We might consolidate more before the next legup starts: Sandip Sabharwal
Many stocks could be nearly 50-60% off their peak value or even lesser, says Sabharwal.
The election dates have been announced and it is a very long drawn process, spreading over a month. Would all focus be on elections?
The focus will shift to the elections from April onwards. It is a 10-day longer process than last time. That time, the results came out on the 13th of May and this time it is the 23rd of May. I guess it is more to do with the security situation at the border. There are less forces available to move around the country for conducting the polls. So, it is more or less in line with what it was the last time.
Markets have their own way of thinking and to that extent, after a significant underperformance, we were expecting some sort of comeback for Indian markets. But we are still significantly underperforming most emerging markets even now. If you look at a combination of what is happening on the rupee, there is rupee strength.
Forex reserves are moving up and that indicates there could be some buying from RBI and despite that, the currency continues to appreciate which reflects positive foreign investor sentiment.
The PMI numbers also have turned positive. There seems to be some positivity on the ground. Obviously markets will continue to trend up. The only small hiccup could be that other markets moved up substantially and we did not. They could enter into a corrective phase and as that happens, we might consolidate more before the next legup starts. But needless to say the trend should be positive.
Is there a bigger chance that midcaps may actually outperform the benchmarks from here? The clamour is only getting louder for a mid and smallcap recovery as opposed to the benchmarks?
That should happen because the valuation gap and the performance per se has reached proportions which typically lead to reversal. If we look at historical analysis also, with this kind of underperformance of midcaps combined with the valuation gap that has built up, typically interest comes back. So, interest is coming back and many stocks have run up 10-20% from the bottom.
Whenever that happens, people think stocks have run up a lot but if you actually look at it from where they have moved from the top, most of them could be nearly 50-60% off their peak value or even lesser.
There is a still substantial scope for many companies to move up and that should continue to see play out over the next few weeks.
SBI is now going to switch to that new benchmark linking the deposit rates and short term loans to RBI’s repo rate. How are you looking at this from a customers’ point of view and as well as from SBI’s perspective?
It is good from SBI’s perspective because what typically would happen is that for banks with a very high CASA ratio, typically repo rate moves did not lead to much change in their cost of capital per se in the short run till the fixed deposits etc got re-priced, which obviously is a time consuming process. To that extent, RBI policy transmission in India is one of the worst globally in terms of central bank action and the follow through from banks.
So this could aid that process and I think it is a positive. It is a significant structural move and a reform measure in a sort of way and since the largest bank does that, then other banks will be forced to follow. Now what it actually does for the savers is something we will need to see how that rate gets set and what becomes the average rate but overall, it is a very positive move.
What exactly is your outlook when it comes to the overall banking space as a whole? What else is that that you would be bullish on within the space?
What we are seeing is that many of the banks are saying that credit growth is picking up. Many of the banks on the corporate side are seeing a pickup in corporate loan book and that is a positive. There could be some stalling which could happen as the election process is on, but overall, the trend is positive. The worst of the NPA cycle now seems to be behind us.
Finally, as Essar Steel case gets resolved, it will be one of the largest resolution under the NCLT process. It will pave the way for many other resolutions given the kind of judgement which has come where the NCLT has said that it cannot question the wisdom of the committee of creditors.
It could set the benchmark for many other resolutions. The larger corporate banks like SBI, ICICI or even a Bank of Baroda as the merger finally happens have decent amount of value in them and should continue to trend up. Many of the retail banks also have consolidated for a substantially long period of time and given their growth outlook, they could start performing. Overall, the financial space looks well poised.
What is your view on Arvind Fashion? There has been some issues with its listing. There was a lot of confusion in the market but that aside, would you be interested in the business fundamentally given that it is an offshoot of Arvind Ltd?
It is an interesting stock. But the confusion is valid because it has hardly got any profits at this stage. If you look at the projections of many of the analysts, you see that there is exponential growth in profitability that is projected going forward. We are not sure whether that will play out and to that extent what should be the actual value of the company is very tough to forecast at this stage.
There is a wide range of forecast on what should be the correct price of the stock and that is somewhat confusing. We need to wait out and see what actually gets delivered and where the company is going before we can put a value. So it is an interesting company but it is tough to evaluate at this stage.