IT, FMCG will find it tough to perform in near term; leadership has to come from financials: Sandip Sabharwal

“The hotels story is intact; price wise the stocks have not corrected at all on an overall basis relative to the midcap index or overall market. A staggered buying strategy might be a better one for investors so that they can spread out the buying over a few weeks,” says Sandip Sabharwal of asksandipsabharwal.com.


On cement sector outlook
This quarter volumes are expected to be subdued. There could be a positive surprise as far as the margins are concerned from UltraTech this quarter. The stock is off substantially from its peaks; however, we will see that raw material prices and input prices have continued to rise for cement companies right through April and as more and more of the older inventory of lower cost coal gets over, how that impacts margins over the next two-three quarters is critical. My guess is the overall outlook for cement is neutral at this stage and it could be more interesting to see it after a few months.

On Vedanta numbers and interim dividend
The dividend payout is very high and the reasons for that are unclear. At the parent level, the holding company has some covenants which it needs to fulfill. My guess is it is aimed more for the promoters; for the holding company to get in the money to satisfy the covenants of the loan agreements with its lenders. But that said, the retail investors also benefit given the huge dividend yield. The key now is to see how the stock performs going forward, adjusted for dividend.

My view is that commodities seem to be on the verge of peaking out at this stage. It is tough to build a case for further rise without any demand destruction from here. Just for the stock to perform will be tough, given its performance over the last few years.

What is spooking the TV18 stock?
The overall genre of TV viewing per se, ex of specialised channels, is on a downward trend both in terms of subscription levels as well as the advertisements. So, irrespective of who is buying what, we saw that in the Zee deal also, after the initial excitement after running up, the stock is more or less back to where it started from because the overall industry is on a decline. That is what a longer term investor should consider.

On hotel sector & Indian Hotels
For us to buy is very tough but then the industry is in a sweet spot. It will do very well over the next two-three years. The only thing we need to watch out for in a company like Indian Hotels going forward is that as normalcy returns and as revenue goes up, do they go back to their old property gateways of not controlling expenditure? The expenses are going up too much and that is impacting the growth in profitability which we are actually pencilling in.

That is the only thing we have to be worried about ex of that on the revenue trajectory, on the revival, on the fact that the next three-four years will be a sweet spot for hotels because new properties will not come up so fast and that is a real story. All these results have come without any international tourists coming to many of its palace properties. The premium properties have a lot of foreign tourists especially in the third and fourth quarter which was completely missing this year. That also should come back with the caveat that we do not get new waves of Covid on a big scale going forward.

So the story is intact; price wise the stocks have not corrected at all on an overall basis relative to the midcap index or overall market. A staggered buying strategy might be a better one for investors so that they can spread out the buying over a few weeks.

On what has stood out in a positive way amidst the earnings
There are few positives like in bank earnings, NPA control is a positive. So, most large banks have net NPA below 1% now which is a big positive for future growth prospects of the overall economy other than banks. Also they have high capital adequacy ratios and that is also a positive.

Secondly, from companies with low expectations of earnings: The earning expectation from a consumer company like Hindustan Unilever was so low that when they delivered a pretty decent margin, that is a positive. If it gets repeated in other companies, then it could give a base formation of consumer stocks which have been underperforming. although they might not have a big upside in the near term given demand issues.

In cement, the margins have held up much better than what was expected and that is a positive. So, again there the expectations were low. Bajaj Auto, a large auto company, has reported whereas others are still to report. Margins were better than expected and so that was a positive. There have been positives and negatives both, more negatives in where expectations were high and more positives where expectations were low.

On Axis Bank Q4 report card?
The results were decent. The only challenge I see for banks going forward is that due to the movement in treasury yields, other income might be muted going forward. The best of the asset quality improvements in terms of lesser write offs seem to have come in in the fourth quarter and the net interest income seems to be underperforming for many banks. So HDFC Bank underperformed and now Axis Bank has also underperformed on net interest income. Even Bajaj Finance was a bit muted.

Those are the challenges financial stocks are facing going forward. The best of asset quality seems to be behind and there is a possibility that NIMs could remain a bit soft in the near term.

But overall given that Axis Bank has very high capital adequacy, if credit growth picks up, then the earnings can get a boost. On a net basis, the overall numbers are positive but I do not think this stock will do much because of these results.

On which sector to lead market
See if the markets have to do well, the financials need to do well. So that is where leadership has to come through. Right now in terms of expectations, there are low expectations from sectors like capital goods, infrastructure and so L&T is well placed in that regard, unless they disappoint on earnings.

Clearly auto stocks are well placed in that regard and telecom stocks like Bharti could also outperform. That is where some sort of leadership could come through. IT, FMCG will find it tough to perform in the near term.

On pharma stocks
Among the largecap pharma, the only stock we own is Sun Pharma which has been doing consistently well. The company has been delivering above expectations. Most of the other companies have been disappointing however, I think something like a Dr Reddy’s or Lupin in the largecap side are in a value zone as far as price is concerned but now we need some trigger in terms of outperformance in earnings in one or two quarters.

I think those are the stocks which should be on the watch list and Sun Pharma is something which we continue to hold because valuations are still decent and the company has been continuously doing much better than expectations.

On the US dollar index hitting a 20-year high. Is there a trade there?
See typically large size moves in the US dollar index has repercussions on fund flow into various asset classes as well as emerging markets. This time, the rise in the dollar index has been largely due to the fall of the yen, euro and because of the kind of basket which comprises the dollar index.

Among emerging market currencies, a few have sold off because of their own economic issues but rest of them have not sold off so much but if there is a continued rally and that combines with the start of the US Fed tightening ,cycle then there will obviously be repercussion on funds flow into equities, other risky assets as well as the performance of overall global stock markets. That is something which we have to keep a watch on.

The US, Europe and a lot of other emerging markets have fallen. In India, we have not seen that kind of fall, driven by large local flows which have continued to come into equities but this is definitely a factor which needs to be watched.