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Global risk abetting; domestic, not so much: Sandip Sabharwal

The week started with a lot of events lined up. As the week ends, most of the events are playing out favourably. We are safe in a way that global risk seems to be receding a bit. But domestically, the economy is not going anywhere great because even today, not a single penny of NBFC refinance scheme has been disbursed.

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Updated: Dec 13, 2019, 04.10 PM IST
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The downside risk gets protected from whatever is happening globally, but I do not see any upside playing out in any significant manner, says Sandip Sabharwal, asksandipsabharwal.com. Excerpts from an interview with ETNOW.

Would you say that the economy is healing? I am not using the word reviving or flourishing, but healing?
From the stock market or economic standpoint, two global events have happened overnight. One is that the phase 1 of the trade deal is imminent now. From the global perspective, the key is whether this would be a peaking of good news or would it lead to further upswing in the US markets? What happens will depend on the contours of the deal over the weekend and the UK election results where there are indications of a clear verdict. So to that extent, Brexit will now happen.

A lot has been talked about companies with exposure to the UK but one needs to evaluate whether Brexit is good or bad for them. Finally, Brexit is certain now. Earlier, there was a question mark over whether and when. Now it will happen and that needs to be evaluated.

From the domestic economy standpoint, yesterday’s data on inflation and IIP, were disappointing across the board. Even if you break it down in terms of electricity generation, capital goods and intermediary goods, all of them seem to be disappointing. Some of the data points which you mentioned in terms of fuel consumption and travel data seems to be positive, but on the travel data, you need to take it with a pinch of salt. The festival season shifted by a month from last year. Last year, October was the good month. This year, it is November. People travelled more in November by air. So to that extent there will be some shift which could explain this 10% increase. Otherwise, I do not think the economy has suddenly picked up so much that people started travelling 10-12% more.

From the global standpoint at least, we are safe in a way that global risk seems to be receding a bit. But domestically I do not think the economy is going anywhere great because even today, for the entire NBFC refinance scheme, not a single penny has been disbursed. If you give protection of 10%, no one is going to take debt on their books. The entire thing can go belly up.

Debt is not equity. You can exit with a stop loss. Either you get money or you get wiped out.
A lot of these plans unfortunately are not working. The thinking behind them is good but they are so bureaucratic that from the domestic standpoint, they are not helping the economy. I do not think even this entire real estate AIF is going to happen. I would think the downside risk gets protected from what is happening globally but I do not see any upside playing out in any significant manner.

Stocks are running up on the potential Brexit solution. Yesterday, we saw a big move on Tata Motors coming in. We are starting to see green shoots, price hikes, positive commentary. Would you take a second look at this point or take note of what is happening in auto names?
In auto, I have been optimistic on Maruti. We already hold Maruti and to that extent, it remains the best play whenever the recovery happens. But my expectation of the recovery was better than what is actually happening because my view was that during the festival season recovery will start, inventories will be cut down and subsequently we will again start seeing if not double digit growth, at least 5-10% kind of growth.

But that also does not seem to be happening because last month’s data also indicated flat to down for most of the auto companies. It is taking more time than expected and that is because of the fact that many of the NBFCs are out of the system. They were aggressive lenders in the auto and consumer loan segment and it is only the banks which are lending now. As the liquidity crisis abets for those NBFCs, maybe we could see a better recovery.

What about Tata Motors on Brexit play?
It is a tough evaluation because Tata Motors actually has manufacturing in the UK.

They have shifted manufacturing partly to Czechoslovakia and other countries. They are claiming that they want to derisk themselves from Brexit.
Yes. Let’s see how the derisking plays out because whatever manufacturing you do in the UK, you benefit if the pound is weak because it is export but if the pound is strengthening so much in the near term, it could actually hit margins for Tata Motors. So the end of uncertainty play creates an uptick, but fundamentally, it has to be more closely evaluated. My guess is fundamentally it would be more the US-China trade deal and if there is a bottoming of the Chinese economy, that is more beneficial to JLR rather than Brexit itself. If China demand starts to pick up a bit, that could actually be more beneficial.

Brexit in the long term is not good news, but bad news. Today you may breathe a sigh of relief that uncertainty is over but that bad news eventually will come out.
Yes, absolutely right because now the companies will actually need to plan for UK to operate as a separate economy away from the European Union. To that extent, it will be disruptive in the short run. Once Brexit happens, next three-four months after that could be very disruptive especially for companies but from Indian companies’ perspective, it might not be so disruptive because you do not really have any cross border from Europe to the UK but for the overall economy out there, it could be disruptive.

Following Brexit, the impact of the pound could be on companies back home like Tata Steel, Hindalco, Motherson Suni as well as Tata Motors. . Are you looking at any of these names?
Overall. if the US-China trade deal happens and the US dollar continues to weaken, that will have an impact on trade next year. The commodity stocks could do well and to that extent Tata Steel could do well. It is very tough to play on Brexit. The contours of how exactly Brexit will happen, whether the deal will undergo some changes, if there is a very strong majority for Boris Johnson, will there be some renegotiation, etc.

Once Brexit happens, next three-four months after that could be very disruptive especially for companies but from Indian companies’ perspective, it might not be so disruptive .

-Sandip Sabharwal


There are a lot of uncertainties on that and Brexit will create friction. Friction is normally negative for growth. So, these are the things we need to evaluate. More than a trading play, a fundamental play cannot be made at this point of time.

We have so many triggers this week -- Fed, Brexit, Trump. Everyone seems to be in the mood to close the year on a peaceful note.
Yes that is true. The week started with a lot of events lined up. As the week ends, most of the events are playing out favourably. The perspective the markets will evaluate going forward is, whether this is the peaking of the good news because global markets are at highs. The US markets are at all-time highs already and this will create a further upside. I am not really very sure on that at this point of time.

For Bharti, the bad news just does not seem to stop. Last time, we got that some minor reprieve in terms of commentary from the government or a push back on the deadline, but clearly they are far from seeing this as a positive environment.
That is true. On top of AGR dues, they have significant pay out for license fees and then 5G will come in. It is not an easy industry. There was a lot of euphoria till last week on telecom. Now the reality is setting in for both Kumar Mangalam Birla and now Sunil Mittal have clearly come out and said that it is a very tough phase and it is an existential crisis for these companies. Today was the deadline given by the government to these companies to come out and state what they are going to do with regards to the AGR dues. Let us see what happens today.

If you take a very holistic and balanced view AGR, relief should come because government does not want the sector to suffer. If the ARPUs go to Rs 170-180 or even closer to Rs 200, we do not know what the balance sheets would look like?
That is a hypothetical scenario that more rate hikes can be absorbed by the market without impacting demand. Today the demand is higher because the rates were so low. Obviously, there will be some impact if rates go. Earlier, the logic of rate hikes finally creating a bottom for the stocks, was a realistic one. That is why the stocks went up.

Now, like you rightly said, most of the foreign investors have had bad experience investing in the Indian telecom sector. Now, getting foreign money into telecom is going to be increasingly tougher. Obviously, Singtel will put in money in Airtel to maintain their stake, but other than that, FDI coming into telecom is going to be tough.

There are too many unfathomable scenarios and so whether AGR relief will come or not, is very tough for us to predict. We do not know the way the government thinks and if it comes, we will react to that. If it does not, then obviously both Vodafone Idea and Bharti are in a tough space.

The whole Brexit rhetoric is about making the British economy more inward looking. Trump is also trying to say that, America first. US elections are next year. Outcome of UK elections will be an indication of where politics is headed and what kind of economic policies we are headed towards?
It is all about identity politics now because due to globalisation, many countries thought that they have lost their flexibility and everyone is coming in and taking their share etc. Now everyone wants to turn protective. Even in India, it is the muscular image which led to the re-election of the Indian government. This is a global phenomena which is happening everywhere.

Which means trade will be more inward looking; preference will be given to local manufacturing; local jobs will be protected, global jobs entry barriers will get created. We are moving into a very differentiated era. If trade war barriers were high, China would not have reached what they have achieved. Frankly India is in a sweet spot because our exports are low right now. If there is a shift in manufacturing, hopefully we should gain.
But if the trade deal happens, then the shift in manufacturing story also might not be there..

But do they want it? Today the election verdict is making it very clear that the people of the UK want Brexit. Boris Johnson is saying he will make the economy more inward looking.
The US is a very different country because they are more focussed on the economy. It is all about the economy out there. My guess is that now they are feeling that if there is no reduction in tariffs etc. the inflation which has already started to pick up in the US would pick up substantially going forward, leading to rate hikes.

The US President does not want the stock markets to do badly next year because bad stock market is not good for his re-election bid, he wants the stock markets to do well so everything is focussed on that actually.

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