Risk-reward not so great now for buying IT stocks: Sandip Sabharwal

Should we begin with the big earnings that came out on Friday post-closing bell and what you made of them, ?
Reliance’s results per se were perfectly fine. In terms of we are seeing profit margins delivery and performance across the businesses, Jio was slightly slow but that is fine as it was expected.

The two points which keep the valuations down is one, the debt levels again are increasing rapidly. There is huge capex reported in this quarter also around 38,000 crores, net debt has come up to 1,13,000 crores, interest costs went up sharply as a result in this quarter and this is despite none of the new businesses which they have announced investment into hydrogen, etc, actually kicking off. So I think that keeps the valuations down for Reliance. They had a target of zero net debt so that does not seem to be possible right now.

But it is going to be a tough battle between and Kotak I think. You think Kotak would impress the Street more considering the consensus ICICI Bank already is?
You could be right because of the fact that

has underperformed so much in the recent past mainly due to valuation concerns. Those valuation concerns have not gone away in terms of valuations it still is expensive relative to both and ICICI Bank at a time when most growth parameters for all banks are virtually similar.

So, I would think that Kotak Bank results were good, its value of subsidiaries expanded but it is still more expensive than the other banks. With respect to ICICI Bank results, it was difficult to find out anything negative except for the lower deposit growth vis-a-vis credit growth and as they try to gain more deposits how that impacts their margins that is something we need to see.

The most positive thing about ICICI Bank is their contingency reserves. They have built up contingency reserves of 11.5 hundred crores while the net NPA is just 5500 odd crores.

So effectively they are at zero net NPAs which is an exceptional performance and their provision coverage ratio is at 82% which is the highest in the banking industry and it is still 20-25% cheaper than HDFC Bank. My guess is it will continue to be one of the better performing banking stocks over the next two-three years. The big beat that we have seen from , till now so much has been said about ICICI Bank and has been the preferred private sector lender in that sense to bet on, can that change, is it now the turn of Kotak?
In the near term it is very tough to predict but I think in the longer term Kotak Bank still trades at a significant evaluation premium to both HDFC Bank and ICICI Bank and there is no reason for that premium to actually exist because the phase where some of the banks were smaller and they were growing much more rapidly than the bigger banks is over.

Kotak itself is a big bank now. So again the point is that given its huge underperformance it is possible that it can outperform in the near term but then given that its valuations are much higher than that of most larger banks, it will be tough for it to outperform significantly.

Why are metal stocks growing higher, is it because world is convinced that growth is back?
I think there are two-three factors. One, they got down so much that as the Chinese reopening story came up the prices started moving up. Secondly, in a downturn, de-stocking happens so no one was building inventories and as soon as prices started to uptake there is inventory build-up cycle which starts and that leads to prices moving up further and that is playing out in the commodity companies. Clearly, margins seem to have bottomed out and that is driving the stock prices but I do not think we will see a spiralling up move because global economies are still going to weaken and this Chinese reopening theme will play out for some time before people realise that they are going to be in a structural downturn now for several years and to that extent there might still be some time to play this move in metals but not long term.

We did see a bit of a perk up coming in on IT but yes LTTS on for instance on Friday fell about 5% but you have a on the same hand which held out by about almost 4% or so. Anything to read into the recovery in IT names sporadically albeit but they are making an attempt at least so you think this is just a trading move?
I think it is mainly due to two factors. One, although the results are not as great, the outlook given by most other companies was not as negative as what people were expecting. Secondly the US inflation seems to be strolling down, without a huge decline in the economic activity at least as per the data which is available now. So maybe the interest rate hikes will impact the economic growth going forward.

I think these two factors are creating some positivity. On the flip side, the rupee depreciation aided the profitability of IT companies among potential margin pressures in 2022 given the huge depreciation of the rupee. Now that depreciation seems to be stalled as the dollar depreciates and already in this quarter I think the rupee is already up to 2.5% odd and which could actually continue till March and we could see further appreciation so that could become another headache for IT companies. So on balance I would say risk reward is not so great now for buying into IT stocks broadly across the board.

Wanted to get in your take then as to what exactly you would be watching out for when it comes to an ’s numbers?
I think the trend should be similar as what we have seen in other banks where CASA ratio is high and NIM expansions has hit recent highs or multi high levels. I think from Axis Bank specifically people will be looking out for some commentary on the Citibank integration as to how that is going and how much they will be able to retain out of the clients they potentially acquired due to that acquisition because they have paid a substantial amount for that. I think that is something which will be the more important factor for Axis Bank.

The real estate stocks have actually done nothing. Why is that real estate was supposed to be in a bull run and real estate stocks were supposed to follow the real estate bull run?
Major part of the gains came in 2020-21 only. I still remember we were exited that

was around 420 levels more than a year back and even now it is at 370.

So my logic was that the stocks ran up too much too fast and they are the most interest rate sensitive segment. So as interest rates rise, it will be tough for their valuations to move up. And thirdly, although booking have been strong, the pricing in real estate has not been as strong and to that extent there are concerns that margins could take a hit.
So I would think that real estate will come back like you said, it is going to be a long cycle, it is still in an up cycle. But from the stock perspective, I would think that we will have another move as the valuation consolidation ends and the interest rate hike cycle ends.

I do not know how closely you are tracking an RBL, or for that matter.
IDFC, I am tracking so I think they are on the right route with their change in strategies both in terms of lending as well as garnering deposits. And it has been a huge outperform also. So valuations have moved up in the near term. I would think that huge upsides might not be imminent in the near term but directionally this bank should continue to do well. RBL and Yes I am not looking at them.