Be careful about overtly optimistic IT cos; it will be tough for Reliance to disappoint: Sandip Sabharwal

Sandip Sabharwal, asksandipsabharwal.com, says in the case of ICICI Bank, “hopefully we will see good profitability and I expect them to do well. So, the question again for many of these largecap banking stocks is where is the upside in the near term, given that they are near all-time highs rather than having corrected most. But, overall, my construct for the larger banks is positive in India.”

Sabharwal says, somehow this time, for Reliance, the expectations seem to be very low. So, to that extent, it might be tough for them to disappoint.

What do you want to start with Titagarh, the jackpot which you hit in the last one year, what is happening in IT or something else?
The railway investment theme is a strong one. The key is to identify the stocks which can benefit disproportionately because of that. We invested in Titagarh initially because of their success in getting the wagon orders which will be spread over three years. So, many of these companies had invested hugely many years back in anticipation of large railway orders which never fructified. It led to them making losses, etc. But things have turned around in a manner where the growth profile has completely reversed, completely changed.

From that, they moved forward to getting more metro orders, wheel orders and recently they got huge wheel orders. There is a paradigm change in the growth profile of the company and to that extent, that is getting reflected in the stock price. Now, it is tough to estimate till what price such stocks can go because the growth cycle is just starting.

Initially there is no ownership and so the movement is very fast. Then, once such a big move has happened, there could be phases of consolidation, etc, but given the overall outlook, the next two-three years should still be very good for them.

On technology, results and commentaries are in line with expectations, so there is a definite slowdown and many of the IT analysts are now recognising that the slowdown could actually persist for the following year also, not only this year, but that is not built into the stock prices. So, it is a dynamic situation, we want to buy these large IT stocks at some stage, but I think we can still wait out for maybe a quarter or two.

Is it Infosys specific problem? Mastek numbers yesterday were not bad. HCL Tech is just about okay. So, it is not a linear trend in IT. Yes, IT is going through a period of pain, but it is not universal.
It could be that there are specific companies with specific projects or businesses. They will stand out and that always happens in any cycle in any industry. Even in the pharma down cycle, there were some companies which continued to do well. It happens across the board. But the IT spending reduction is a reality and that is going to affect all the companies, even those which are giving bullish guidance and those which are giving conservative guidance.

So, just because a company gives a bullish guidance at this stage, I do not think people should be jumping in to buy those stocks because eventually this slowdown is going to catch up with all the companies. So, we should be careful about companies which are excessively optimistic at this point of time.

Two important earnings, 10% plus weightage for Reliance, 8 odd percent for ICICI Bank. What do you hope to hear from both?
Let us hope that both of them give positive commentaries. Somehow this time, for Reliance, the expectations seem to be very low. So, to that extent, it might be tough for them to disappoint. I do not know the reason for such pessimism in the near term, but telecom obviously is a place where the profitability improvements are not happening at the pace people expected because Reliance Jio itself has been resisting taking tariffs up while other players actually wanted to go up.

So that is one aspect which is concerning. People have some concerns on retail because of the slowdown in consumer demand and what most of the other retailers have been talking of. Those are a few concerns, the petrochemical and refining business incrementally should see improvement.

In the case of ICICI, hopefully we will see good profitability and I expect them to do well. So, the question again for many of these largecap banking stocks is where is the upside in the near term, given that they are near all-time highs rather than having corrected most. But, overall, my construct for the larger banks is positive in India.

The other space which has sprung up is pharma. While all of last year was about Cipla and DRL, now we are beginning to see much larger participation from pharmaceuticals. Just the other day, after an EIR nod, even a Piramal Pharma which has been a rank under performer shot up at about 8 odd percent or so. Are you buying into any of the pharma names yet?
In pharma, our exposure is limited to Sun Pharma and Dr Reddy’s because that is where we have more visibility, more comfort in the management, lesser concerns and valuations. Although Sun Pharma valuations are not as cheap as they were two-three years back, they are still not so expensive given the way they have been operating and reporting results.

Smaller pharma companies are more speculative and there I do not see a big story in any of them. Most of them are doing excessive capex which eventually goes to hurt them, etc. Cash flows are not there. So, I think such speculative moves will keep on happening but there is no big story.