I wanted to understand about the infrastructure space. Given the fact that this year being an election year, you did see a slowdown as well when you talk about the way how the spends have been on the contracts versus last year. But what does it mean for the infra space going ahead. Should one actually build hopes that things will only rebound going ahead, the contracts will only start flowing in and therefore start taking bets in these counters now if they have not already?
Sandip Sabharwal: Yes, the space should do well. Just look at the focus of the central government, it has always been on driving the economy via investments rather than trying to revive consumer sentiments because consumer demand has been subdued but on the industrial manufacturing side. Most of these companies have been doing well. So, I would think that like you rightly said order flows were muted because of election, execution got impacted and that will not be there next year and this year we also saw execution impacted for many of these companies because of severe heatwave and then prolonged monsoons, so that is tough to predict how that will go next year, but this year was extraordinary in that sense. So, overall outlook I would say that for this space is encouraging.
We were chatting about this just last afternoon as well as to how you are pegging on FMCG actually make a comeback. I was just looking at the list, I mean names like a Tata Consumer for instance have fallen 15% year to date, a 19% loss coming in on a Nestle. Asian Paints of course is a different story altogether, I will come to that. But firstly, just on FMCG because you do track the space closely, do you think 2025 will mark these stocks bottoming out?
Sandip Sabharwal: Ideally, initially, we were expecting that they could bottom out this year itself and with the festival season we could see the demand revival, but that did not take place. So, the stocks ran up in anticipation of revival and then they corrected subsequently. So, YTD returns would still be low negatives.
But if you look at the fall from the top for many of these companies, most of them have fallen between 25% to 35% from the top. So, typically in large FMCG companies, historically I have seen that 30-35% falls from the top typically is a level where one could invest and most of the stocks never tend to fall much more from those levels.
So, I would be positively inclined on a vast majority of these large consumer companies which would include all the names which you took.
What is your take on the IT space and how do you read the Accenture earnings, the company did raise its guidance? But what these brokerages are concerned of is that they are highlighting that the demand environment more of the same, remains intact, as well as the deals that Accenture does not currently see an improvement in the overall spending by the clients. So, how do you read through this and what are the cues that you are taking for the Indian IT companies?
Sandip Sabharwal: So, the numbers and the guidance increase was taken positively, but like you rightly said that order booking was flat on year-on-year more or less and to that extent the demand uptick might not happen to the extent which many of the analysts are predicting.
On top of that, we have the Fed also easing off on interest rate cuts and there is a new government taking over with their stated policies of cutting down on expenditure to repair the US government’s balance sheet.
So, there will still be uncertainties around and most of the IT stocks have had a very strong rally, like if you look at the larger ones, they have had a decent rally but many have virtually moved up in a straight line and today traded valuations which are two-three times historical earnings for some of the mid-tier companies which would be unsustainable in my view.
So, I would take a cautious stance at this stage and look to the results next month to take a more considered view whether there is a case to be more optimistic.
I want to have your take and to know your favourites within the pharma space because it seems like in the market volatility, it is somewhat the IT and the pharma that is getting more of an investor confidence at this point in time. So, how do you see the whole space panning out as well as what are your top bets here?
Sandip Sabharwal: Pharma has a strong run, then it has gone through a phase of consolidation. Some stocks have corrected, but many of them have not. It is a sector where valuations I would think are still reasonable. So, I normally stick to largecap names in pharma. So, we have a holding in Sun Pharma.
We used to have Lupin, but we have sold off, but the company continues to do well. Dr Reddy’s could be coming into interesting price levels. So, overall, the sector should do decent. Many of the companies have growth drivers related to improving profit margins as well as improved growth prospects.
Again, for many of these companies, the US is the largest market. So, if there are some policy changes out there which impact their growth, that is something we need to see next year. But ex of that, the sector seems well-placed.
Among the small and midcaps, there are many companies where analysts are positive because of the CDMO opportunities. I do not track them, but then there could be opportunities there also.
I wanted to understand about these emerging themes, like CDMO is one of the themes that has actually started to see a lot of pickup over the last few months. Apart from that, there is another theme that has been making waves of late is that is the renewable energy space, the solar, the ones that are related to solar as well. What is your take on that space and do you think that favour that is found in the markets will actually continue come next year as well?
Sandip Sabharwal: Tough to predict, but solar is in a big bubble. Each and every company if you see wants to set up solar panel plants or sell infrastructure, etc. In my view, in two years, there is going to be so much oversupply in India that it is tough for that to get absorbed.
So, if someone wants to play the renewable energy theme, it is better to play it either via the power companies who are able to sign PPAs, there also there are significant delays, or by companies in transformers, transmission, and other ancillary equipment segments where a lot of investments will be required because solar as a theme, like if you look at the competitive advantage also, the Indian companies hardly have any competitive advantage vis-à-vis the international competition. They are just surviving because of the import duty protection.
The other thing I wanted to talk about is the entire capital market theme. We have seen that also play out very well this year. I mean, be it the returns on Angel One, CDSL, BSE, and now you have got the Dam Capital IPO which is currently on. Do you think this will also remain a good long-term bet and can one continue to deploy more or even add fresh names such as the IPO which is currently on at any given level?
Sandip Sabharwal: Historically, we have seen that even in the global markets as the capital markets have evolved, many of the companies which focus on capital markets have done well. Now, there could be various competitive dynamics like for pure broking companies, you could see margins squeeze, new players come in as entry barrier tend to be low, but on themes like you said like CDSL, BSE or themes related to wealth management, etc or even asset management companies, there we could see more secular growth.
Now it is a question of valuations because the valuations become excessive at some points of time and then there could be corrective move because of some negativities, etc, like we saw BSE sell off significantly a few months back. You have to use those opportunities to buy rather than buy at very high valuations.
