“So, at some stage you come to a level where returns obviously get muted. So, you have to buy some of these stocks whoever wants to buy on bad news like for example Amber did not do well when the entire AC market was in doldrums,” says Sandip Sabharwal, asksandipsabharwal.com.
I think you mentioned last week that these EMS stocks they look good, now the point is that I know anything above 50 PE Sandip Sabharwal will be the first one to come out and say mehnga hai, valuations are stretched. Why are you not bearish on these stocks because the PE multiples I think are 50 plus and the margins are 6-7%, that is not your style of investment.
Sandip Sabharwal: I am not buying these stocks but the whole point is that when the question was asked whether these companies will do well over the long term the only thing I see is that they are getting so much traction of growth by so many tie-ups and benefiting because of PLI, etc, and the entire PLI business because a few companies get selected and then it is very tough for new companies to come in so these people are getting sort of a moat because of government policies not because of what they are actually doing.
So, I think that is the reason some of them could actually do well over the long term, that is what I said. So I am not very comfortable buying them at these valuations and the kind of margins at which they operate, but the fact of the matter is that some of them could actually do well long term.
I mean I was just discussing this Kunal that optically look at these businesses, that is great on top line but 2-3-4% margins, but look at the return what a Dixon or an Amber or even Kaynes Technology has given. We can endlessly argue about low margins but the market in a sense have been rewarding these stocks as if there is no tomorrow. Where are these stocks headed? Let us say if somebody takes a three-year view for Dixon, for Amber, can they double in three years?
Sandip Sabharwal: I would think it will be tough simply because of the valuation at which they trade. Like Dixon I think trades at these prices, I would say 100 times earnings, so to sustain 100 times earnings you need to grow at 50% for the next 10 years continuously.
Whether they can do that or not, I do not think so. If they achieve that, then maybe you will get returns. So, at some stage you come to a level where returns obviously get muted. So, you have to buy some of these stocks whoever wants to buy on bad news like for example Amber did not do well when the entire AC market was in doldrums.
So, when the AC turnaround started to happen for those who believed in these stories, they bought at that time, they would have made very good returns. So, people need to wait either for an overall midcap, smallcap correction when these stocks normally fall more than the market or due to some fall due to bad results, bad news, etc.
So, five years where do you think the Sensex is headed and ten years where do you think the Sensex is headed?
Sandip Sabharwal: But I stopped making those projections.
But if one has to put logic together, 12% compounding right, which means if there is 12% compounding five years, then we should be anywhere between 1,25,000 to about 1,50,000.
Sandip Sabharwal: See, it depends on growth assumptions. So, if we believe that India can grow at 7% on a real GDP basis, have a 4% to 5% inflation, so maybe 11-12% nominal growth, and on top of that a couple of percentage obviously of efficiency gains. As the efficiency of the economy improves, Indian economy is very inefficient. So, efficiency gains typically add substantially to stock market returns as we have seen in many other developed markets, especially the US markets over the last many years. So, if we can do 7% GDP growth, I think 13% to 14% average market return for the next five years is very much possible.
Swiggy, Zomato, not many options within that listed universe, but still sticking by with Zomato or do you think Swiggy also makes a relook?
Sandip Sabharwal: I think Zomato is much better placed if someone has to make a choice simply because they have I think cut down their core structures in a manner that they are profitable. Swiggy is still on the substantial negative profitability train, so they have still huge losses. How they turn it around is something we need to see. That said, given the intense competitive intensity now coming in into the quick commerce side, I would be cautious on the valuations of both these companies, especially Swiggy, but also Zomato at this stage. We need to watch out because stocks moved from 50 to 300 and at this price most positives seem to be factored in.
Any new exciting business which you are looking at acquiring? I mean, it could be small today, but it has potential to become large. Anything which is, let us say, outside the comfort of the largecaps which we have discussed or the obvious themes like travel and tourism, anything which could be small today but big tomorrow or anything like they say could be on the theme of catch them young and see them grow?
Sandip Sabharwal: Well, tough to say, because if you look at the small and midcap valuations, so we do not see that opportunity right now, where one could say that such opportunities are available very cheap.
