Avoid IT stocks unless valuation turns attractive in next 2-3 quarters: Sandip Sabharwal

"The demand concerns for next year still exist and are real and to that extent, IT is a sector which is broadly an avoid unless valuation become very attractive for the next two, three quarters," says Sandip Sabharwal, asksandipsabharwal.com

What do you make of Patanjali? There was a much fancied listing there but the management commentary is a little uneasy. There are multiple headwinds when it comes to the edible oil segment, so of course, it is not reflecting in the earnings?
Yes, that is true. While there have been exceptions, most companies have said that because of inflation, there is a pressure on volume growth, rural demand has not picked up as much although my view is that the rural incomes will be very strong and rural demand could actually pick up while urban areas could still remain under pressure. Although in many of these companies the input prices have come off and gross margins could improve going forward.

Most company commentaries indicate that they are pushing huge investments into sales and promotion in order to try and push volume and retain or increase market share, rather than focus on short term profitability improvements. That could also keep the profit margins a bit pressurised vis-à-vis what most analysts are expecting. The entire consumer space with one or two exceptions could remain quite range-bound for a quarter or two.

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What have been some of the key takeaways from Zee Entertainment’s quarterly numbers?
I stopped tracking this company because of my structural view on the entire entertainment-based broadcasting space where I think they will keep on losing both; advertisement as well as subscription market share and cost will keep on going up. It is going to become tougher and tougher.

Which is the best one from the private midcap banking space? PSUs have got rerated for the first time ahead of private banks?
I am not looking at any old private sector bank. From the new generation ones, what has clearly stood out is the performance of IDFC First Bank, both in terms of their gain on the CASA front as well as the execution and control of NPAs. For someone, who is looking to take a bet over the next three, five years on emerging financials, that could be the one to look at.

The challenge with IDFC Bank is that we do not know how and when the merger would move. They are also raising CASA at a rate which is higher than the industry average which means somewhere the margins will get compromised?
It is the same strategy Kotak followed. When you are newer and people are unsure of putting money with you, you give a higher rate and then later on, as you get more established, even if you reduce rates, people do not withdraw the deposits if your services, technology etc look good. I think that is the strategy they are following. Whether they will be successful in that or not, let us see but as of now it seems to be working for them.

It is getting extremely selective when it comes to pharma. It is tough to find anything beyond a Cipla and Sun Pharma?
Yes, it is because the results are all over the place.One cannot judge what is happening where random results come out of the smaller companies and that has been always my contention that it is very tough to evaluate some of the smaller companies which continuously report very high margins and suddenly those margins collapse. People need to focus on the balance sheets also, monitor receivables, debt movements, capex etc and that is where the clearer picture comes up. So I think like you said the clearer picture is in only the two largecaps.

IT companies did not do well when rupee was weak and IT companies are doing poorly when rupee is strengthening. It is one of those sectors where nobody is reacting to good news but acting on the bad news?
I will say the opposite. The Indian technology stocks will not fall as much as the global technology stocks did in the Nasdaq carnage. So they held up pretty well. If they held up pretty well, then on the upside also their performance has to be moderate. So that is where we are. There is too much correlation built on day-to-day rupee dollar movement for IT stocks, which is not the right way to look at it.

The demand concerns for next year still exist and are real and to that extent, it is a sector which is broadly an avoid unless valuation become very attractive for the next two, three quarters.