L&T very well placed for next 2-3 years; it’s a patience game in Yes Bank: Sandip Sabharwal

"L&T has got a deleveraged balance sheet, it has been winning very strong orders and the margin profile could also improve going forward. L&T is very well placed for the next two-three years. Recently there has been a sharp runup and there could possibly be a phase of consolidation but valuations still leave scope for appreciation," says Sandip Sabharwal, asksandipsabharwal.com

Accenture results have been topping estimates but the commentary is weak and that will have an impact on Indian IT companies too. What can be the opportunity here?
HCL Tech downgraded growth estimates somewhat and also talked about possible margin headwinds and now we are seeing the same from Accenture. This was bound to happen because there is anticipation of a significant slowdown next year which is what the US Fed wants to do in order to control inflation because in an economy where the population is growing just 0.3% by year and the jobless rate is so low that to control inflation, they have to induce higher unemployment and a slowdown in the economy and that will have an impact on IT outsourcing because a lot of projects will either be scuttled or cut down etc.

So, next year will be tough for most of these IT companies. The management has been unwilling to accept this and so have the analyst and that creates the risk for investors. Once this acceptance comes in, then the risk reduces and so opportunities will come over the next three to six months but in the meantime, we could see further decline in most of the IT stocks.

Since you have been an investor in sugar for a while now, what do you make of the GST council meeting takeaway? GST on methyl alcohol has now been cut to 5%. Do you think that will give a further leg up to ethanol blending and thereby benefit sugar players and Praj?
See blending has been proceeding at a very swift pace and it will continue the same way. It creates some additional incentives because of overall directionally where the thing is going. I do not think it is a game changer per se and because of which people should be going and buying. People should be going and buying just because the outlook remains positive. Sugar tends to be a very cyclical sector. We play it cyclically. We had exited 18 odd months back. I do not remember exactly when we had exited and we entered a couple of months back into Balrampur Chini. Right now, I am positive about the outlook.

L&T is a newsmaker. There is an asset monetisation drive which is in the spotlight. Jefferies has said that it could add about 1.5% to 2% of the FY24-FY25 EPS. What is your view, given that L&T is perched at an all-time high market capitalisation. We are seeing an incremental move in the stock price?
Majority of investors have actually missed this move because L&T like ITC failed to impress so many times that a lot of people lost faith. I think directionally the call that the management took to deleverage the balance sheet and not go into BoT kind of projects where fresh investment will be required from their side and focus on EPC and also monetise whatever assets they have, is moving well.

It has got a deleveraged balance sheet, it has been winning very strong orders and the margin profile could also improve going forward. L&T is very well placed for the next two-three years. Recently there has been a sharp runup and there could possibly be a phase of consolidation but valuations still leave scope for appreciation.

In general, when sugar prices are at a five-year high, irrespective of the GST outcome in terms of the GST new rate, do you think Balrampur Chini is in a sweet spot?
Yes, it is in a sweet spot. I was mentioning earlier that if you were in cyclical sector, we have to exit at some time and enter at other times. A couple of months back, at around Rs 310-315 levels, we entered into Balrampur and subsequently they announced a buyback at Rs 360 also, where they are unable to do much because price has been above that but overall sugar looks well placed, especially given the current weather pattern.

Also as sugar prices are high, export prices are good for sugar companies. Domestic prices as well as yield should be better this year. Balrampur is well placed. It is just that it has moved around 30% very fast. I do not know whether the current price is a good price but directionally things should be good for the next one or two years.

Indigo, Tatas are going to be coming and increasing their market share. They have got giant and jumbo plans but by the time they scale up, it is about 12 to 24 months away. Indigo still has a sizable market share. We know that is what is happening to air travel and given where crude is, do you think the stock and the company are in a sweet spot now?
It is in a sweet spot for sure. They deliver very strong results. If you look at the holiday season and the ticket prices or the fact that international travel is also improving and international business as the flights normalised tends to be more profitable for airlines in any case. So it is pretty well placed, it is way off it's all time highs etc.

Its competitors in the low cost business – Spicejet as well as Go Air – have their own financial issues so they are not able to expand so rapidly. Like you said the entire Air India rejig and combination with Vistara etc. will take at least 18 to 24 months. Indigo should do well and they should do well even after Air India becomes more aggressive as it is a growing market and there is a space for two-three big players.

Quite a bit of a clean up act is happening at Yes Bank. I am wondering whether you would want to take a bet on this?
I would not like to take a bet but the risk reward is reasonably favourable. A bigger move in Yes Bank is awaited as the management is professionalised and it starts running like many of the other banks like ICICI Bank, which is also publicly owned but it has got an independent board and private management. Once that happens, we could see a better rerating.

Banking overall is not an easy business and there has been a huge increase in the capital of Yes Bank. It also needs to be considered while factoring in the impact of improved profitability but that has to be spread over a humongous base of equity. So, it is a patience game and the downside is limited. But when the upside will play out, I am not very sure.

Yes Bank is at a price to book of 1.6 times and SBI is at 1.7 times. What if I have to choose between SBI and Yes Bank using price to book as a benchmark?
What you are saying is absolutely right. Why should you prefer a Yes Bank to SBI and that is the exact thing I am saying. So, it will be a patience game but the only thing is that because Yes Bank comes out of an extremely depressed zone, the pace of improvement in its book value, given the fact that it is very small, could be faster than that of SBI if they deliver on all fronts. So to that extent, the valuations we are looking at price to book could change going forward. That is the story any investor who wants to play it has to play.

The clouds of USFDA overhang are clearly not lifting away from most of these pharma majors. 2022 saw great returns for Cipla and DRL, but beyond that, the list could not extend itself.
It is an industry where one has to be very stock specific. It is not like technology where a rising wave lifts all boats and so on. We saw that there are companies that delivered earnings growth and cash flows like Sun Pharma and Cipla did very well while most of the others did not. The same phenomenon could continue going forward.

Many of the smaller companies are investing so much high capex that if the margins get suppressed, many of those where people have high projections, may see losses going forward. One needs to be careful where we are investing in this space.

AMCs are in the business of creating wealth for unit holders but ironically AMC stocks have not created wealth for shareholders!
No, it is not ironical because many of these stocks just went way above the fundamental valuations and if you see globally how the AMCs are valued, they were much above that. Now they are somewhat in the value zone and one of the main issues I see in the AMC industry is that most of the stocks are just hugging index returns.

Most of the active funds are not able to beat the index and that is leading to a shift of investors from actively managed funds to index funds or PMS, AIF kind of structures, which tends to hurt the overall industry and also impacts their overall margins which they earn out of their assets under management.

That needs to change as otherwise, there would not be any great story in the overall business directionally. So, we would be able to take them as compounders and we will have to treat them cyclically and buy them when they are cheap and sell whenever you make your money.

As the year ends and the new one begins, are you willing to reconsider PSUs in the new year? Disinvestments may come in the fourth quarter this financial year via OFS?
Yes, so disinvestment will be negative overall because it will create a continuous pressure at a time when foreign investor flows are also moderating. We need to be careful about PSUs, especially for the pace at which they have moved. I believe if there are some OFS in some defence-oriented PSU companies which will create a decent crack in their prices, that is the segment people should look at.