Wednesday, October 20, 2021
HomeMarket Live UpdatesMarket overbought, keep some cash in hand: Sandip Sabharwal

Market overbought, keep some cash in hand: Sandip Sabharwal

The risk in the market is continuously increasing with a frenzied euphoria playing out. I would think that all investors should hold some amount of cash now, says Sandip Sabharwal, analyst,

Should one just buy India?
Yes! The Indian market has been defying gravity and has completely delinked from the global market. I have never seen the markets being so overbought. The open chart of the Nifty you is in a straight line. Even in 2007, I did not see that. The last time was in 1999 when we saw that kind of move happen. That is the tough part today because the valuations have become high, market cap to GDP has crossed 135% and that is very near the peak. On a pure size and ratio also, the market is trading at 27-28 times. So, the risk in the market is continuously increasing with a frenzied euphoria playing out. I would think that all investors should hold some amount of cash now.

Is the new bad bank going to help PSUs as well as private banks? Within banks, would certain beneficiaries garner more?
I would say that those who have the worst balance sheet should benefit more because of the fact that the people who have already been cautious in lending, obviously do not have bad loans to that extent. So, it will be a work in progress. The various asset reconstruction companies over a period of time have not been very successful and one of the main reasons has been that there are so many bank lenders in our consortium. A centralised ARC of this kind could actually hasten resolutions.

Initially the impact on banks should be lower because the first part of the resolution, which could be in the next two years, would be about the loans which are completely written off and where banks have tried and not been able to recover anything. We are seeing that even in operational companies which are going to NCLT, recoveries have been very low — 2%, 3%, 5%. So to that extent, initial benefits could be low but depending on how it works and what kind of success it has in the long run, it could possibly have some impact but in the very near term, except for the excitement which it creates, the actual impact on any of the banks — be it PSU or private — will be very low.

What is your take on because this one has been a bit of an underperformer in the last couple of weeks and only now has started to show some momentum?
The underperformance of IndusInd Bank started at the time of the Yes Bank crisis, when the IndusInd Bank management did not come out clean on their asset book. They kept on saying that the book was cleaner than what it actually was and then there was a crisis of confidence. In financials, we have seen that once there is a crisis of confidence, typically the comeback is slow and it is a long haul process.

I would not think it has one of the healthiest lending books.There has been chinks in the armour of a lot of banks which were supposedly going to be the next HDFC Bank and which have been left on the sideline. IndusInd Bank is one of them. They do have some portfolio. For example, they have a huge commercial vehicle book and we have seen stress on that coming up both in NBFCs as well as lenders. We need to see how that plays out.

Overall the bank got undervalued for sure but whether it will be able to revive and get back to its earlier valuations will depend on the revival on its asset quality and growth because this was a bank where people were used to the balance sheet expanding 15-20% like HDFC Bank and suddenly the balance sheet stopped growing for the last two years. There are lots of things which the bank needs to do before it regains its mojo. Yesterday’s move was more related to Vodafone-Idea and general underperformance getting compensated. But directionally, longer term, the management has a lot to do before it can regain the valuation it used to get before.

On the sidelines of their last quarterly earnings, Sanjiv Puri very categorically said why is the market looking at as just an ESG compliance cigarette company? They have other businesses which are FMCG and hotels, which are bound to do better! But what explains the 7% move yesterday?
This is the time when the laggards are catching up and the biggest laggard has been ITC. The fundamentals are also not bad. It is a debt-free company, generating huge cash flow. The dividend yield is so high! This year, we have seen several such stocks come up after remaining undervalued for long. It started with Sun Pharma; then we saw the move in United Spirits and then we saw Bharti pick up. ITC was one of the last largecaps left and that has moved now.

ITC is a story where the stock can be considered undervalued at this price, 10% higher, 20% higher or even 30% higher. It depends on how the overall market holds up and what happens there because it is now a very under-owned stock. But the key concern remains capital allocation and overall earning growth which has not been able to pick up despite what the management has said over the last several years and unless that is fixed, a durable move cannot be expected.

There are clear indications that is going to take the lead in terms of a tariff hike. Do you think Bharti after the recent climb-up in the stock, could go up to a four digit figure in a year’s time?
Four digit in a year’s time will require the ARPU to move to Rs 300 levels which Mr Mittal has been indicating. That looks tough in the current environment. First they have to reach Rs 200 and then possibly go higher. But it is not impossible. Once a price war ends, we have seen what the impact is on any industry. We have seen that in cement. Now most large cement companies in India are totally debt free and making huge cash flows and record profits.

Telecom is a consolidated industry with just three major players. MTNL/BSNL is a separate thing but the three big players are still bleeding. It is a very strange environment. Things are on the mend directionally. Bharti will continue to do well. The undervaluation has got taken out as a stock moves from Rs 500 to Rs 750. A lot will now depend on the pace of improvement in the ARPUs in the industry. It is still a very under owned stock and most investors do not hold this stock. But as incremental positive keeps flowing in, more and more investors will keep on buying and directionally the stock will do well. The exact price targets are very tough to say.

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