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“There is now an expectation building up that a couple of quarters down the line, there could be a significant slowdown in the US economy and when the slowdown comes, discretionary IT spends tend to fall very fast. Today, most of the IT companies’ managements, irrespective of the size, will be excessively bullish but they will never know what hit them,” says Sandip Sabharwal of asksandipsabharwal.com.



There’s a lot on our plate. We have got the Fed meeting, we are in the thick of earnings season and the LIC IPO is also opening?
Some of the results of the Nifty and other companies have come out but a lot of results are still to come out. The key feature of the result season has been that in general we have seen some sort of downgrade in earnings, not very huge, but broadly the trend has been towards downgrade except for the sector. People were not expecting much, which is the auto sector where margins have held up.

We have seen Bajaj Auto and Maruti numbers were better than expectations, Some price hikes have been passed on. The companies are able to hold margins and that is broadly where we are right now. Globally, we have seen a much bigger correction and Nifty was down 2% in April.

If you see markets across the board, all over the world, Nasdaq had the worst year in several worst months in multiple years down around 13%. Whether we catch up with global trends is something we need to see. You rightly said, the Fed meeting becomes important normally. The belief is that before the event, the markets already factored in what is going to happen. That could be partly true this time, given the selloff in global markets. But the extent of monetary tightening that has been factored in the markets overall is doubtful. Markets are still not factoring that in.

The underperformance in IT will continue because after Infosys, also has reported a mixed bag and it has reported profit growth of just about 4%.
There are several factors. The margin squeeze picture is still to play out because many of these companies have salary hikes in this quarter. The hikes will be much greater than what most of the analysts or even the companies are expecting. The IT hiring sector is really hot. Secondly, there is now an expectation building up that a couple of quarters down the line, there could be a significant slowdown in the US economy and when the slowdown comes, discretionary IT spends tend to fall very fast and which most companies tend to react to. Today, most of the IT companies’ managements, irrespective of the size, will be excessively bullish but they will never know what hit them.

Thirdly, IT stocks are correlated to the Nasdaq. We cannot have a scenario where Nasdaq was moving up. When Nasdaq has corrected so much and fallen so much, our story is different and that does not happen. Overall for this year, the technology sector will be an underperformer.

Does the big whack that Axis Bank got after its earnings makes your choices within banks limited to an ICICI Bank within the private banking lot or are you willing to bet on the underperformers like Kotak, or even buy an Axis on declines?
Axis Bank has some value in it. Somehow the stock does not perform due to various reasons. The underperformance on the net interest income front did not help. Except for ICICI Bank in the largecap bank space, all other banks have either underperformed on the analyst expectation of net interest income or have just about met it.

Secondly, the big uptick in bank earnings because of NPA reduction is over now. Most banks have NPAs of 0.5 to 0.75 on a net basis now. From here on, it is important for the core earnings, which is the net interest income as well as other income, to grow. This year, other income will remain under pressure because treasury gains will not be there.

If the overall credit goes up, obviously some other income up move will be there, but on an overall basis, that might not be the case. That is the scenario in which banks’ and even IndusInd Bank’s numbers look good. The management gave a very strong projection but on the NII front, there does not seem to be much of an excitement.

That is the challenge in financials and with the impending monetary tightening cycles, we have to be selective in what banks we buy.

This week all of us are trying to analyse LIC. What is your view?
In LIC, there are two-three things, which are good. One, the overall pricing seems to be better than what was initially envisaged. The size of the issue has come down substantially. At one point of time, we were talking of Rs 70,000 crore, now we are talking of Rs 20,000-21,000 crore and retail participation from people who might not have invested in the market and who will just subscribe to LIC and not sell will be high on the retail side.

It should be a decent issue although I am not so positive on the long-term direction of LIC’s business because they are continuously losing market share. They are not growing much but there is substantial value and the pricing is decent. Given the overall construct of the market, we do not expect much this year and LIC is a decent way to put money. People should subscribe.

What is the best way to invest when we know that the fortunes in the power sector are changing rapidly?
New capex has to happen and unfortunately the last five-six years were just focussed on solar power which cannot be generated at night for it to meet the frequency for peak power requirements, etc. So there are a lot of technical issues. The government gave mandate to go solar and everyone just went solar and that is what is hurting now. There is a need for diversification. They need to go hydro, maybe some thermal, maybe nuclear along with solar.

There will be a capex cycle which will benefit some of the equipment as also the EPC companies and there has to be investment on the transmission side also because that has slowed down over the last couple of years. There are several transmission companies like KEC, Kalpataru; on the equipment side or EPC, L&T is a big player. Then there’s Thermax which sets up small plants, etc, and there will be many other equipment companies. They will definitely benefit over the next few years.

Is there a trade in the short term in Cummins India or Kirloskar because power shortage means more generators?
Yes there has to be because this shortage is not going to go for the next two-three years. This is the first summer we are suffering from this. It is impossible for it to be resolved soon. It will take three years minimum. So if we get scorching summers and the economy continues to grow, then the peak demand next year will be greater than this year and that peak demand will not be met by the capacities we have now. If the planning starts now, it will take at least three years.

So this market which had completely cooled off mainly due to Covid with demand being down, could suddenly come up. So there will be a sharp demand uptick in all these DG sets, etc.

You have been bullish on the hotel category including Indian Hotels and Lemon Tree. Would you be brave enough to buy the latter afresh?
Yes, we have these stocks. Indian Hotels has gone up very sharply and directionally, the next three-four years will be good. But when a stock is at an all-time high and the markets are weak, we have to be a bit cautious. People should not all go into this stock but they can buy in a staggered manner.

Lemon Tree on the other hand, still has value. It has not moved up as sharply as Indian Hotels and to that extent, there could be better percentage appreciation potential in Lemon Tree over the next one year.

Actually if I look at the subsidiary businesses of Reliance – be it TV18, JustDial or East India Hotels – none of these stocks have created a lot of wealth. While is at an all time high, none of the listed subsidiaries are at an all-time high.
It could be both because these are unrelated things for Reliance and they are too small in the overall context of the Reliance balance sheet. The reason for many of these investments have always intrigued me because there is no logic for this even if these companies end up making some Rs 50-100 crore profit, it does not matter for Reliance. It should be a concern for Reliance shareholders also because they keep on making these investments which are small compared to Reliance but actually large investments but which actually have zero correlation to the overall business profile of Reliance.

Anything that is standing out within the auto pack which you are keeping on your radar?
Within auto, commercial vehicle sales uptick is much better than expected. It is a positive sign for CV players. Secondly, Escorts numbers and their commentary reinforces my bullish bias on Mahindra & Mahindra where I was largely playing on the auto segment and the kind of success they are having there but on top of that, they have been continuously gaining market share in a downtrending market in tractors.

If there is an overall uptick in the tractors market, then that also adds to the story. I would think that M&M is pretty well placed. The stock is still cheap and should do well.

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

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