Sandip Sabharwal, asksandipsabharwal.com, says “it will take some time. Valuation will adjust, but that does not mean the bull phase will get over unless and until the situation in the Middle East goes totally out of hand and to that extent, we would like to buy on a reasonable dip, but you have to let the reasonable dip play out. Even after a 300-point dip, markets will be just 5-6% off from the top. It is not that we would have had a huge correction which presents the market as a value buy. I would still like to be cautious, wait and watch.”
What would you recommend investors today? The headlines are not looking good. But India has at least historically managed to insulate itself to a large extent.
Sandip Sabharwal: Yes, it is an evolving situation in the Middle East and I do not think people should correlate this with the usual incidents or the war-like situations which happen where one side is so much more powerful than the other that the retaliation effectively does not happen and it plays out that way. We are still not very clear on what is happening and although many will try to call a bottom today, that you buy on a 300-point dip, etc, I think even after a 300-point dip, markets will be off just 5-6% from the top. It is not that we would have had a huge correction which presents the market as a value buy. I would still like to be cautious, wait and watch.
Let us just erase the morning headline and if I take the clock back to Thursday or even Tuesday or Wednesday, markets were falling independently of the geopolitical situation. They are falling because the interest rate trajectory has changed and they are falling because the Fed seems to be talking about inflation coming back. Do you think irrespective of when and how the geopolitical settles down, the fabric of the market is still looking weak?
Sandip Sabharwal: The fabric is weak because the assumptions which went into the current market valuations are getting challenged now. It was my view also that these rate cuts are not going to come as fast as what people were expecting. I think people were just going by Fed speak. Central banks have a tendency to change their views very fast and almost every meeting you go back and see the commentary of central banks, they change. We have to evaluate the macros ourselves and the macros do not indicate a weakening of the inflationary trajectory anytime soon. It might happen eventually, but not right now.
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You look at how global commodities have rallied. You look at various other factors, employment picture, asset prices, etc. So, it will take some time. Valuation will adjust, but that does not mean the bull phase will get over unless and until the situation in the Middle East goes totally out of hand and to that extent we would like to buy on a reasonable dip, but you have to let the reasonable dip play out.
What is the definition of a reasonable dip purely in terms of percentage or purely in terms of a Nifty level?
Sandip Sabharwal: The first level where I would like to start buying more aggressively will be more near 21,000 of the Nifty and if by chance it falls further to between 20,000 and 20,500, then I would like to be fully deployed at that stage.
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Is it time to take small bets in FMCG stocks? Should you buy IT largecaps on 10-15% correction?
We have always argued and debated which way IT is going to move. Every time I come back from TCS numbers, there is a hope that the worst is over. Every time I see Infosys numbers, that hope is dashed. It is quite confusing looking at what we have heard from TCS and what we have got from Infosys.
Sandip Sabharwal: I have studied AI to the best of my capabilities. It is the biggest factor which is leading to the delays in most of the projects. Even if the companies are winning the projects because the entire AI evolution is so rapid that companies or institutions themselves do not know what they should be investing in.
They do not want to invest in something which becomes totally useless a year later and they spend billions on that and that along with the general uncertainty leading to the delays which most analysts are unable to fathom and that could continue for some time. So, the order wins of the IT companies are very intriguing that you win so much but then there is no execution and that is why I always say do not focus so much on the order wins of these companies and focus more on macros, what they are actually doing on hiring. In fact, hiring has been continuously coming down, headcounts have been coming down. That shows they are not very confident about the near term. I do not think the bottom is done per se. Stock prices will bottom before the fundamental bottom happens and we have to see when that happens. I do not see it happening today.
What is the expectation from HDFC Bank?
Sandip Sabharwal: In the case of HDFC Bank, it will be interesting to see what happens when trade growth gets suppressed so much and deposit growth increases so rapidly. Now, have they done anything on the operational cost front which can actually reduce the impact of this phenomenon is something we will need to see. I think analysts\’ expectations are still very high in terms of what they think HDFC Bank can deliver. I think the NIM compression could be sharper than what most analysts are expecting. So, that adjustment is still going on. I would think that there is one more year for the entire adjustment in the HDFC balance sheet to play out.
Real estate as a pack has been doing quite well. What is your view there? Whether it is commercial real estate or residential, any top bets within that space?
Sandip Sabharwal: Not really. In fact, I would say that people should be cautious on this sector because whatever is happening on the launches of projects, the kind of pre-sales these companies have been reporting, the euphoria that is built in, price hikes, all are indications of some sort of a bubble building up or already built up. If interest rates are not going to decline and liquidity is going to remain tight, I think at some stage we will see this ebb off and most of the stock valuation do not really factor this in. So, I would think that people should be cautious, especially of this sector at this stage.
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Just wanted to get in your take then as to what the outlook is on an HDFC Life and the auto space, TVS Motor?
Sandip Sabharwal: So, TVS valuations are high for sure. The company has been doing well and to that extent I would agree that purely on valuations TVS is not a buy at this stage. Life insurance companies have been disappointing over the years. It was expected to be a sector which will grow rapidly. The value creation will be rapid. But I think HDFC Life results disappointed on each and every parameter and to that extent that again limits upside in this stock.
What is the outlook when it comes to the entire FMCG sector with the rural slowdown, results season, where is it that you are finding comfort within FMCG?
Sandip Sabharwal: FMCG could be one of the more interesting sectors as a contrarian bet because stocks have underperformed for years. There is expectation of a very strong monsoon from all weather forecasters all over the world and we have had very low volume growth for several quarters now. A revival is imminent in the FMCG segment and to that extent some stocks could be considered as the correction plays out.
So, I think Dabur looks interesting. Even HUL is at a multi-year low or near a multi-year low, I think at the same levels where it was six-seven years back. Some of the other companies which have been doing well in the stock markets, Godrej Consumer, Tata Consumer, they can be considered on dips. But right now, their valuation look a bit stretched relative to the entire FMCG segment.
