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In the case of and , what are you working with in terms of expectations or what the Street would like to hear?
In the case of HUL, people would like to hear that there is some uptick in growth because in the last few quarters, HUL management has been saying that volumes are under severe pressure and that is unlikely to change in my view. But if they see some early signs because of good monsoon, rural demand etc. or stabilising inflation, that will be a good handout.
The other thing is obviously the current quarter might not be as great for margins but for most of the consumer companies, the next two quarters’ margins should improve significantly as most of the key raw material prices have fallen drastically and these companies took price hikes and to that extent they will benefit.
Reliance numbers on the other hand will be very good because of the extraordinary refining margins which they enjoyed but the outlook going forward will not be as great because refining margins have come back to the trend level and on top of that, there is the export duty. So that profitability will be under pressure. While petrochemical profitability is under pressure, we need to see how the retail business performance is going. Overall, it will be interesting to see ex of refining and petrochemicals, how the other businesses are doing for Reliance.
The realty revival story has played out for over a year now, if not more. Is the bulk of the gains behind us or do you think this is a multi-year bull cycle and one can even buy now?
I think both aspects are true for the near term. I will say for the next few months, the bulk of the upside is behind us and this quarter’s results, in any case, are very tough to evaluate for most of the companies because last year in the same quarter saw the Covid delta wave.
Right now, given the overall interest rate environment where there is a tightening bias combined with the fact that these stocks overall in the last two years have delivered very strong returns, need to consolidate. The real estate revival cycle should be there for a few more years but these stocks need to adjust for the gains they have made as well as potential cooling off demand because of higher prices due to input cost inflation as well as high interest rates.
Which realty names would you keep on your long term radar? Does it continue to be or is the momentum now with or ?
Given the stock prices, we have to take a call at that time and we want to buy whichever offers greater value. So it could be from companies from the south like or from Mumbai like Oberoi’s, Godrej, or DLF. There is a spread of 10 to 15 companies to look at but it will depend on how we are evaluating the stock price related to growth profits at that time. For people who cannot track too much and just want to play real estate, DLF being the largest company, would be the preferred bet for them.
ET Now: What is the outlook on
given the kind of numbers that they have delivered in the quarter gone by?
Sandip Sabharwal: Bank’s numbers were not very exciting in the sense that on an operating basis, they underperformed expectations. The only reason profits held up was that they made Rs 200-300 crore less provisions and as a result of that few hundred crore of extra NPA was built in, although the overall gross and net NPA levels remain quite muted for HDFC Bank.
I still believe merger is a big overhang, given that it is happening in a rising interest rate environment, where a lot of the liabilities will have to be repriced and we do not know what will be the status of RBI on SLR, CRR etc. requirement because HDFC also has a big balance sheet. There is no case for HDFC to start outperforming the overall banking universe. If the market is very buoyant, HDFC Bank will also move up, given its huge weightage in the index.
The currency has collapsed against the dollar. For IT, which gets about 25% of its total revenue in euros, what changes?
That is a fair issue which many of these companies are grappling with because the rupee has not actually depreciated so much against the dollar, but the dollar has gained so much against the euro, yen or the pound, that the cross-currency headwinds are actually working against the IT companies, contrary to what most of the analyst keep on putting out like rupee depreciation against the dollar being positive for technology companies. On a standalone basis, if the other currency moves are not happening, it would be true.
So, my guess is that it could put further margin pressure on IT company earnings over the next couple of quarters unless and until, this trend reverses and the chances are low. In the case of convertible currencies, the major driver of the relative currency moves is the interest rate differential and the interest rate differential between the US and Europe, Japan and Britain is only going to grow over the next three-four months, not decline.
Would you be brave to buy a little bit of IT after the recent fall?
It could be a trading kind of a rally but directionally for long term investors, I do not think IT offers too much value at this stage because I believe we will still see earnings downgrades.
A PSU has become a multi bagger?
I think defence is a separate space for PSUs and where they have a strong presence. So
, are good companies which will continue to do well given the domestic, indigenisation focus for defence. They have been doing well.
Given the Covid Delta experience, the first quarter last year year-on-year numbers are very tough to evaluate. We have to now look at more on a full year basis. For some of these companies like BEL, a majority of the profit used to come in the fourth quarter. Now they are trying to spread out over the year how the profit reporting is done. That also distorts it a bit. But that said, overall, the stock will continue to do well although given the gains it has made and the current valuations, the gains might slow overall over the next one or two years but still it should be market beating.
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