For Infosys, long-term investors' target range has to be Rs 1,350-1,400: Sandip Sabharwal

“When a normal growth stock like say a consumer stock falls around 30% from the top, we might be on the largecap side. Generally, it is a buy level. In most cases, they do not fall more than 30% from the top, unless we get into a total financial contagion. But commodities can halve from there also. People need to be very cautious in this space at this stage,” says Sandip Sabharwal of asksandipsabharwal.com

What would a fourth Covid wave mean for pathology and hospital stocks? Could we see an intermittent bout of uptick coming in?
Yes, all these pathology stocks got sold off so drastically that they just need a small amount of positive news flow to create some short covering rally or some buying from investors. But directionally, given the competitive intensity and the fact that they are still not very cheap, even after halving from the tops they are at 35-40 PE.

So near term, there could be some positivity because of news flow and the fact that they are following so much. Even if we look at hospitals and the way they have fallen from the top, given the profitability pressure they have been showing over the last two-three quarters, that is unlikely to go away. As for the fourth Covid wave, it is too premature. I do not think we can say conclusively that any such wave is going to come or not.

Export levy and domestic surfeit can really dent the bottom lines of steel makers. Please help our viewers understand whether steel is a go-to space from either a trading or an investment perspective in the near term?
What most people do not realise is that the costs are more or less fixed for commodity producers. When the product prices move up sharply as they did over the last one year, we see the profitability jump up much more than what analysts are expecting and when the reverse happens as is happening today where domestic steel prices are down almost 20% plus over the last three-four months, then the analyst is also slow in cutting their estimates.

This year, it is expected that steel company profits over the last year’s levels can fall 50% to 70% and this is at the time when we are assuming that global prices remain at these levels. It is possible that global prices also correct going forward in the second half, which could further pressure domestic steel prices. That is why I do not think people should benchmark what the price of the stock was two-three months back and what the prices are now because commodity stocks are not like normal growth stocks.

When a normal growth stock like say a consumer stock falls around 30% from the top, we might be on the largecap side. Generally, it is a buy level. In most cases, they do not fall more than 30% from the top, unless we get into a total financial contagion. But commodities can only halve from there also. People need to be very cautious in this space at this stage.

What about largecap IT? Jefferies has reiterated a buy on Infosys but they have cut the target pricing. Infosys is well positioned to deliver 15% EPS/CAGR FY23-FY25. Your outlook?
My view is that these stocks are 12-15% return stocks from other levels which we are comfortable buying. My comfort level on something like Infosys is around Rs 1,400. It fell slightly below and it has jumped up around 10% from there. The upside potential remains 5-7%. For 5-7% we can buy the stock, we have to gauge for some bad days some negativity in the tech space, some further correction in Nasdaq etc. and that might again give opportunities. The targeted range in my view for longer term investors has to be 1,350-1,400 rather than current levels.

ET Now: I was just looking at some of these so called realty plays although these are more land bank plays. Everything from Bombay Dying to a Raymond to Century Textiles have given some phenomenal returns both on a yearly basis and even in the last one month. Whether as a textile play or a realty play, what is your opinion here?
Sandip Sabharwal: The market is clearly not playing them as textile plays, they are being played as realty plays and due to old land banks which are virtually free. Now because they are free for these companies, any real estate development gets them bigger cash flows and the realty overall has been in an upswing over the last one-one and a half years. So that is broadly the story.

It is tough to make a play in a stock like Raymond. Historically they have never delivered too much for shareholders. The real estate industry itself would face some challenges given the pace of monetary tightening which is happening as home loan rates are moving up by 1-1.5% and that could impact the pricing power of these companies. We have to monitor this and so real estate as a sector has had a sharp up move. It needs to consolidate before moving up for a longer term.

What is the outlook when it comes to Asian Paints? They came out with their annual report and they did flag off inflation concerns. Given that there is a lot of competition building up within the paint sector, where do you stand when it comes to the likes of Asian Paints?
Asian Paints is a good company, a great brand and it will continue to do well. However, the question for equity investors. There is a good company and then there is a good valuation from the equity investor standpoint. We need to consider our valuations factoring in that kind of competition is going to come and as a result, the margin squeeze which will come in because these companies most of the incumbent playing companies have enjoyed very high margins because it was more of a oligopolistic kind of industry where a few players dominated the entire industry on the organised side.

Now large pocket competition is increasing, JSW is very aggressive, Grasim is becoming very aggressive in this space. My point for the paints industry is that the demand will continue to be there but some part of it will get taken away by the new players. Existing players’ growth will slow down. Secondly, the new players getting market share will keep prices low because initially it will be about getting in and getting the market share that will squeeze the margin of existing players and valuations are still not cheap.

Asian Paints trades at 90 times reported earnings of 2022 and even if we assume a 15% earnings growth this year, it is at 75 times current year earnings this is way beyond any valuations which we can possibly justify so I think the stock has to fall significantly to come into value zone and that significant could be 20 to 40% before it comes into any sort of value zone.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)