Investment Strategy: Sandip Sabharwal talks about two stocks to bet on if the market corrects by 5-10%

“We have improved the publishing results a bit and we will look to add more if they correct further. Then during the budget period, I said one company that we own which has also done reasonably well, SH Kelkar, which is in the flavours and fragrances sector, so they have received a large order, the entire profitability cycle seems to be improving and the valuations are not as demanding, so I think these two,” he says. Sandip Sabharwalquestionsandipsabharwal.com.

Saregama is an interesting case, I mean, they definitely have a monopoly. Now, whether it’s retro music or the music library, they’re the ones who actually own the rights. And since it’s now easy to listen, whether it’s streaming, apps or music on the go, is this one of those businesses that you think you should buy and hold on to? Why? Because that library that they own, in a sense, can’t be replicated.
Sandeep Sabharwal: Yes, I have analyzed the company many times, but the issue that I have always grappled with has been what would be the growth outlook beyond a point in time, so I think that is something that will be difficult for them, as the library can be used perennially and they have made innovations in terms of bringing their products to market with the music library and different types of products and so on, as well. But then beyond a certain point, I can’t see growth because the new additions will not be as many. So I think that is an issue that I particularly grapple with. The stock has actually performed reasonably well.

What is on your radar that you would say you would start buying at a 5% drop, add more at a 10% drop, and double down if it drops 20%?
Sandeep Sabharwal: I think in the post-earnings seasons, some companies that seem to be on the mend, like UPL, I think they went through a tough time.

They have now done some inventory corrections etc. Crop outlook might be improving. And a big concern for them has been refinancing their global borrowings so if the interest rate cycle globally comes down that might not be as much of an issue so that is a company where I have a contrarian bet. We rallied a bit after the results and we would look to add if it corrects further. Then during the budget period, I had said one company that we own which has also done reasonably well, SH Kelkar which is on the flavours and fragrances side so they have got a big order, the whole profitability cycle seems to be improving and the valuations are not as demanding so I think these two. And then among the companies that we own which has corrected because of the poor results in the first quarter but the outlook because of the order book remains strong, there is something like Ahluwalia Contracts which has given back I think 15 per cent from the top. If it corrects further, I think that could be something because the long-term outlook is good.
Why do you like UPL? I know that you have owned shares in the past even in different capacities and in different roles. Some would argue and say that, look, they have multiple acquisitions, a lot of debt, and they forget about that. I mean, this bet that UPL will do well and that the agricultural sector will continue to grow, somehow that thesis has not made sense historically. Do you think it will continue to be successful in the future?
Sandeep Sabharwal: Yes, it hasn’t increased because I think they made a big acquisition and then they took on a lot of debt and then the cycle turned negative and for two years we had a very bad harvest cycle globally. So those concerns are there.

We have owned the stock for a long time now and I follow its quarterly results closely. This was the first time that it seemed like things might be bottoming out.

It’s more of a gamble, maybe we wouldn’t get into a secular uptrend, but in markets like these where valuations are high, we’re not looking for 100% gains in stocks.

I think companies that can give 20-30% are also very good in the current market environment. So it’s more of a contrarian bet.

In which areas have you relaxed or reduced your positions and have you completely exited private banks or not?
Sandeep Sabharwal: No, we are still holding ICICI Bank. We also have some Axis Bank stocks. One of the stocks that we exited was Tata Motors after the last quarter results because I thought domestically things were slowing down and globally the outlook was not looking so encouraging, so I think that is one of the stocks that we sold.

We sold a lot of railway stocks because I think the growth cycle was peaking. So they will continue to grow, but valuations have become much more expansive.

So, stocks like Titagarh, Texmaco etc., which we bought at a very low price, we sold them. So, with all that, we have generated cash and we are waiting for new opportunities.

If I recall correctly, you bought Kotak. At that time, Kotak was going through two problems: transition problems and a diktat from the Reserve Bank of India. And some would say those problems still persist. The Reserve Bank of India is not clear about where it wants its digital payments business or its digital app to move and, well, the transition is still going on. I mean, it will take the management two or three quarters before they show that the new man is serious.
Sandeep Sabharwal: So, it is a small allocation in a kind of contrarian strategy, where you buy when you think bad news is coming and then wait and see how the stocks will perform, which could happen when the RBI restrictions are removed.

As far as asset quality growth is concerned, there has not been much of a problem. We have seen this before with other financial institutions as well, I think specifically with Bajaj Finance, when those restrictions were removed, the stocks went up. So I think it is more of that kind of story.

But it’s more something you buy when you think valuations have bottomed out and you could get better performance.

I come back to the point we were discussing initially. There are two trends that we are facing. One is that metals have corrected, but there is weakness in the dollar index and there is tapering at the Federal Reserve, which means that generally this could be a time when commodities could rally again. So you have to bet on commodities to see if they recover. The second trend that we are facing is that commodities have corrected, so you have to bet on consumers of commodities rather than producers. In your opinion, which has a better chance in the next three months, producers or consumers?
Sandeep Sabharwal: I think consumers, because the only thing that matters when it comes to commodities in the current environment is what China is doing and how it is doing it.

And China continues to slow down despite all the measures taken by the government because of the kind of overinvestment it has made in the last 10 or 15 years.

There are so many zombie projects, real estate and infrastructure, that do not generate any profit. And what most people don’t know is that even now, 50% to 60% of the consumption of most industrial products, steel, copper, aluminum and many others, is due to China.

If growth is actually slowing, then there’s no reason to think commodities are going to rise much. Typically, historically, we’ve seen the dollar index fall, which has been positive for commodities. But if you look at the last few months, that really hasn’t been the case.

So, in general, how do you recommend the sensitivity of raw materials in general?
Sandeep Sabharwal: Gold is a different commodity because gold is more about economic uncertainties, about allocations, about people wanting to hold an asset other than one that can be used as a hedge against currency volatilities, etc.

So I think gold is independent and will continue to perform well. But I think we should be very cautious about the rest of the commodities, most of the commodity stocks.

And what proportion does gold have in your portfolio?
Sandeep Sabharwal: It could be around 12-13% today.