We are going to see large block trades in new age tech stocks – sold by SoftBank at a discounted price of Rs 555, TPG Capital is selling in blocks at a discount of 0.5%. Now Paytm is testing Rs 500. At this price, would you finally be a buyer?
No, and the main reason is that these companies still don’t have a model for making a profit. I’ve always said that they were built trying to increase valuation by posting higher and higher GMV or higher sales without focusing on profit. Now, because the markets have punished them so much, management has started talking about free cash flow flowing into earnings.
But I don’t see any change in strategy that would allow them to achieve this. Saying something and doing it are two different things. It’s for those companies. Second, the fact that many older investors want to bail out on the very first day the lockdown ends and at prices that are either at all-time lows or 52-week lows, gives no confidence. It is better to wait widely on the whole of this sector. Some stocks will reach a buy level at some point which could be in the first quarter of 2023.
What is your vision of the whole rail space? Vinayak Chatterjee said there was a resurgence in order books for rail electrification, new lines, etc. and that the investment plans for the railway sector seem quite encouraging. Do you like a stock in this space?
Sandip Sabharwal: Yes, the overall railway investment cycle is very strong. If you want to play pure play railroads, there are those PSU railroads that I don’t normally play; then there are those wagon companies
.
Titagarh reported very strong numbers yesterday and both of these stocks are something we own, albeit at levels well below current levels. I still think the next two to three years will be good for them. The other companies are in various other EPC companies but also work for railway companies like
, etc. which also received good orders from the railways. Some of them will do well. Then there are others that are either unlisted or multinational and we can’t really play them.
On a sector level, a new trend is that metals are emerging as winners. Are you comfortable investing or putting new allocations into metals?
It will be too premature to address metals at this stage, as there has been a small short-term upside as the dollar index has fallen and many metals have rebounded globally; we have to examine it fundamentally.
Basically Western economies are going into recession, China, despite all the reports coming out in terms of growth numbers, seems to be in recession already. So the demand drivers for the metals are lacking and that could lead to further difficulties in 2023. I think these will be trade bets, if at all. In fact, they are good trade bets in the sense that they tend to move 10-20% very quickly. For people who can act on such action and move in and out quickly, there could still be an opportunity; otherwise in the longer term I do not see it for the moment.
What about the telecom space? There is news coming that raises fares in two states. The desire to increase tariffs improves the average revenue per user and is one of the most important parameters for telecommunications companies. Would that be a good trigger?
It should be like you said it’s practically a duopoly now with Jio and Bharti Airtel.
Of course there are other activities and telecommunications are a part but not the majority of the company. Pure play therefore remains Bharti Airtel. Bharti is doing well, he is at a new high and I think his outperformance should continue. A disclosure, we own the stock.
How did you interpret the quarterly numbers for the overall capital goods space? Are you sticking your neck out and moving away from the likes of L&T to other players?
We own some of the other companies. Some of them had margin execution issues, but now they are coming back. We own companies like KEC International, Kalapataru and a few small amounts of
and other capital goods companies. A company where the story should be very good over the next two or three years is . There the execution was very strong and the margin improvements very impressive.
Debt reduction and free cash flow generation have been very strong. Over the next two or three years we will see huge earnings growth from this company and it is still trading at only 7 to 8 times next year’s earnings. This is a company where a revaluation is imminent and investors can watch them.
The big winner of the past year was . Where do you find comfort in the two-wheeler space?
I don’t watch the two-wheeler space except for
. They are doing quite well in the field and sales are picking up. Valuations are still not cheap. I think that might be the only overperformer. Otherwise, TVS Motors is very heavily owned at this point. TVS is very highly valued at this point, has issues with exports and is not doing well despite positive feedback from management.
Much has been said about the finances that ended the year on top. We saw how it went, we saw how SBI went. The question now is for people who might be entering the banking and finance space now, what is cheap? What is likely to see more benefits?
Unfortunately, what has happened is that given the huge outperformance of financials, they are no longer cheap across the board. There will be a few small NBFCs that look cheap, but then they have issues with raising low-cost funds at a time when credit growth is double deposit growth.
Even if lending rates don’t rise as much from here, deposit rates will continue to rise because the gap between deposit growth and credit growth has continued to widen. It is also a sector that has been a favorite of traders and we are seeing huge trading activity limited to financials now because many other sectors are not performing.
Overall, performance expectations for financial companies going forward should be moderate and people should stick to the big banks. It is premature to say this because the balance sheets keep improving in terms of NPA, GNPA and net NPA. But historically, whenever interest rates rise and as sharply as they have – 2-3% in a short time, we again see a re-emergence of NPAs. This is something that most analysts do not integrate. Given the pace of change in financial stocks, people’s return expectations from here should be moderate now.
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