If TCS had given salary hikes at the original time, we would have had no growth in operating profits, says Sandip Sabharwal, asksandipsabharwal.com
On TCS
TCS delivered strong numbers which were better than the expectations of most of the analysts. There is a lot of excitement around technology stock numbers but if you look at it, they have delivered a 3% increase in sales year on year. They have delivered a 6% increase in operating profits year on year and largely due to salary hikes not being given to employees at the right time. They have given the hikes from October 1. If those salary hikes had been given at the original time, we would have had no growth in operating profits effectively.
The commentary of the TCS management is always positive and to that extent, since the new dispensation took over, I have not seen them being cautious or negative on outlook. So I think we need to discount that. For an investor who is already holding the stock, it is great news as the stocks have done very well. There is a buyback and as it is a small amount, it does not move the needle on the stock price to a great extent. It is just that you will get some cash back.
Now for someone, who has looked at the stock afresh, you need to see that this is an industry growing at 5-10%. It is 10% at the upside, 4-5% as base case, 7-8% in the margins and could be stable for the sector. TCS now trades at 32-33 times earnings. I would think that it is trading at more than fair value till the buyback is on. Obviously the stock could remain range-bound but to move up substantially from here, it will need to deliver on numbers which are much better than what they actually ended up delivering this quarter. That is something we need to see. In terms of a holistic view, there is no great upside left in the stock in the near term at least.
On diagnostics stocks & Apollo Hospitals
We used to own that sector but I have exited it and after that also, stocks have run up 15%-20%. These stocks now trade at price earnings ratios which are 80-90 times earnings. The business is still subdued and even in the best case, the business growth outlook was 8% to 10%. I just do not know what people who are buying these stocks afresh are looking a. I do not really see anything of value in these stocks at these prices. In case of Apollo Hospitals, even if normalcy returns to its operations and everything becomes normal, the stock might trade at 80-90 times earnings for a business which has been barely able to generate double digit returns on equity. This sector shows typical signs of frenzy. I find it tough to see value in Apollo Hospitals or the diagnostic stocks.
On Balrampur Chini
The sugar story and especially Balrampur Chini is a very good story. It has excellent management. They have handled cyclicality very well and are trying to move away from cyclicality which cannot be done in a pure commodity like sugar industry completely but they are looking at value-added products although the board is yet to decide on those things. I will be keenly watching their outlook and news flow in that space but overall the stocks still trade at around six times earnings, at the current valuations for a business which is generating very high incremental return on equity.
There is a possibility that we could see a hike in ethanol prices as the government tries to and there has been news flow around it as the government tries to wean away sugarcane from excess sugar to ethanol which also replaces oil imports to some extent. So it is an overall good story. In this space, I like Balrampur Chini as a purely play and Triveni Engineering as a play on sugar plus engineering.
On Tata Motors
Tata Motors is a story where you actually need to believe what the management is saying to buy the stock. When the management says that we are looking at cutting debt to almost zero over the next few years, if you believe that, it is a great buy. But on the other hand, there are two-three things we need to evaluate fundamentally; firstly, the domestic CV cycle will remain subdued for a prolonged period of time because trucks are still unutilised and there is a lot of idling and the fleet operators are unable to buy new trucks. So that is one part of it.
The second part is the JLR story which seems to be improving because they are widely present in geographies like China and the USA where consumer demand has improved. So, that is one part of the story which has started to work for them. At this price, investors who are willing to take a 15-20% downside in their stride over the next two, three years, can easily make much higher returns than what the downside could be, if the management executes well.
On JSPL & Vedanta
JSPL seems to be a decent story. In the metals basket, steel is the strongest sector because of the domestic protection they are enjoying and the way the steel prices have rallied over the last few months. Steel as a basket should do well. JSPL also has shown its intention of cutting down debt substantially. As they go down that path, they could do well although it is a stock very much linked to the market, if the overall markets correct, that stock will also correct.
It is very tough to have a fundamental view on Vedanta because the delisting process is on. The drivers of the stock price movement are much different than what we could possibly evaluate fundamentally. That is one stock I really cannot comment on.
