Sabharwal also says that in every bull market, when there is a correction, that can be fast and swift. So, whoever is investing at these levels should be ready for that kind of correction.
Where do you think in the market breakouts will happen now?
Sandip Sabharwal: Markets are interestingly poised because globally, the equity sentiment is at a very elevated level. If we see parameters which determine euphoria or despair, cash levels of funds have come down to nearly three-year lows, the bullish sentiments are very high. On the other hand, we have a situation where the inflationary trajectory also seems to be stalling globally in the sense that the declining cycle is stalling, so the easing cycle also might be postponed. Markets are fairly priced. They have factored in a lot of positives and to that extent, significant upside on the broader indices side looks tougher. It is a stock by stock approach now.
What should one do then because there is this outside view which is that look, election is round the corner, never say never. Then, there is this temptation to sell at these levels. Should one stay invested or is it time to raise cash?
Sandip Sabharwal: I think it depends on how you are positioned. For people, who are fully invested, they do not have anything, they have made a decent amount of money, it makes sense to have some cash on the sidelines because some cash on the sidelines always helps you whenever there is a corrective move. For people who are very less invested in the market and then still they are thinking what they should be doing with whatever money they have invested, I do not think it makes sense to pull out because longer-term picture for India is attractive given the fact that a 7% kind of economic growth outlook for two-three years at least for now seems to be very clear.
In an economy, which is now at a higher level, given the size of the Indian economy, a 7% real growth or a 10-11% nominal growth creates a significant amount of new GDP every year. It creates a lot of opportunities for companies to grow and investments to have opportunities to invest. In the longer-term picture, I do not see an issue. But in every bull market, we have seen that when there is a correction, that correction also can be fast and swift. So, whoever is investing at these levels should be ready for that kind of correction.
The theme last year was, buy companies which will benefit when inflation is rising. The theme this year really could be to look at companies which would also take advantage when inflation is stable and inflation is coming down.How will you bet on companies which will benefit when inflation is flat or down?
Sandip Sabharwal: Yes, it is perfectly right and some advantage of those things we have seen over the last few quarters also especially for companies which have been able to show volume growth. For example, the auto sector stands out because there has been volume growth and raw material price deflation, they have been able to show significant improvements in profitability. Now, a similar thing could happen in consumer durables as well as non-durables going into 2024, in the later part, maybe not this quarter. That is because even as we saw the results of many of the companies, let us say in the apparel segment this year, this quarter the fall in fabric prices or lower cotton prices, etc, have benefited on the gross margins.
But the profitability at the net level, if you leave aside the trend, has not improved so much because of the fact that the top line growth is not so much. But as the revival happens on the demand side, we will also see that kicking in and that will create a significant upside in terms of earnings. I think beaten down stocks in these segments should be preferred at this stage.
If we were to just take out the entire energy space owing to the way we have seen the likes of an ONGC perform, the stamp of approval given by the government and if I were to include even OMCs in this basket, what is your outlook for the year ahead when it comes to earnings performance?
Sandip Sabharwal: I do not buy these stocks because they are very prone to any kind of government action determining what earnings they can report. For example, the tax on crude oil, the windfall tax, all the fact that suddenly in the run up to the election we could see significant fuel price reduction, so what it does to the profitability is very tough to predict.
Stability in fuel prices has aided the uptick in OMC stocks and everyone is turning very bullish on them, but I think there are risks on the horizon which need to be recognised. ONGC, it was very cheap so it has had an uptick but it is a very inefficient company in terms of any ability of its to actually increase production. In fact, it has been incurring thousands of crores of capex every year, but its production has actually been falling. Now, they are predicting some uptick in production next year but I do not think it is significant to drive such huge re-rating.We were just talking about this big capex thrust and a push there. What would you be looking at by way of individual opportunities for the long haul when it comes to the capex theme? If I were to say capex, what really comes to mind when it comes to individual stocks?
Sandip Sabharwal: Across the board, we are seeing the benefit of the capex cycle among companies. So, the largest player L&T is the biggest beneficiary obviously. Then, on the largecap side we have seen ABB and Siemens deliver very strong numbers and that has also driven the re-rating higher, ABB and Siemens I believe are now trading at valuations which need a little upside in the near term. Then, you come to companies like Thermax, etc, where also the valuation seems to be stretched and then their construction companies.
So, among the construction companies I think there are few where I believe still the valuation growth paradigm looks attractive. One of those companies which we own is Ahluwalia Contracts where the company has done very well and it has built up orders significantly and its current order plus L1 itself is around nearly 15,000 crores which gives it visibility for two-three years’ growth and valuations are still reasonable. So, I think that is one company which we have and NCC obviously we have but there I think the re-rating has happened. Now, it will be driven higher more by earnings growth.
But is that space in a good turn? I was looking at numbers from Ahluwalia, where 24% margins are enjoyed by FMCG companies, NCC. BL Kashyap number is not bad. Is that space in some kind of a turn? I mean what we call in Hindi the thekhedari business?
Sandip Sabharwal: Yes, it is in a good space, especially because the competitive intensity has reduced and one of the very important facets which I have observed is and which many of the governments both state and central governments are now driving is timely completion of projects and which leads to timely realisation of dues because earlier in this industry, the big problem was that every project used to be delayed, payments used to get stuck, etc, and that used to get these companies into problem. That has got resolved to a very great extent and that by itself is something which should lead to a re-rating of the sector.
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