Sandip Sabharwal sees limited tailwind for IT amid weak global demand

"So, in my view, foreign investor flows should continue. There could be some volatility and when we see some bounce back in the US dollar globally, so that could slow down flows for some time, but directionally things should look good," says Sandip Sabharwal, asksandipsabharwal.com.

Firstly, the big trend that we are tracking is that FIIs have made a comeback. In the month gone by, the FIIs were actually the net buyers in the cash market, but like the famous saying says that sell in May and go away, will you agree with that and are you also looking to cut down your positions in the upcoming month? What is the outlook overall?
Sandip Sabharwal: Actually, if you look at it on a macro basis, things are not bad in India. Things are only improving. Most economic data will keep on improving as we go through this year. The only risk which remains are the geopolitical risk where we are unsure of how that is going to pan out, but that will be a short-term impact.

So, in my view, foreign investor flows should continue. There could be some volatility and when we see some bounce back in the US dollar globally, so that could slow down flows for some time, but directionally things should look good

But in the month of May you would imagine that IPOs will start, earning season has not been that great, you will hear news on the trade settlement which means that markets will start getting more and more clarity. So, April was about little bit of oversold conditions, FIIs coming back, suspense around earnings, all that is not going to be at play in the month of May.
Sandip Sabharwal: So, I would think that weak results for the March quarter were already expected in general because obviously the remnants of the slowdown were still there. The monetary policy easing as you know started just three odd months back, so it takes typically six months for that to play out on the ground and we do have the tax cut impact, plus any potential deal on the tariffs front which could be an incremental positive.

So, directionally on a macro basis things are moving fine. Now, the markets have staged I think from 21,800 odd to 24,300. So, there has been a sustained straight rally.

So, once that happens, you could have a phase of consolidation, some correction, etc. But I think that is all part of the overall market movement. So, I do not think that there is any reason to become any significantly negative on the markets at this point of time.

Zomato, it has had breakout moment in 2023 and 2024, now that same franchise is feeling the heat of slowdown. Is it a good time to buy into a franchise like Zomato because what they are doing is that they are investing right now with the hope that they are getting future ready. Is there merit in buying this decline in Zomato, this numbness in Zomato.
Sandip Sabharwal: So, people need to understand what Zomato is doing. They had significant moat in the foods business. Food delivery business, it was largely a duopoly and they were coming to a phase where they could generate significant cash flows.
So, what do they do? Instead of using that cash flow and generating shareholder value, they start investing in a segment where no one has any moat, basically quick commerce and there is so much competition out there. On top of that, they decide to invest into huge number of dark stores where they will actually start holding more and more inventory.

So, if you hold more and more inventory, then ROE, ROE, everything keeps on going down of the business. I believe it is a risky strategy. Now risky strategies could play out over the long run, but it is a strategy which will not be good for minority shareholders and too much money is going into a segment where profitability will be low, ROEs, ROC will be low rather than the core business which was highly profitable. So, it is going to be a tough phase for minority shareholders.

I specifically wanted to have your take on Bandhan Bank because this is one of those names which has been debated around that it could be a good story to ride in terms of the transition that the company has been undergoing. But given the earnings it has been once again a soft quarter for the bank where the slippages have gone up, but despite the fact the brokerages are holding a positive view on this one and they are saying that the company is undergoing a transition and in some time from now the numbers will also start reflecting in. What is your take coming in on Bandhan Bank post the earnings? Do you also believe that one should have faith in the undergoing transition and the steps that the bank is taking?
Sandip Sabharwal: So, it will take a lot of time to play out because in financials once stress builds in the balance sheet, it takes a long time for that to get resolved. Now, the good point is that most of the banks and NBFCs who have come out with results have indicated that stress on the unsecured side, MFI side, etc, seems to have peaked and from here on things will only improve. So, if that scenario plays out, over next six to nine months we could also see Bandhan Bank financials improve, but it is going to be a long road.

Wanted to get your view actually on the cement pack, how is that one looking to you because you have Jefferies has come out with a note where they are actually saying that they are expecting the prices to actually see a good uptick in this financial year after at least two years of decline that we have seen in the pricing power for the cement pack. How are you gauging the cement pack? And given the fact that now the narrative is look inwards, look at domestic oriented counters, do you think cement is a sector that is looking attractive to you?
Sandip Sabharwal: News flow out of cement companies have been mixed. Now, the main issue higher prices sustaining is that the supply increases are much more than demand increase. And in any commodity industry as all of us understand when supply is much higher than demand, it is very tough for prices to hold on. Even with some sort of informal pricing arrangements which cement companies might have with each other which has played out at various points of time. So, I would be very surprised if any significant price hikes sustain in the markets.

So, let us see how it goes. But I do not think that is a bigger story. But if volume growth picks up and many of these companies have been controlling their prices, the cost very significantly through renewable energy investments, cutting down on fuel costs, etc, so that has helped them maintain and sustain their margins. So, volume growth combined with cost controls should lead to improvement in margin this year, sustenance of any significant price hikes looks tough to me.

Overall, back home how do you see the Indian IT companies moving because of late we are actually witnessing that these tier II IT companies be from the small and the mid end of the market they are actually inching higher. But do you believe that the market should now start to looking beyond six months and how do you see the up move in the IT?
Sandip Sabharwal: So, IT stocks got severely beaten down. Now, we have seen some bounce back from extreme beaten down levels. Now, from here on it is tough to build a significant bull case because of various factors, even the rupee has appreciated so that also will not support the profitability of these IT companies. And on top of that discretionary demand spend will remain subdued for some time given the economic data which is lately coming out of the US which indicates a growing slowdown. So, the case is more for a phase of range bound stocks rather than any significant upside or downside.