What are your views on HDFC Bank? CLSA is flagging off a lot of risk, high ask rate, tough environment and twin challenges for deposits, which is why they have downgraded the stock to an underperformance/the target price. Your take?
Sandip Sabharwal: These are the issues which all of us knew exist and that is the reason I was not very bullish on HDFC Bank to start with one after the merger was announced. I think many analysts are realising it now. Hopefully what this will do is that the negativity it creates will help the stock create some durable bottom and then it will come into the buy zone. Because longer term, it is a good bank, all of us know, but it faces challenges for the next one or two years and the key is now what would be the right price to enter into the stock.
What is the right price to enter the stock?
Sandip Sabharwal: My estimate would be near Rs 1.300.
Everybody was anticipating this kind of divergence, that largecaps will finally come back and smallcaps will start going down. Have they corrected enough or this downslide in smallcaps will continue?
Sandip Sabharwal: If we look at a holistic picture, the correction is hardly anything. If you see the way the indices have moved, the correction needs to be much more for many of the stocks or the indices by itself to come into a decent valuation zone. Remember that the small and midcap indices are at least 25% to 30% more overvalued vis-a-vis the long-term valuation. So, they are not cheap. So, the risk always remains out there.
What is supporting these stocks and indices has been the incessant flows into mutual funds as well as PMSes, AIFs, etc, focusing on these categories. But fund flow led moves eventually reach a threshold and then correction happens. My guess is there should be more correction and that will be healthy for the markets.
The buzz started that Tata Sons will have to go public and the reason was, it is an NBFC and there is an RBI guideline there. Now, it appears that they will be able to make some changes in their structure so that they can avoid the compulsion of going public. But markets are markets. Stocks which have ownership in Tata Sons have gone up like Tata Chemicals, Tata Motors or Indian Hotels. Will these recent gains get challenged now?
Sandip Sabharwal: Some part of the moves in some of these stocks have been fundamental and some technical. For movements especially in Tata Chemicals, where the base business is facing challenges in terms of profitability, the reversal could be faster. For Tata Motors and Indian Hotels where the companies are doing very well, reaction could be more moderate. Can Reliance be the stock of the year. So far, it is showing all the signs of leadership?
Sandip Sabharwal: Yes, it is possible because there is scope of profitability improvement in at least two of its businesses, the retail side, as well as the telecom side and the lack of aggression on the telecom side which they have recently shown, they have not hiked priced but they are not trying to compete on tariffs, that has created positive momentum both for what could potentially happen for Jio on the telecom side as well as Bharti Airtel. These two are drivers for the stock. Petrochemicals as well as the refinery business tend to be cyclical. We will keep on seeing ups and downs in cyclicals. But on the retail and telecom side, there is still improvement potential.
What is the sense you are getting when it comes to some of those oil marketing companies with respect to the news of the LPG price cut coming in and the oil minister indicating that as of now there is not going to be any price cut for fuels.
Sandip Sabharwal: The LPG price cut will hit the profitability of these companies because as far as I read, it takes them into selling these at a loss. Now, there could also be possibility of fuel price cuts going forward because crude prices are down and fuel prices actually can be cut and are not being cut. So, we do not know about that. So, that is an additional risk. These stocks have gone up so much. I think people should be wary of these stocks in my view.
Is Bharti a better play than Reliance? You mentioned that one of the businesses which will do well for them is telecom and for Bharti it is the only business? Also, it is the only business which is now showing signs of price discipline. Sunil Mittal came on ET Now and said that he expects ARPU to go to Rs 300 in the next 12 months.
Sandip Sabharwal: If ARPU has to go to Rs 300 over just a year, then the stock is still undervalued. But that is aggressive and that is what the company aims. Whether they will be able to achieve that or not, it will be tough. But directionally, it is good. Bharti as a stock, once it started its improvement cycle, is continuing now and it will keep on continuing and typically, as profitability improves, stocks tend to keep on doing well. So, Bharti should do well.
Given that Kotak is talking about the broad-based rally in the PSUs which is largely driven by a top-down bullish sentiment and with no major structural, fundamental developments being seen, what is your take on the run-up in PSUs across the board?
Sandip Sabharwal: I would tend to agree with that because the run-up has been across the board in companies which are doing well, companies which are not doing well, and companies which are supposed to do well but have not done well till now. So, like all of us know, it started off with the railway and PSU defence companies and then it has gone down to other companies.
So, longer-term the defence and railway companies could still do well, although the valuation right now is very extended and they could correct. In many of the others, the move has been unnatural and might not sustain.
What we are discussing are passé examples. What could be that big trade for the next five years or three years in terms of making a portfolio of a group?
Sandip Sabharwal: All the large group stocks have already done quite well. Look at the Tatas, the Mahindra Group, Adanis or Reliance. It is tough to pick out a group at this stage. The main thing is that if the economy can sustain 7-8% growth over the next few years, my guess is many companies and many groups will continue to do well.