Retail, industrials to do well; pharma only contra pack in market: Sandip Sabharwal (2023)

“Pharma is the only contrarian or defensive pack left in the market today. Whenever markets are not doing well, we will see pharma stocks doing well and when the markets bounce back like we are seeing today, we will see pharma underperform. That is because for the overall basket, there are no real triggers in terms of any significant upgrade in earnings or growth triggers,” says Sandip Sabharwal, asksandipsabharwal.com

Are you startled by the complete turnaround that transpired overnight on Wall Street despite the hotter than expected inflation data? What did you make of the bounce back and what does it indicate for our own market?
We have been discussing over the last few days that many of the markets have become extremely oversold and the Dow and Nasdaq were down 25-35% for this year. At some stage, the markets become extremely oversold and then bounce back and that will be the feature of the market and volatility tends to increase as some potential tops and bottoms are approaching.

That is the process which is on right now and we should not read so much into one day’s data because the macroeconomic data points do not change as much but create some sort of positivity. That combined with some positive numbers from

Infosys

and

Mindtree

as far as India goes also creates an element of positivity.

Is MindTree and Infosys enough to convince you about the recovery in the IT sector?
It is not a washout, these are good cash generating companies and we cannot write them off but we cannot ignore the macroeconomic threat in front of us. Some of that Infosys talked about in the first quarter commentary. They had talked about a few sectors facing slowdown. They have added a few more in this commentary. The margin improvement was very significant and that was a significant positive.

What levers they use we do not know but going forward, they have narrowed it down and said that the lower end would be what we will be achieving. That means they will end up at around 21% for this year. So most of the big margin improvements seem to be behind us.

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My main worry is the imminent slowdown in the western economies and what impact that will have on IT outsourcing. If these companies remain totally immune to that, then that call was totally wrong and these could become huge performers next year. But I would not bet on it. So what this result commentary and the buyback does is that it reduces downside risk. But it does not open up a very significant upside potential in my view.


What is your sense on

Bajaj Auto

in terms of what the street is pencilling in with respect to the focus on exports?
Bajaj Auto is facing challenging times simply because of the fact that most of their major export markets are facing import challenges, some have good quantitative restrictions and something like Sri Lanka which was supposed to bounce back, is in its own turmoil. Those are the issues Bajaj Auto is facing on the export side which is 50-55% of their turnover.

The rupee fall benefits them hugely because 50-55% is exports and to that extent, they directly benefit on margins. It will be a mixed picture and their commentary always is more realistic than some of the other management which tend to always be bullish. Their commentary post results will be important for us to monitor.

What about the pharma space? It has given a lot of false starts. We see some sort of up move but that gets corrected. Stocks like

Biocon

have been languishing for a long time. How should one approach the entire pharma pack?
Pharma is the only contrarian or defensive pack left in the market today. So whenever markets are not doing well, we will see pharma stocks doing well and when the markets bounce back like we are seeing today, we will see pharma underperform. That is because for the overall basket, there are no real triggers in terms of any significant upgrade in earnings or growth triggers.

Some stocks are at reasonable valuation on the largecap side but then it has become a defensive sector in the market and the only one. I think that we could be range bound with an upward bias if the market volatility continues.

There is chatter about the retail stocks in India, given the fact that we have seen quite a play up within this entire basket. They have grown significantly largely on the back of online shopping and they tend to be a little bit less volatile than some of the other trending stocks. Where do you see opportunity within the entire retail space?
The retail space should do well. The stock which we own is Aditya Birla Retail. I like the company because of the kind of restructuring they have done over the years, the fundraising they have done and the way they have cut down debt and their strategy to keep inventory in control and push profitability.

Aditya Birla Retail

should do well.

Trent

is something which I do not own because at this stage I find the valuations too high. Then there are these new generation companies which have got listed like Campus Active Wear or

Vedant Fashions

and all, which are good companies in terms of their business models but the valuations right now are very high. I would not be a buyer in these stocks at this stage.

How are you playing the overall capex theme? Would you bet on capital goods, infrastructure or real estate stocks?
Real estate had a big run and now the interest rate hike will start hurting them to some extent and growth should slow down. I will be wary of that sector but since the long-term cycle has started just a couple of years back, it should last a few years. I will be looking to add if there is any reasonable correction.

On the other hand, many of the capital goods companies are doing very well and we need to be focussed on those which do not have too much debt. L&T has been reporting steady win of new orders constantly. Their margins should improve going forward and that is one company on the largecap side which should be an outperformer overall.

On the midcap side, the transmission tower companies like AEC,

Kalpataru

have also diversified into civil construction, railways, etc. Those took a huge hit on margins in the last one year and there the order booking has been quite good and margin improvement could also play out. Those are looking reasonable now. Those could be some of the spaces investors could look at.

ET Now: What are your thoughts on the entire defence sector?
Sandip Sabharwal: I think the theory about the high growth period of defence companies is for real simply because we import so much of these equipment and indigenisation creates a significant opportunity across the board. The only issue right now in defence as in many fancied sectors is that everyone has been talking about it for months now and those stocks have gone up in a straight line and that creates the risk in the short run of a drawdown because whenever retail investors get in in a very huge quantities or it becomes very fancied, the risk of selloffs in the short term remain.

Secondly, many of the projects in defence tend to be very long gestation and so for investors, who think that they will see growth quarter on quarter, might not see that happen in these companies. So for short-term investors, in between, there could be disappointments but for those betting on a three-five-year cycle, these companies should do well.

What’s your take on these brokerages and AMC? CLSA this morning also came out with a note that F&O volumes are picking up and the retail participation seems to be bouncing back quite a bit. Is there any name from this entire space that you would like to bet on?
Not really because their performance is so much correlated to how the market does. For example. such companies in the US markets have seen volumes totally collapse. So I do not like too much cyclical companies which are so dependent on the market and that is why I tend to avoid this space.

Industrials, which were doing quite well at one point of time, seem to have gone in a bit of slumber. Do you think the rally that was expected has already played out or do you still believe that the likes of

ABB

,

Siemens

and can still rally?
I think they will still do well over the next few years. It is just that they ran up too much too fast and had to go through a phase of consolidation which is happening now.

Secondly we also need to see the impact of rate hikes on their future order book. The current order booking has been very good. Whether the future capex cycle order booking gets impacted because of higher rates is something we need to watch over the next few quarters, but overall I would still think that this will be a sector which will do much better than the overall market.

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