There is a greater probability of underperformance in over-owned stocks: Sandip Sabharwal

I do not know how August will be, but over the next 2-3 months, the market should be lower than what they are today, says the analyst.

The intriguing stock for me today is Bharti. There is nothing wrong with the numbers but ever since the promoter stake sale has happened, the stock is down. Today also the stock should have been 3% higher, but it is 4% lower.
Yes exactly. When management sells to institutional investors, most stocks tend to find a bottom near that price. However, for Bharti, it has acted more like a stop for the stock like it has found it very tough to cross that and the stock remained below that level. This could be partly because so much investment has gone into Jio and they have continued to gain new subscribers, while Bharti and Vodafone have lost subscribers.

The problem with many of the over-owned stocks, especially where stake sales happen is that as and when these euphoric ETF flows reverse, we will see selling in them in a similar manner as we saw buying. So, there is a greater probability of underperformance in over owned stocks.

Time and again, markets get excited over PSUs divestment. But this time it is different.
The problem of BPCL disinvestment is very clear. It was assumed that there is a free pricing environment for fuel in India. Then Covid hit us and if you look at the way the fuel pricing was handled, it was under complete government control.

There was a time when crude prices were falling and prices here were not allowed to fall here. Then the government took away a huge amount of taxes and then there was still an element where prices could actually have stayed at the same level, but they were increased when crude prices were stable or going down. This has obviously thrown a spanner into the works for the disinvestment process. Private sector players will be afraid to come in because they won’t know what will be the profitability of the enterprise. For example, today Indian fuel prices are so high when crude prices are just at $40-42. Ultimately this global liquidity spiral will also go into the crude market like it has gone into gold, silver, Bitcoin, copper, etc.

So what happens when there is a crude oil spiral? What happens to the pricing environment in India? Will the government allow prices to go above Rs 100 a litre? There are so many imponderables. BPCL investment is a very, very tough task unless the government tones down its expectations and is willing to sell at a very low stock price. Otherwise it is a tough game.

ICICI Bank has cracked today. Again it is one of those stocks where valuations are attractive, the retail book is looking okay and subsidiaries are doing very well. They have got enough capital and are in the process of raising capital. But the stock is still underperforming.
Unlike some of the banks like Kotak, HDFC, etc, which pushed their clients not to go in for moratoriums and pay up instead so that the moratorium book remains near 10% or below, ICICI Bank was more liberal in giving flexibility to its clients to take that moratorium. So, their moratorium book is 17%. Now 17% is quite large because it is nearly Rs 1 lakh crore and their total loan book is around Rs 6,50,000 crore. Of the Rs 1 lakh crore moratorium book, what will be the amount of NPAs is tough to say, although they have made provisions of around Rs 8,000-9,000 crore on that. That has spooked the markets because they are 5-6% more in terms of the moratorium book than the other larger banks.

But it could be more optical because ultimately the NPA levels for all the banks out of the moratorium book could be similar. Whereas ICICI Bank has been more customer focussed, other banks have been focussed more towards showing a lower number.

How do you read the headline numbers of Dabur?
The numbers look decent in the context of where the market has been and are in line with what they had indicated in the previous conference call. The margin performance is pretty strong. The key will be to look at the outlook because eventually in the second quarter, if volumes are back to pre Covid levels or above that because Dabur is in a category where people were actually expecting them to do well and to go back to a growth path like some of the other FMCG companies. So, that is what we will have to watch out for. In terms of the numbers that have been reported, they are pretty decent.

We have put a 20% gain on the IT index in July. We put a 9% gain on the Nifty in July. What should we expect in August -- drop, consolidation or rise?
The markets are extremely optimistic about the future direction. Retail participation in terms of just buying every day and expecting to make money has gone up substantially and institutionally flows have been pretty muted in the Indian context. It is not that large institutional buying has taken this market up. On most days when markets have gone up, institutional flows have been either negative or somewhat positive.

The markets are positioned at a level where they are pricing in a V-shaped recovery and significant positives and no negatives. I do not know how August will be, but over the next 2-3 months, the market should be lower than what they are today.

What would be the operating leverage for Reliance?
Ffinancial leverage is seen more in companies which have debt because as the revenues go up, debt gets repaid and the impact of that is seen. For Reliance, most of that seems to have got factored in already because of the way the stock moved on various rounds of financing.

The other thing for Reliance specifically would be that most of the money has come into Jio platforms and for it to flow into the parent company might be tougher. So how do they handle that is something we need to see. That is one aspect that needs to be watched but purely in terms of reported profits for Jio, obviously that will go up because the interest cost will just go away for them as most of their debt should be repaid with the kind of money they have got.