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May consider cement pack after a few months; Axis Bank a candidate for rerating: Sandip Sabharwal

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Sandip Sabharwal, asksandipsabharwal.com, says the Axis Bank stock needs to get re-rated higher. It trades at 1.8 times book while most of the other large private sector banks are more near 2.7 to 3 times. It trades at valuations which are 35% cheaper than HDFC Bank while on most parameters it is doing maybe as well or better in terms of gross NPAs, net NPAs, provision coverage, return on equity across the board.

Disadvantage Kotak is turning out to be advantage with good numbers from Axis and the entire PSB bank pack is also holding out very smartly. SBI had a solid 4.25% move, the smaller ones are holding out well. What is it that you have made of the RBI move on Kotak banning addition of credit cards as well as online accounts and Axis numbers as well?

Sandip Sabharwal: Axis numbers were very strong and Axis continues to be one bank which is unfairly cheap relative to many of the other large private sector banks. It trades at valuations which are 35% cheaper than HDFC Bank while on most parameters it is doing maybe as well or better in terms of gross NPAs, net NPAs, provision coverage, return on equity across the board.

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I believe Axis Bank results actually stood out and this should be one stock which needs to get re-rated higher. It trades at 1.8 times book while most of the other large private sector banks are more near 2.7 to 3 times. I think this process should continue. Public sector banks are really tough to explain at this stage because it is not that any loss of Kotak is going to turn out to be a benefit for the public sector banks.

At around Rs 1125, would you add more to Axis Bank after looking at these numbers?
Sandip Sabharwal: Yes, I would think so. So, as per my analysis of the valuation at which the bank should trade, another 20% higher on Axis Bank over the course of the year should not be an impossible task.

What is it that you are making of all these announcements coming in from the Aditya Birla Group? The stock price is pretty much reflecting all of that be it the move in Vodafone, AB Capital, Grasim, etc?
Sandip Sabharwal: The moves could be related to some sort of relief given that Vodafone Idea has been able to raise equity and to that extent people believe that the pressure on the entire group will ease off which it should. So, it could be a reflection of that. Specifically on some stocks like Aditya Birla Retail, it is more to do with the announcement of a demerger. Madura Garment’s division, the company which could trade at a significantly higher valuation as compared to the combined entities. That is reflected in the stock price of Aditya Birla Fashion and Retail.

Since we are on the subject of cement, there’s a lot of news flow there, whether it is of course the commentary coming in from Dalmia Bharat about the pricing pressure, Orient Cement, wherein ET Now sources have told us that the AB Group might be looking at picking up the promoter stake and of course numbers from ACC as well. What is your view on the cement pack?
Sandip Sabharwal: Cement is a sector we need to be cautious about. Valuations are pretty high and pricing pressures are very significant. Companies have been trying to increase prices for the last eight-nine months but they have been unsuccessful. Dalmia Bharat also has indicated that they do not see a pricing recovery anytime soon.

Even in ACC results, something extraordinary must be there because margins have taken a significant beating and margins could decline further going forward as the prices remain under pressure and costs have bottomed down now. So, cost pressures could come down going forward. So, I think it is a sector we need to avoid for the time being. If valuations correct, then we could look at it maybe a few months later.

In this kind of a market, would you give FMCG a skip right now because so far, the managements do not seem to have any clarity that there is any across the board recovery in rural demand taking place?
Sandip Sabharwal: Yes, but that is the reason why most of them are at three- to four-year’s lows or some even lower than that. I am looking at opportunities to add to this sector. Now, I am waiting for some better price levels in HUL. So, HUL could be interesting if it sown another 8% to 10% because at that price, it will be trading at multi-year low valuations and we need to realise that this is one sector where valuations are always high and when the volume growth kicks in and the companies start reporting good numbers, the prices could be much higher. We have to buy them when the news flow is negative. So, I am looking at the sector looking to buy some stocks here but not yet buying.

What would be your view on that and this upgrade that we are seeing on Bharat Forge?
Sandip Sabharwal: Bharat Forge is very well placed because of its diversified product mix and the initiatives they have taken on various fields, especially defence and aerospace, etc. Oil and gas was subdued for them but could come back. However, all these brokeragesare coming out with upgrades or downgrades just a few days before results make no sense.

I think we need to watch out for what the company says. Their longer-term outlook is good but in the near term, the valuations are not cheap after the kind of runup it has seen. We also had bought this stock at around Rs 600-700 odd level, but we exited last time it went near Rs 1,300 and we have not bought it again. I would like to wait for valuations to be more reasonable here.

Your view on the market right now has been that it is actually the global market strength which is supporting the Nifty and the upside looks a little bit capped and one should place higher bets on the broader markets in small and midcap names. Give us a list of two-three names or even more than that if you wish that one can look to buy within midcaps right now.
Sandip Sabharwal: Unfortunately, what is happening is that for the midcaps which are doing well and which have done well, the prices have gone up so much that it is tough to even buy those stocks further. So, some of the stocks we own like for example VA Tech Wabag has gone up substantially or Voltas or some of these companies.

I think it is tough to buy afresh. Where there is value still could be stocks like VIP Industries which is also on the verge of turnaround and where returns could follow something like what happened when Lupin turned around or something like Voltas turned around. That is something which looks interesting with a one, one-and-a-half-year perspective. Consumer durables have been doing well and a very conservative group V-Guard has given some returns in the near term but not substantial and that is where if results are decent, we could see some upside.

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