi Soya is up 13%. You were not quite convinced about the FPO but have you taken a relook?
Such volatile stocks are very tough to invest into for any long-term investor. I cannot buy a stock where I do not know why they go up or go down.

ITC is outperforming the Nifty as well?
Yes. ITC was cheap at Rs 200 and Rs 260. ITC will remain cheap at Rs 350. Where it will go and at what point of time it will go, we do not know but the up move is good because so many people hold this stock and especially on the retail side, it has been the best performing Nifty stock for this year possible; some commodity stock could have outperformed it though.

So, it is a total reversal of what has happened over the last few years. It still remains a cheap stock; it just depends on investor conviction on what kind of valuation it should trade at.

Outside of ITC why is the rest of the FMCG pack moving up? Is the worst already baked in?
It is mainly related to the significant funds flow into a lot of domestic equity funds and there have been allocations. People always buy a bit of consumer stocks. There is a double whammy playing. Initially 2021 was a story of good volume growth revival but higher input cost pressures ,which they could handle well.

Now we are in a moderating demand scenario and the input cost pressure continues to be high and significant price hikes have been taken. So the top line will look decent for many of these companies because of the price hikes but volume growth has completely collapsed or gone into negative. So, near term, it is very tough to build a case for consumer demand revival.

In fact, consumer demand will further get suppressed given the kind of inflation consumers are facing all around and any revival could take at least six months or more.

Grasim was higher by 5%. Any particular reason for that and are more upsides likely?
I read some news on promoter buying etc. and that could have given some confidence to investors. Moreover, on the business side, cotton prices have been shooting up and that increases the profitability of its VSF business, where their cost base is more or less fixed. Any uptick in prices gets them much higher profitability. Plus on UltraTech also, on the cement side, there have been news flows on price upticks. So, there has been a flow of positive news and Grasim continues to remain a relatively cheap stock.

How are you looking at defence stocks on the back of the Make in India push?
There are companies like L&T, Bharat Forge etc. which could become big on the defence side, even Mahindra’s defence arm. I believe it is a good opportunity and in my view these stocks are relatively under owned by all investors. For example, we also hardly own any of the defence stocks. I believe at this stage of the cycle, when people will just start discovering these stocks, some valuations might also look higher but they might continue to trend higher. People should have some bouquet of defence stocks because this is a clear opportunity over the next five to 10 years.

Rakesh Jhunjhunwala’s name was not amongst the top investors which means his holding in Escorts from the earlier 5.8% would be now less than 1% or nil perhaps. What explains this decline in Escorts which was actually one of the most sought after names, even more than M&M perhaps in the entire agri equipment space?
The only reason Escorts was holding up was because of this open offer and there was no reason otherwise for Escorts to hold on to these levels because the tractor segment is going through deep stress. M&M has got a business segment of utility vehicles, CVs etc. which is doing well for it whilst the tractor business was under pressure.

For Escorts, the tractor business has been under more pressure than even M&M. The figures and the valuations, even after the fall, are much higher than most of the other auto stocks. I would think that near term, there should be more decline in the stock.

What about Tata Motors? CLSA, which was forever a Tata Motors bull, is no longer so. A bunch of months, the numbers have come in below expectations. It is a company that is making the right noises when it comes about the future EVs, partnerships?
For Tata Motors, two businesses are going in totally divergent directions. Unfortunately, the business which creates most of the stock value is going in a way where it gives very less comfort to stock investors of Tata Motors.

So while the domestic business, especially passenger vehicles business, is doing very well, in the case of commercial vehicles, there is some revival. This business has stabilised and run very well. On the other hand, the JLR business has been continuously struggling despite the positive sound bites they make. In the last quarter, they continued to make huge positive noise around order book etc. but retail sales quarter on quarter fell while wholesales rose.

If wholesale has risen, then why should retail sales? It shows there is an impact on the demand on the ground, especially in Europe, China etc. I am not so enthused by whatever they are coming out with let us see how the results pan out.