Selective Bets in Defence: Focus on Stock Selection
In an insightful discussion with ET Now, market expert Sandip Sabharwal emphasized the crucial balance between growth and profitability while investing in defence stocks. With the Union Budget approaching, sharp movements in this sector are leading investors to adopt a more selective approach. Sabharwal noted that although the defence theme remains fundamentally strong, careful stock selection will be vital in the coming months.
Evolving Defence Stock Strategies
– Phases of the Defence Sector: The defence sector has experienced various cycles, shifting from broad rallies to necessary corrections. Sabharwal pointed out that we are now in a period where stock movements will require selectivity. Two to three years ago, we saw significant increases across the board. Currently, we need to be more discerning, he stated.
– Caution on HAL: Regarding Hindustan Aeronautics (HAL), he expressed caution due to execution challenges. While HAL has potential orders, their execution has been lagging. Additionally, the civil aviation segment is still four to five years away from fruition, which tempers my enthusiasm for HAL, he said.
– Focus on Strong Executions: Sabharwal advocates investing in companies with proven track records, like Bharat Electronics, which recently reported positive results. It’s essential to be cautious about where we direct our investments in defence, he emphasized.
Commercial Vehicle Cycle Turns Supportive
Cost Pressures and Positive Outlook for Tata Motors CV
– Tata Motors’ Performance: Sabharwal noted that Tata Motors’ commercial vehicle (CV) results were in line with expectations, albeit with some pressure from rising commodity prices. The upward shift in commodity prices has slightly impacted margins, but most manufacturers are confident in their ability to pass on these costs, he explained.
– Encouraging Demand Trends: He remains optimistic about the CV cycle, citing beneficial demand trends. The CV sector is on an upswing. With both replacement and new demand coming into play, the outlook for the next two years is positive, he noted.
– Impact of Economic Activity: Sustaining high economic activity will be crucial. If the Index of Industrial Production (IIP) maintains its growth at 7.5% to 8%, we could witness high single-digit to low double-digit growth in the CV segment, he added.
Valuations: Key Insights on Ashok Leyland and Tata Motors
– Ashok Leyland Valuations: Sabharwal pointed out that while Ashok Leyland remains operationally robust, its current valuations seem inflated. Although it’s a favored pure-play CV stock, its recent price movements render it less attractive, he explained.
– Preference for Tata Motors: He believes Tata Motors offers better relative valuation potential. Tata Motors CV can still achieve operational efficiencies, making it a more enticing option on any corrections, he suggested.
ITC as a Value Opportunity
Strong Results and Dividend Yield
– ITC’s Performance: Sabharwal characterized ITC’s results as encouraging across all segments, particularly in cigarettes and FMCG. The performance in both sectors was solid, he stated.
– Positive Dividend Impact: He highlighted the positive effects of dividend announcements, noting that it offers a 2% yield based on current stock prices. At these valuations—around 18 times next year’s earnings—it appears reasonable for an established consumer firm. It presents a genuine value-buy opportunity, Sabharwal remarked.
– Monitoring Volume Trends: However, he urged vigilance regarding volume trends after recent duty changes. Initial skepticism about volume performance in the coming months is likely, but this stock could be accumulated with an expected return of 12-15%, he predicted.
Swiggy’s Competing Landscape
Balancing Growth with Profitability Challenges
– Trade-offs in the Market: Sabharwal addressed Swiggy’s ongoing struggle to balance rapid growth with profitability. Companies face the challenge of either slowing growth to enhance margins or accelerating growth at the risk of incurring losses, he explained.
– Impact on Valuations: He noted that moderating growth might impact how analysts value the company. If growth slows, it complicates valuation strategies, especially as many analysts remain bullish due to past growth trends, he said.
– Intensifying Competition: Mentioning the competitive market dynamics, he stated, Companies like Reliance, Amazon, and Zepto are becoming increasingly aggressive. This competition is unlikely to ease anytime soon.
– Skepticism on Price Targets: Sabharwal expressed doubt about ambitious price targets set by brokerages. Much of what these companies indicate regarding loss reduction tends more towards hope than realistic expectation. Investing in such environments poses significant risks, he cautioned.
In conclusion, Sandip Sabharwal’s insights into selective bets in the defence sector, the robust commercial vehicle cycle, and value opportunities in ITC highlight the importance of strategic investment choices. As the market dynamics evolve, focusing on well-executed companies and maintaining vigilance in competitive landscapes will be critical for investors.