“So at some point you get to a level where returns are clearly muted. So you have to buy some of these stocks. Anyone who wants to buy on bad news, like Amber for example didn’t do well when the entire AC market went into we were in the doldrums.” ” says Sandip Sabharwal, askandipsabharwal.com.
I think last week you said these EMS stocks are looking good but the thing now is I know anything above 50 PE Sandip Sabharwal will be the first to come out and say mehnga hai, the valuations are high. Why aren’t you bearish on these stocks because I think the price-to-earnings ratios are 50 plus and margins are 6-7%, that’s not your investing style.
Sandeep Sabharwal: I’m not buying these stocks, but the whole point is that when the question was asked whether these companies will do well in the long run, all I see is that they are getting so much growth momentum from so many partnerships and benefiting because of PLI, etc. , and the whole PLI business, because a few companies get selected and then it’s very difficult for new companies to come in, so these people get kind of a moat because of government policy, not because of what they actually do.
So I think that’s why some of them could actually do well in the long run, that’s what I said. So I don’t feel very comfortable buying them at these valuations and the kind of margins they operate at, but the fact is that some of them could do well in the long run.
I mean, I was just discussing this Kunal who looks at these companies optically, which is great in terms of turnover, but margins of 2-3-4%, but look at the returns that a Dixon or an Amber or even Kaynes Technology has given. We can argue endlessly about low margins, but the market has, in a sense, rewarded these stocks like there is no tomorrow. Where are these shares going? Let’s say if someone takes a three-year vision for Dixon and Amber, they can double in three years?
Sandeep Sabharwal: I think it will be difficult simply because of the valuation they are trading at. Like Dixon, I think these prices are trading at, I would say 100 times earnings, so to maintain 100 times earnings you need to grow 50% continuously over the next 10 years.
Whether they can or not, I don’t think so. If they achieve that, you might get a return. So at some point you get to a level where returns are clearly muted. So you need to buy some of these stocks, who wants to buy based on bad news, like Amber for example didn’t do well when the entire AC market was in the doldrums.
So when the AC turnaround started to happen for those who believed in these stories, who bought them at the time, they would have had a very good return. So people should wait for a general midcap or smallcap correction when these stocks normally fall more than the market, or for a decline due to bad results, bad news, etc.
So five years where do you think the Sensex is going and ten years where do you think the Sensex is going?
Sandeep Sabharwal: But I stopped making those projections.
But if we have to put the logic together, 12% is good, which means if 12% is compounded over five years, we should be somewhere between 1,25,000 and around 1,50,000.
Sandeep Sabharwal: Look, it depends on growth assumptions. So if we believe that India can grow at 7% on a real GDP basis, we have inflation of 4% to 5%, so perhaps nominal growth of 11-12%, and on top of that a few percent of course efficiency gains. As the efficiency of the economy improves, the Indian economy is highly inefficient. So efficiency gains tend to contribute substantially to equity market returns, as we have seen in many other developed markets, especially the US markets, in recent years. So if we can achieve 7% GDP growth, I think an average market return of 13% to 14% for the next five years is very possible.
Swiggy, Zomato, not many options within that said universe, but still stick with Zomato or do you think Swiggy is also making a relook?
Sandeep Sabharwal: I think Zomato is much better placed if someone has to make a choice simply because, I think, it has trimmed its core structures in a way that is profitable. Swiggy is still on the substantial negative profitability train, so they still have huge losses. We’ll have to see how they turn it around. That said, given the intense competitive intensity now entering the fast trading space, I would be cautious about the valuations of both companies, especially Swiggy, but also Zomato at this stage. We have to be careful because share prices have risen from 50 to 300 and at this price most of the positive developments seem to have been taken into account.
Is there a new, exciting company you are considering acquiring? I mean, it may be small today, but it has the potential to be big. Anything that is, let’s say, outside the comfort of the large caps we’ve discussed, or the obvious themes of travel and tourism, anything that might be small today but big tomorrow, or anything they say might be too could relate to the theme ‘catch them young’. and watch them grow?
Sandeep Sabharwal: Well, that’s hard to say, because if you look at the valuations of small and midcaps, we don’t see that opportunity at the moment, while you could say that such opportunities are available very cheaply.
