Bharat Forge, Indian Hotels & 4 other stocks that Sandip Sabharwal has added recently

"It is better to buy financial stocks on dips. ICICI Bank is emerging as the top bank," says Sandip Sabharwal, asksandipsabharwal.com

In bank stocks, where do you see opportunities to add more positions for the long haul?
Directionally, the bank which is emerging as the leading bank in India is ICICI Bank. They continue to do well on all parameters. They have adequate capital adequacy plus enough levers on their subsidiary to drive valuation so that the bank continues to do well. A few weeks back, when Bank Nifty bottomed, it touched around Rs 680-690. Now it has come back to Rs 860. In the near term, all banks have had a very strong run and I would think that the financial sector remains a buy on dips but right now, valuations are running a bit ahead.

Does Bharat Forge merit a hold in the portfolio?
I am very bullish on Bharat Forge. We have added Bharat Forge over the last four to six weeks because most of the analysts are underestimating what the company is doing in terms of transformation from largely auto to many other segments and their foray into defence, aerospace and investments into developing products for EVs, etc.

They are doing a lot of things and it is somewhat underappreciated at this stage. It is an under owned stock because it did not do well. There is too much focus on class 8 orders, etc. The management also clarified that they have steady order books till the end of next year. So Bharat Forge is a good stock. Over the next couple of years, it should deliver good returns to investors.

What have you added of late? Have you sold something? Markets have done reasonably well so where are you raising cash and how are you redeploying that cash?
We bought Bharat Forge on the reopening trades. Some time back, we have taken some exposure in Devyani International and Westlife along with Indian Hotels. We have also added some amount of Lemon Tree because that is on a good turnaround path.

On the engineering side, capital goods is one segment where I have taken a small bet. These railway wagon companies have huge capacities but they have remained underutilised for years because railways was not giving any orders. Texmaco Rail and Titagarh Wagons between them have got huge orders worth Rs 7,000- 9,000 crore. I have taken a small exposure. We have to see how they performed. They have not performed in the past but the next three-four years should be good with good growth and operating leverage led profitability increase for them.

SBI is talking about 14% loan growth. If SBI is growing 14%, smaller banks may actually do higher than SBI because of base effect. The temptation to go into smaller banks is coming back. Is there merit in buying a Federal Bank, DCB, Karur Vysya?
All these are trading banks. One might buy into them but then one needs to exit because they cannot be part of the core holding because of the key facet of a bank which is getting newer, higher value customers in terms of who is willing to give you cheap deposits and let them be there. They stand with the larger banks.

Over the last few years, people have been more circumspect putting their deposits into smaller banks and are focussed on the large banks. The larger banks will continue to do better and the other thing which we need to realise is if SBI is talking of 14%, then if the system wide credit growth picks up then the deposit rate increases also will have to be very rapid because over the last almost two to three months, I have seen that credit growth has been more than deposit growth and if deposit rates have to go up, then the banks with high CASA which are the large banks – SBI, ICICI, HDFC Bank – benefit much more than the smaller banks.

I cannot think of a single company which has domination in all categories at least in the financial products also?
There is no issue with the subsidiaries of SBI. They are doing extraordinarily well and obviously we do not have credit issues or NPA issues out there. Where people are more circumspect is on SBI itself because they are prone to lending aggressively in upcycles and taking more greater risk and then which leads to higher attrition of NPAs and that is a cycle which is repeated over many cycles for SBI. We need to see whether the next cycle will be different or not but even in the first quarter, the net NPA accretion was much higher than expected. If not for recoveries, the NPA uptick would have been more severe. So, that is the only monitorable for SBI.

Which of these stocks – PVR, Indian Hotels – is priced to perfection? Sandip Sabharwal: In the near term, they have gone up a lot. So one could argue that there has to be a phase of consolidation after such a strong up move because if you look at their charts, you see a straight line up move in many of them.
On the other hand, the outperformance in earnings is so substantial like Indian Hotels. A majority of analysts are expecting Rs 70 crore profit. They delivered Rs 170 crore. The operating leverage itself is delivering numbers and such outperformance that there is a possibility that the earnings itself could keep the valuations look less expensive than what they would normally.

So in the near term there has been a very strong up move. There has to be a phase of consolidation and possible correction. If the markets also correct as they have also run up substantially, on dips I would still like them. The next two, three years will still be very good for them.