DAILY VOICE | With rich valuations, primary market is becoming risky for retail investors: Sandip Sabharwal of Asksandipsabharwal.com 

Market Outlook

Most IPO’s are very richly priced and are offering less and less on the table for investors. While some unique offerings like Zomato will be lapped up there are a huge number of IPO’s lined up which is a risk for the markets itself, Sandip Sabharwal of Asksandipsabharwal.com said in an interview with Moneycontrol’s Kshitij Anand.

Sandip has a knack for picking out multibagger stocks. He has been a part of the equity markets for 25 years now and has managed mutual fund schemes for over 15 years. His approach towards picking stocks is backed by fundamental research as well as market analysis.

Edited excerpts:

Q) As we step into the second half of 2021 what are your views on markets? The Nifty50 rallied 13% in the first half, do you think the momentum will continue?

A) If I take into account all broking houses projects with respect to the earnings growth estimates for the next year, it varies between 32-40%.

While one might argue that this should be possible because last year the first quarter was a washout, it does not take into account a possible increase in interest rates at some stage and the huge pressure that could come from rise in commodity prices, as well as a return of normal costs, can put on the profitability of companies.

With an expected GDP bounce back of 12%, an earnings growth of 30-35% should be possible under normal circumstances, however, the estimates have now got downgraded to more near 9%.

In a scenario when input costs move up by 50-100% and the economy is just recovering this could become a challenge and that is what I will be monitoring.

Overall, market valuations are not expensive, if we believe that 35% earnings growth is for real. However, if we trend towards 25%, then markets look quite expensive and that should be the base case.

I expect that the current momentum is unlikely to last and the second half of the year should see subdued returns.

Q) In terms of IPOs we saw an exciting first half, and now as we enter the second half the biggest attraction would be the Zomato IPO. What are your views on the primary markets for 2H2021?

A) Most IPO’s are very richly priced and are offering less and less on the table for investors. While some unique offerings like Zomato will be lapped up there are a huge number of IPO’s lined up which is a risk for the markets itself.

From the promoters’ and Investment Bankers’ standpoint, it’s a good opportunity to IPO or do an Offer for Sales at high valuations.

For investors, the primary market is becoming riskier at this stage. No one is looking at valuations, everyone is bothered just about the listing pop and many fund managers are just lapping up these shares post listing due to low float which leads to a situation where prices move up with or without fundamentals.

As such the IPO market will become riskier in the second half but we will see many more issuances.

Q) Do you think the recent announcement made by the FM to support the economy are enough? Or, more should be done to achieve double-digit growth rate?

A) I think double-digit growth is going to be very tough in India due to the fact that the government has little legroom or inclination to do any sort of fiscal stimulus and on top of that, we have growing inflationary pressures combined with a fall in incomes due to the Covid Pandemic.

Double-Digit growth on a sustainable basis requires a greater focus on key areas, especially infrastructure investments where we have made progress but not enough.

Most of the steps of the government are just extensions of deadlines of tax filings or loan extensions which is no stimulus of any durable manner.

I believe sustainable double-digit growth given our low bases is possible but requires many more steps to increase overall income levels.

Q) What are the cues that you are getting – any signs of topping out? Dollar is getting strong, and the impact is visible on the rupee as well? What are your views?

A) The US Dollar is the most hated currency at this stage and carries the maximum short positions. People are short on the dollar, long commodities, and cryptocurrencies.

As the US economy recovers and inflation picks up we could see a further spike in the US Dollar in the short run. We have already seen the rupee declined by nearly 3% over the last month itself.

This is not good for inflation dynamics also as its estimated that every percentage decline in the rupee hits inflation by nearly 0.3%.

Under the circumstances, it is possible that the markets make a short-term top, give some correction, and then we will get entry opportunities.

This will not be a bull market top but every bull market has sharp and deep corrections. That’s possible over the next 4-8 weeks.

Q) W H O has warned of a third wave in Europe and other parts of the world. There are few cases that signals that a possible third wave is here. Do you see more lockdown that could come into play and disrupt the business cycle which would mean that earnings estimates would have to be revised again?

A) I believe that slowly it is being recognized in the Western Countries which have a high Vaccine coverage that now due to the Vaccine even if there are spikes the serious cases and deaths will be limited. The jury is still out on this but initial indicators all point towards that.

Under the circumstances what India will experience will depend on our pace of Vaccination. If we get to a 60% coverage of a single dose over the next 2-3 months we could potentially prevent more economic disruptions.

However, at this stage, it seems like Europe and USA are much better placed for sustainable recovery and this could put the Emerging Markets on the back burner for some time.

Earnings estimates are very aggressive in any case and downward revisions are more likely than not with or without a third wave.

Q) The year 2021 also marks 30 years of reforms for India. What is your take on that? For the market, it never looked back – do you feel that the current reform process are equally strong and will take economy to new highs?

A) The reform process has slowed down over the years with the growth of socialist handouts. Giveaways have been increasing over the years which some might argue is also necessary given our low social security coverage and the fact that not much was done on this front over the last many decades.

However, given that we have finite resources with our low tax to GDP and a negative trade balance the potential rate of growth which should have been in double digits unfortunately is 6-7% at this stage.

We need much deeper changes and reforms for us to reach this level. Costs, interest rates, productivity improvements from current levels need to be much better for sustainable double-digit growth. Let’s see what more the government does over the next 2-3 years.

Q) What is your call on the small & midcaps. This space has been resilient in the recent past and has outperformed the benchmark indices so far in 2021. Will the momentum continue in the second half as well?

A) Many Small and Midcaps are now trading at very high valuations. However, in a recovering economy with low interest rates new opportunities are coming up, and as such opportunities are always there in that space.

Valuations of the Small and Midcap universe as a whole is very stretched now and many fancied stocks of this segment trade at valuations of 100X earnings plus.

These valuations are not sustainable and overall risks are high and investors should be careful about where they are investing into. The same momentum is unlikely to last now.

Q) Someone said that don’t chase what has done well in the last six months. Do see the underperformers of 2021 making a comeback in the second half?

A) Yes this is a very realistic assumption. Most investors are chasing the same stocks which is taking the valuations higher and higher.

For discerning investors opportunities are huge and I am finding such opportunities where contrarian investing can play out.

Capex cycle recovery and infrastructure and green investments are a reality and companies in these segments will also give good opportunities.

Q) Any sector that could emerge as a Dark Horse towards the close of 2021?

A) I believe that infrastructure companies will strong balance sheets, capital good companies, as well as some companies in Real Estate which are under-owned, could emerge as good contrarian bets over the next year.

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