Longer term, large banks continue to be better bets: Sandip Sabharwal

“Near term, because of the fact that people see them as low value or they did not move up as much, there could be some interest but longer term, larger financials are much better placed,” says Sandip Sabharwal, asksandipsabharwal.com


What is the outlook in financials? Where are you expecting leadership to come from within the entire financial space, given that of late, we have seen some of the smaller names in the limelight. Will that be a trend to continue or will private sector banks take leadership?
In the near term, smaller banks could still see some interest because of the fact that retail investors are more attractive and the bigger banks moved up earlier but in terms of a trend, from a two-three years’ perspective, larger banks are much better placed in a tightening liquidity and higher interest rate scenario because of the high CASA deposits they have. That helps them maintain their margins and also expand it in a rising interest rate scenario.

The smaller banks in the near term till liquidity tightened, were in a good spot because they did not have to raise deposit rates but their deposit rate increases will be much more than the larger banks and to that extent, they will see margin squeeze going ahead. Near term, because of the fact that people see them as low value or they did not move up as much, there could be some interest but longer term, larger financials are much better placed.

Are things looking better vis-a-vis the HDFC twins?
HDFC Bank is doing very well. HDFC has a business model which will see margin squeeze going forward because of the high and rising competitive intensity in housing and to that extent, it’s the merger which has held back the stock price movement of HDFC Bank in my view. Otherwise, standalone HDFC Bank should have been much higher. The merger is still pending. It has huge uncertainties around it related to CRR, SLR requirements, regulatory requirements and how HDFC Bank will raise the deposits required to compensate for the credit growth of HDFC. These issues have not gone away at all.

Coming to the consumer tech and fintech companies, what does the market want to hear? What is your take on Zomato?
That is it exactly. They know what the market wants to hear and they are saying it. Among the results which have come out of the new generation companies, I still believe Zomato stands out best simply because they have a business model which can be profitable as long as they like. They have said they do not make random minority investments in new areas. They just have to focus on the current business. The reserves combined with commentary could get some upside in the stock near term and then investors will monitor the next few quarters.

You said you like Zomato the most out of the earnings. Most of the earnings have improved from Paytm to Nykaa to Policybazaar. Nykaa’s bonus issue has been criticised on social media. What is your view on the bonus issue record date coinciding with the pre-IPO investor lock-in lifting?
Yes, it is rightly criticised because it creates a problem in valuing the company, especially from a lay investor standpoint given that they give the bonus in a 5:1 ratio instead of 4:1 which would have made it an easier calculation. It is more of an investment banker kind of a move coming from the promoters of the company and it is rightly criticised.

If we make an all time high do you see the market sustaining there?
Market levels per se have less significant value than overall how we see various companies and the market valuation. Market valuations were stretched yesterday, will be stretched today given the environment of interest rates so we need to be cognisant of what we are buying and to that extent the market will become more and more selective.

Did you get a chance to look at Trent or Indian Hotels performance? The earnings came out yesterday post markets?
Yes, both results were strong. Indian Hotels obviously stands out because of very strong results, very strong commentary and also the fact that the next three to five years will be a very strong period for hotels because supply increase is expected to be just 4-5% and demand increase should be much more than that. That puts hotels in a very good position after more than a decade because these are very high operating leverage businesses because costs are fixed to a large extent and as occupancies and rates go up, it flows through straight to the profits.

I think it is in a good position. The only issue is that the stock has done so well and trades near all-time highs. So it is prone to market corrections but directionally, for any long-term investor, it should be still part of the portfolio.

Trent is doing well. Valuations, however, are extended at this stage like other retailing companies. Even Trent is good for the longer term but near term, one has to be careful.

Do you think after defence, railway stocks is the space to go?
Defence is a more longer term sustainable story and there are various facets to it and to that extent, companies can grow rapidly out there with more visibility.

Railways is an opportunity for the next three, four years at least and maybe beyond that if railways keeps on investing the way it is doing. When we had discussed, I think the discussion was around the railway wagon companies which for the last 10 years have been languishing with no orders and have got huge orders now. Plus some of these companies have got overseas presence as well in the metro side etc. These are Titagarh Wagons and Texmaco Rail. We own more Titagarh Wagons and small quantities of Texmaco Rail at this stage. The next three, four years should be good for them.