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Market ready for consolidation with some downside: Sandip Sabharwal

I do not think there will be either a big downside or a big upside in the near term.

ET Now|
Updated: Nov 18, 2019, 10.26 AM IST
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ETMarkets.com
Sandip Sabharwal2-1200
We are at a stage where globally the US market is zooming up. That is supporting all the other markets but in terms of economic performance, there is still a question mark, says Sandip Sabharwal, asksandipsabharwal.com. Excerpts from an interview with ETNOW.


Telecom stocks are likely to see action today. Last Friday, telecom stocks recovered 20% from the day’s low. Apparently Mr Birla was at a CLSA conference, where he is supposed to have made a presentation and explicitly said that they had a conversation with the government which has agreed to support them. Some of that news came out and markets reacted to it. After the FM’s comment on Friday evening, it is out in the open now.
I do not think moral support is going to help in anyway. It has to be real support where there has to be some waiver. etc. Just making statements can help the stocks perform in the stock markets for a few days but the stress is real.

The kind of amounts involved here are so huge that they can take the company down because from a group perspective also, if the Aditya Birla Group has to look at it, they risk the entire group just because of one company. Those are the issues which are there. I am not really sure what the government can do and what they are looking to do. People should not get too excited at this stage and wait till there is clarity on this issue.

If the broader market is supposed to improve and if the small and midcap stocks are back in demand, why are the haloed stocks still outperforming? Typically, when rotation starts, mid- and smallcap stocks start outperforming.
It is happening because people were expecting that there will be some sort of commentary, where managements would say that they have definitely bottomed out and from here on there should be a secular recovery story. But I attended so many conference calls but did not hear that.

Most of the companies are still very circumspect. What they have said essentially is that the festival season was good but beyond that, we do not really know what is happening and the stress in the system is real. The interest rates have come down on paper but in the marketplace, for most companies leave aside the top few, the rates have not really come down to the levels they should have. That is the reason why most of these fancied stocks keep on performing.

People were starting to take a bet on the other companies expecting that the bounce back in the economy is going to be real, but people are still unsure now. Most of the companies themselves are unsure and that is the reality of the market as of now. Three months later, it might be totally different if market rate actually stabilises. I think the markets need to go through a phase of consolidation now.

Finance Minister is saying that the government plans to wrap up the sale of Air India and BPCL by March 2020. Is some sense of confidence back in the disinvestment process?
Statements are all good. We heard Rs 90,000 crore of arbitration dues which companies have. One heard they will be released within a month but nothing has happened on that. They said NBFCs will be financed through the refinance window which was announced in the Budget but hardly Rs 10,000-15,000 crore has been disbursed and that also the top tier NBFCs who do not really need that money.

Then there was this disinvestment news where the government wants to sell but the buyer also has to do the due diligence before buying it. I am not sure whether a due diligence of a BPCL can be completed in four months and the company also sold in that time. So, there is an aspiration and then there is what will actually happen. There will be a gap but eventually it will get sold. So, March or May or June should not matter to long-term investors, as long as the direction is right. I do not think they will be able to meet a lot of the timelines which they have set for themselves.

Isn’t it strange the way things are moving for Aurobindo Pharma?
It is not strange. It was all in the balance sheet. People refused to see that. It is all about stressed balance sheet. I have not followed the fundamental so much. I just followed the balance sheet and I saw that the way they were reporting numbers and giving out interest cost which was very low. They were showing borrowing cost which is lower than that of the US government and they seem to have no hedging cost, etc. It does not work. Then companies like Reliance can show so much profit because they can borrow at finer rates than Aurobindo. My concern was more about that.

Some fundamental issues are coming up now which were unpredictable. When there is a negative cycle, a lot of things add up ad that is what is happening. Fundamentally, people should still be wary. Technically, there could be bounces at various points of time when stocks get oversold.

For divestment, March or May or June should not matter to long-term investors, as long as the direction is right. I do not think the government will be able to meet a lot of the timelines which they have set for themselves.

-Sandip Sabharwal


In case of Indigo, it is obvious that someone is going to want to log out. The problem is that the 30% plus stake split between both the promoters is so large, where can one expect a buyer?
On the contrary, if one partner decides to exit, the sale might not be so tough because of the strength of the company and the strength of its balance sheet. It is a debt-free company and with the 45-50% market share it has in the Indian skies, I would think finding a buyer for an exit may not be so tough. But it should not get murkier so that the fighting goes on and the issue is not resolved. If it gets resolved one way or the other with one partner taking over, that will be a positive.

It seems there was no revenue or profit growth in Q2. The only surge was on account of tax benefit. What is your outlook on the quarters ahead?
The next two quarters will see the same phenomena where just because of the tax rates being lower, we will see profits improving. There might be top line growth this quarter because the festival season was good for many companies. But the next quarter is something of a question mark unless and until, the rural economy improves. Inflation is coming back into the rural economy in terms of food prices moving up. That anomaly aids incomes on the rural side. So, whether that has a positive impact on consumption or not, we will get to know in the next quarter.

From a scenario where there was an expectation that because of government moves and RBI’s rate cut cycle, there could be a more rapid recovery, that really does not seem to be happening because there is still a lack of confidence both with consumers as well as companies.

A lot of people will wait for the Budget also because that will be February beginning and it is just two and a half months more where some more measures could be taken. We are at a stage where globally the US market is zooming up. That is supporting all the other markets but in terms of economic performance, there is still a question mark.

You are sounding very bearish to me.
It is a reality. We need to state reality and then markets will move on their own, depending on how much they pre-judge a possible recovery etc. Globally, the scenario is still supportive of equities but even when I look at the US markets, they are in a frenzied up move. Such frenzied up moves normally get over and then there are some corrective moves.

When there is a global corrective move, we need to be ready for such a move to impact the other markets. This is a time where I do not think there will be either a big downside or a big upside in the near term. We should see a consolidation phase with possibly some downside.

What is your view an SBI and ICICI, post the Essar verdict?
ICICI again has moved so much that we could possibly see a phase of consolidation coming there because it has moved from being totally under-owned to becoming the most liked corporate bank today. But directionally, it is positive.

SBI will depend more on how the entire NBFC resolution goes now that the government also realises that it needs a special dispensation. They are talking of how stressed financial institutions will be resolved under IBC. Vis-à-vis manufacturing companies, there should be a distinction. Let us see how that goes because if DHFL is not resolved, then it is a significant hole in many of the bank’s balance sheets.


We have been talking quite extensively about the banking space and interesting views have been coming in from our market experts, the healing cycle for ICICI Bank is a comparatively safer bet on the valuation play. Of course, SBI is very compelling too. Which side are you on?
The reason I believe people should not any longer compare ICICI and SBI is because ICICI moved out of being a bank like SBI couple of years back. They are in a different cycle. Even HDFC Bank to some extent, has a very small exposures in lending to some of these stressed companies. ICICI Bank somehow has been able to navigate through all these stressed exposures and that I think is a big positive. They have cut down net NPAs from 3.65% to 1.6% in just one year. It is huge. It has not happened in a banking industry ever without any capital infusion. So, I think it is in a different league. It should be able to get rerated further because at the peak price to book, a HDFC Bank or a Bajaj Finance etc. is still five-six times while they are at 2.5 times now. There is still a potential. So along with earnings growth and price to book expansion, over the next couple of years, they should still do well.

Also Read

Better to avoid beaten down midcaps now: Sandip Sabharwal

Consumption, insurance stocks are the new defensives: Sandip Sabharwal

Ideal time to buy ICICI, HDFC and Axis Bank on dips: Sandip Sabharwal

Sandip Sabharwal’s top 3 picks for next three years

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