Market should give up some more gains before becoming attractive: Sandip Sabharwal

“People should get into better quality sugar companies where there is hardly any debt on the balance sheets now and the next two, three years’ outlook still looks good,” says Sandip Sabharwal of asksandipsabharwal.com

There has been a lot of flip-flops in the market. Till 10 days ago, we were stable, US was not declining, India did not fall much. Do you think there is still a lot of nervousness and uncertainty in the market which is getting factored in?
There is a lot of uncertainty related to economic growth prospects not only in India but globally and RBI itself accepted that when they projected that the economy will grow just 4% in the second half and that is not correctly reflected in the Indian market valuations.

Whereas most of the global markets have corrected significantly, Indian markets are still down 3-4% for this year as of yesterday. Interest rates have moved up substantially over the last one month, bond yields are at two-three year highs and there is inflation all around. That is the threat there is as we read in the data today the inflows into domestic equity mutual funds continue to be very strong. That has been giving a buffer to the markets since most of the funds follow a fully invested strategy and money keeps on coming in.

That is the distinguishing feature between the Indian markets and many other markets and that’s why we have not corrected as much. But ultimately, it is not about funds flows, it is about valuations improving. We should see the markets give up some more gains and before they become attractive. It is too early to talk of peak inflation or peak interest rates.

IIFL Finance has entered a cracker of a deal selling 20% to ADIA for Rs 2,200 crore, valuing them at Rs 11,000 crore.
It is a good deal and we have seen a series of such funding coming from Gulf-based entities because they are the ones who are raking in the mullah with the uptick in crude oil prices and as far as money flows goes, the Gulf countries have huge funds flow and they are investing. That is one segment where some time back we saw good flows coming into some Adani group company. These kinds of deals might keep on happening going forward.

What do they do about the rest of the businesses which are still smaller as opposed to finance – gold, MFI lending which as of now are valued at Rs 1,500 crore. I guess the Street would also look at what they are going to do about value unlocking here?
Value unlocking is specifically done in separate segments because it became a muddle strategy. They got into so many things and then at the NPA levels rule some segments and the overall valuations of the brokerage entities also come down as the markets do not do as well. I would think it will do something to stabilise the stock and not provide any significant upside in the near term.

Reliance Industries is near record highs. There are lots of triggers – refining business tariff hikes, capex. Brokerages across the Street are giving a huge thumbs up. What is in store for RIL?
It is ironic that the business which Reliance actually wanted to give up majority stake to Saudi Aramco two years back is the one which is leading the stock to an all time high now – the refining oil to gas business. Refining margins continue to be strong and I think this quarter and the next, they will contribute significantly to profit but the investor should realise that these are cyclical businesses.

The way the spike-up has happened, the refining margins could also collapse as the peak driving season gets over. The stock is trading at an all-time high and has the largest weightage in the Nifty at the time when the rest of the market is substantially down. If people have a very high weightage in Reliance, it is a good chance to trim and possibly shift to some other sectors.

How would you look at certain sectors like pharma, IT where correction has been severe? Traditionally, these sectors benefit in an environment of low growth in domestic markets?
Well, the challenge is more about what happens to the US and Western economies because the commentary is coming in from both, the monetary as well as government officials out there. Their priority is inflation now and not growth. To that extent, we will definitely see an impact on IT demand, outsourcing demand over the next few quarters.

We should just not see the correction, we should from where they started in 2020. The moves have been very huge, especially in midcap IT. I think there will be disappointment over the next few quarters. So in the two sectors – pharma is under owned. It could have some positive triggers going forward although they are not imminent but valuations might be cheap.

People can look at them but technology in my view is an avoid at this stage. It is a matter of time. When growth slows down, we will start getting profit warnings etc and at that time we might get better valuations.

What about sugar, especially on the back of news that ISMA has now asked the government to allow exports of over 10 million tons? How will the dynamics within sugar play out now for an investor?
The sugar companies are in a sweet spot in a way because global sugar prices are around $560-570 which on an equivalent basis is around Rs 43-44. Domestic prices are at Rs 36 odd right now. It is one of the few commodities where without any protection also, the domestic prices are lower than the global prices, driven by various factors like drought in Brazil etc. They are well positioned for the next season in terms of both sugar and ethanol profitability and to that extent they should do well.

In the near term, because of the fact that many retail investors got into these stocks we could see some corrective activity here also if the overall midcap market corrects. I think people should get into better quality sugar companies where there is hardly any debt on the balance sheets now and the next two, three years’ outlook still looks good.

What are your thoughts on TCS? N Chandra at the AGM was talking about how the forecast ahead is looking quite gloomy due to supply chain shocks, fuel, semiconductor issues, the challenging macro environment. Do you think this is some sort of a precedent as to what lies ahead for TCS?
It is surprising. I did not go into the details of that interview but I saw that some such comments were made. Now it is surprising because just a few days back they were speaking very positively and I think that is the feature of the economies. Even in the US, we are seeing that some CEOs who were talking very positively, suddenly started talking in a gloomy or negative manner. It is a real challenge and the earlier company managements start realising it, the better it is and investors should also look at these things because inflation and slowing growth is a real challenge that we have to grapple with in the near term. The faster the markets adjust to these changes, it will be easier for us to buy things at a better value.