Be cautious in sectors like auto where the runup has been very swift: Sandip Sabharwal


At these levels, the margins of safety is low in the overall market, says analyst at asksandipsabharwal.com.

Seems like some fatigue is setting in ahead of expiry next week and globally as well, we are seeing a continuation of the downtrend that we saw across the US market overnight.
We are down but we are still outperforming most of the other markets. If you look at the pattern which has been there for the last many days when the global markets fall, we are falling less; when they rise, then we rise as much and so to that extent, we have a series of aggressive optimism getting built into the Indian markets and that has been prompted by some companies in some sectors coming out and giving very bullish assessment of what they are seeing on the ground and the way forward.

But on the other side, if we look at many of the metro trends be it inflation, be it bond yield movements, be it the fact that the MPC decided to hold rates — and I think it will be tough for rates to go down further — and we still have Covid crisis at a reasonably serious level. So the markets seem to have fully factored in the positives while it has not taken cognisance of the risk on the horizon which could be the movement of the US markets prior to the elections and spike back in the US dollar.

There are various parameters which could play out. People should be cautious especially in those sectors where the run up has been very swift. The run-up has been very, very sharp where most traders have got in. Those are the sectors which are most vulnerable which could be a sector like auto where the stocks have moved up so much that they are factoring in a complete revival and also growth over the next one or two years which in my view is tough.

Most of the positives are factored into those prices. Financials remain the weakest link as you were saying. Every time the market has fallen, it has been led by the financials because now the moratorium period is ending. We do not really know how the entire moratorium book will behave subsequent to that. There are various assessments. People have 30%, 50% which will go into NPAs or have to be restructured. It is Rs 3 to 5 lakh crore which is very substantial. That is something which we will need to monitor going forward.

But is not the moratorium hit somewhere in the price and in the underperformance that we have seen from banks already?
Financials are the most owned sector and then Covid hit us. Obviously, there has been some over-ownership which has gone off but the reported results, etc, have created some buoyancy. I would still think that there is reasonable pain which will come into the financial sector which is being underestimated by most at this stage.

I would still think that financials continue to be the weakest link. Substantial fundraising will have to be done. We have seen Rs 70,000-80,000 crore of equity being raised by banks. My guess is a double of that will have to be raised by banks over the next one year to take into account the kind of hits they are going to take because of Covid and the resultant restructuring in NPAs.

Are you still anticipating any major correction on the cards or perhaps just use these opportunities to buy on dips?
The opportunity is to buy only those stocks or sectors where there is an underestimation of growth prospects. Otherwise, wherever there is excessive optimism, the correction could also be substantial. Many of the auto stocks could easily give up 10-20% because they have gone up by 70-80% from the bottom.

Similarly, there has been excessive optimism around pharma whereas if we look at data in terms of growth numbers from the domestic as well as overseas markets, the growth numbers are not really as great. There was a margin tailwind which most of these pharma companies got in the first quarter which might not sustain.

At this stage, it is tough to say that the markets will sell off big time immediately. We could have a correction pullback, 200 points correction pullback etc but directionally I would think that at these levels, the margins of safety is low in the overall market.

RBL Bank is ready with a marquee list of investors that have been lined up.
A lot of long-term investors are taking positions in these banks with possibly a perspective of three to five years. Over three to five years, we expect things to normalise and then the better performing banks will do well. Most of these investors should ideally not be bothered about day to day price moves and even if there is a 20-25% correction, they should not be too bothered.

That is what is happening in the entire banking sector where investors are coming in who want to buy a chunk of equity and remain invested in India over a longer period of time. This is something which could continue. This will not be the last bank. My guess is there is still a huge amount of fundraising left for financials and hopefully that will happen before any deep correction happens because right now with the liquidity floating around, these companies are able to get equity whatever they want quite easily.





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