India IT sector could finally attract value investors after a prolonged correction, but market expert, Sandip Sabharwal believes the rally is unlikely to turn into a long-term structural uptrend. Although lower valuations and attractive dividend yields have improved the risk-reward equation, he views the sector as a tactical opportunity rather than a buy-and-hold investment.
“The IT sector has been in a one-way decline for almost a year, and in the last three-four years it has come to nothing. TCS And Infosys have declined, so they present opportunities for value investors. But I look at it more as a business sector…we could gain 10 to 20 percent, but I don’t see the trend reversing completely,” he said.
Sabharwal said he had taken small positions in large-cap IT companies but intended to exit them once they generated reasonable returns instead of holding them for the long term.
DMart’s valuation still seems strained
Commenting Avenue SupermarketsIn the first quarter update, Sabharwal said the retailer continues to deliver respectable operational performance, but its premium valuation remains difficult to justify.
“The performance is good, but the valuations do not justify the growth. In my view, the stock has no upside potential due to the very high valuations. It is unlikely to outperform,” he said.
Although overall market sentiment remains favorable, he believes any upside in the stock will likely remain limited.
Marico Strengthens consumption strength
Marico’s stronger-than-expected quarterly update boosted confidence in the consumer story, according to Sabharwal. He highlighted healthy volume growth, improving rural demand and positive outlook as encouraging signs for the FMCG sector as a whole.
“The numbers were very, very good and the outlook also looks quite positive. It gives a positive connotation to the whole consumer space,” he said.
He added that his channel checks indicate that consumer demand remained resilient during the first quarter and expects this trend to be reflected in upcoming earnings from other consumer companies.
Margin pressures expected to ease
Although rising input costs could weigh on the margins of some FMCG companies in the near term, Sabharwal expects the pressure to be temporary as raw material prices decline.
“Demand is resilient on the ground. Packaging costs are already below pre-war levels, and these benefits will start to show. Prices will largely hold up and contribute to margins for the remainder of the year,” he said.
The automotive sector well positioned for growth
Sabharwal remains constructive on the automotive sector after healthy sales of conventional and electric vehicles. He believes that the current transition to electric vehicles is also accelerating replacement demand.
“The numbers were very strong in the ICE portfolios as well as the EV portfolios. EV penetration is reaching new records and replacement demand could maintain the momentum,” he said.
He, however, warned that an unfavorable monsoon remains the biggest risk to rural demand.
“The possibility of a poor monsoon remains the main risk, but many earlier concerns have eased. The sector is well placed for growth,” he said.
Both automotive OEMs and accessories are attractive
Sabharwal expects automakers and component makers to benefit from improving industry conditions, especially as concerns over export-related tariffs have eased.
“We own Maruti, M&M and Bajaj-Auto. All of these companies should do reasonably well. We also have a small stake in Cotton Strikeswhich could work just as well,” he said.
Electric vehicle adoption has more room to grow
Momentum for electric two-wheelers is unlikely to slow down anytime soon, Sabharwal said, citing lower running costs and a faster replacement cycle.
“This dynamic is going to continue and the change is not going to stop. The market for electric vehicles is huge and replacement demand could accelerate further,” he said.
Liquidity will determine Credit growth
On the banking sector, Sabharwal said credit growth will ultimately depend on the availability of deposits, although expected FCNR inflows could provide temporary support.
“If liquidity does not improve, it will limit credit growth at some point. FCNR flows could fill the gap this year, but deposit growth needs to keep pace,” he said.
He added that stable flows of foreign funds could also improve the overall liquidity of the system.
Tata Engines Still facing execution challenges
Sabharwal believes that Tata Motors continues to remain a stock that periodically disappoints despite its improving domestic business.
“Tata Motors is still a work in progress. Some quarters are good, then the forecasts disappoint the market. But domestically, it seems to be stabilizing,” he said.
Titan Remains the favorite bet for jewelry
Despite strong updates from some jewelry companies, Sabharwal continues to favor Titan over the rest of the sector due to governance issues elsewhere.
“For many jewelry companies, corporate governance remains a concern. Titan is the only credible player I see. If anyone is going to play in the sector, they should do so through Titan,” he said.
