Is this the start of good times for ITC?

“I do not think we will see the kind of rallies which we saw over the last couple of years and to that extent, metals in general should be avoided, especially steel,” says Sandip Sabharwal of asksandipsabharwal.com.





On ITC

Finally, ITC gets its day because all the numbers ticked rightly Although a large part of the turnover growth was due to the agri sector growth, on the hotel side, on the FMCG ex of cigarette growth, is decent in the context of what other companies have reported in that segment. Plus they declared such a significant dividend where the dividend yield itself is more than 2%. So I cannot call anything negative on these numbers. If this is the start of the profitability cycle and ITC or other companies remain focussed on profits and continue to do well, what many investors have been waiting for the last 10 years might play out over the next one or two years.

I know you have never liked these new age companies. At what price would you buy any of these shares or would you just not touch them?

Zomato, Nykaa are companies which have a business model and they have a reasonable market standing. The models can get disrupted. For Zomato, it is almost a duopoly in India with Swiggy and Zomato right now, but Nykaa’s model can obviously get disrupted by increasing competitive intensity by much stronger players; but it still has a business model. It still wants to make profits and such companies can be bought at some stage, which is substantially lower than the current price. I am looking to buy them at least 30 to 50% lower than the current prices.

On the other hand, there are companies whose managements have no strategy of making profits like Policybazaar or Paytm. We cannot invest in a scenario where liquidity will not be so easily available and valuations will compress. We need to understand that when valuations of profit making companies are compressed, it does not matter to them. They can continue with their growth and their cash flows. When valuations of loss-making companies are compressed, they do not have the money to fund them at higher and higher valuations and that leads to further deterioration in valuation.

That is something which is not recognised in the market today because of the easy liquidity over the last so many years and also because there are so many investors in the market today who have not seen various cycles. It will be a good learning experience for them over the next two-three years.

What about the metals basket? Do you like Tata Steel within this space and is there anything specific that you would watch out for by way of earnings?

Profitability might get compressed because steel prices corrected somewhat and input prices have gone up. The key is to watch how they are able to maintain the spreads and that will determine how well they can do. For integrated players, it is tougher because then when the prices are rising, they make more profits and when prices fall, they make less profits.

But overall for steel, this year we will have more uncertainty because the Chinese economy is slowing down drastically. Their real estate sector is in turmoil and they still consume 60% of the entire steel in the world. So many people are focussed on the supply side, but on the demand side, there are still some issues and that will lead to steel prices remaining subdued this year. I do not think we will see the kind of rallies which we saw over the last couple of years and to that extent, metals in general should be avoided, especially steel. All other metals have other drivers. Those companies might continue to still do well.

Is sugar a long haul story? Can one still buy into sugar stocks?

It is tough to answer such a question whether we can enter right now or not, especially when one has entered much lower. But I attended the conference call and had discussions with several sugar companies’ management; I think the outlook looks decent.

There are several factors working for them. Inventory in India is at the lowest in several years. The ethanol story is playing out for them and the possibility that we could have another two-three years of good profit years with their diversification, a lot of these companies are getting more and more into more steady businesses like ethanol. That is a reality.

Near term sugar prices have corrected a bit, but directionally, over two-three years it still looks good. We own Balrampur and Triveni Engineering which has some engineering business along with sugar. I am still constructive on this sector. It can do well over the next one or two years.

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