Sandip Sabharwal, asksandipsabharwal.com, says “both hospitality and hospitals have done well due to different reasons and both took a beating during that time. Today as we look at it, hospitality overall as a sector is much more attractive than the hospital segment given the fact that the trends are very positive. I believe Indian Hotels is one stock which should be a core holding for people who believe in the India story as well as investing in mid-tier companies.”
The global markets are favourable now. Are we in for that hurrah now? It may start with Happy Diwali now and then goes to become a Merry Christmas!
Yes, it is possible and very much likely because global positioning on equity as well as risk assets is now at extreme pessimism. All of us tend to look at the Indian markets without correlating to other overseas markets. In the global market, there have been significant corrections, both in the US, European as well as other emerging markets. So India held up and there are several reasons for that. One is strong domestic flows.
Secondly, the macros in India are much better than most of the economies, etc. So to that extent, our rallies might be less sharp but that is fine because in any case, I do not like very sharp rallies because things tend to move up very fast. So 2024 overall, I think, will be good for equities.
How should one read into this reversal, which has happened in the 10-year paper, crude, global volatility? I mean, the decks have suddenly or the table suddenly has changed, you know, setting on the table has reversed in one week?
It was imminent because people track crude prices. The key things to track are refining margins. The way refining margins were collapsing, it was very apparent that final product demand was very low and crude holding up at these levels was not possible. And this is despite the tensions in the Middle East persisting. Over the next few weeks, it is very much possible that those tensions will actually come down as the fighting ebbs in Israel, Gaza. The demand scenario for crude like oil products is pretty weak at this stage.
On a macro front, that is a positive but from the Indian perspective, crude is not the same thing as it used to be 50 years back. Only crude determines our trade deficit or the inflation trajectory. Overall, the inflation trajectory is in a much better place. Even if you look at the 10-year bond movements, it is very important. Two years back, the US 10-year was at 1.6%, Indian 10-year was 6.5%. Now US 10-year is more near 5%, Indian 10-year is nearer 7.4%. Our rise in interest rates also has been much more shallow, allowing the economy to adapt and the growth to sustain at higher levels.
What is your view on hospitals as a sector? I know you believe that Apollo Hospital, etc. was expensive. Today Morgan Stanley has initiated coverage with quite a bit of upside on that one. Any change in your view?
My view on hospitals was that it is a good long-term structural story but we cannot be buying the stocks at all prices. Near term, some of the hospital results which have come up, show some stress on margins. We need to let the results, etc. come out and then we can evaluate. Structurally, it is a good story but we have to buy at the right prices because we cannot be buying at any price and at any valuation.
Hospitals and hospitality are two different sectors. But in terms of the price trend, hospital stocks have done well, and hospitality stocks have also done rather well. And both the sectors got completely decimated post-Covid. Hospitality for obvious reasons, hospital for obvious reasons, But from the Covid lows, whether it is hospital or hospitality, rhyming?
Both have done well due to different reasons and both took a beating during that time. Today as we look at it, hospitality overall as a sector is much more attractive than the hospital segment given the fact that the trends are very positive. I believe Indian Hotels is one stock which should be a core holding for people who believe in the India story as well as investing in mid-tier companies.
At the beginning of the year, your view was, this could be the year for Tata Motors and the operating leverage benefits would kick in. Then they did a DVR buyback. Now they are taking a subsidiary public. But at Rs 636, whatever good work they have done, is it priced to perfection?
I do not think so, simply because of the fact that the improvements have been much more drastic than what people expected. It is like what happened on the hotels where in one quarter, some Indian hotels, last year delivered profits which analysts were expecting for the full year. That is what operating leverage means. When things turn around, then the improvement in performance tends to be much better than what most analysts expect.
Their revision of EBIT guidance for JLR from 6% to 8% is very significant and it indicates that the cash flow generation could be much stronger. And if you look at it on a price-earnings ratio, the stock is still near mid-teens PE ratio. It is not that it has gone up and it is trading at 25, 30, 40 times PE ratio. So I would think that stock still has the ability to do well.
I know you have been fairly positive on that stock but let us say what are the levels you are watching out for? What could be that stock price, let us say, a year from now on?
See, stock price prediction is very difficult. But the trends are positive. So, in many stocks and sectors, you have to follow the trend and as long as the valuations are not above your comfort level, so valuations of L&T are not above my comfort level because their delivery in terms of what they actually started to deliver in terms of top line, the possibility of improving margin profile as the older order book gets over because typically it is a 36-40 month order book cycle.
I think margins could improve next year and the kind of orders they are getting and the larger size orders are so significant that it is very positive. Now, the reason many investors remain sceptical about such companies is because of lower return ratios as compared to some of the consumer companies, etc. But there also, it will improve as they have become very wary of capex and not going to BOT projects. The stock has done well in the recent past and I would think that there is no reason why it would not do well over next year. What returns it could give is difficult to say. I would think that whichever largecap stock offers 15% plus kind of return potential, that is something to look at.
Sandip Sabharwal knows that best is yet to come, right, age is never a barrier for you?
No, in the investing business, you count the reverse, so it is not like the player’s life cycle. The investing and life cycle are actually the reverse. The best for many people are yet to come.