Why Sandip Sabharwal is bullish on Bharat Forge

“Everyone is just going for the lowest brokerage, given the fact that new SEBI regulations, your funds, etc. are relatively safe. So it is not that the brokerages can turn rogue and run away with your money. So to that extent, there is very little to distinguish from one broker to the other. So I do not like brokerage stocks because I do not think they have any real moat going for them. I am not looking to invest in these sectors at all,” says Sandip Sabharwal, asksandipsabharwal.com.

We are in the middle of a bull run, we are in the middle of what could be called as a strong financial inclusion, we are in the middle of what could be called as a multi-year theme, but AMC stocks, brokerage stocks, all of them are at multi-month lows?
Both of them are suffering from a sort of profitability squeeze. Margins are coming down despite the business growing and the squeeze in margins is such that the growth cannot compensate for it. So I think that is the challenge which brokerages as well as AMCs are facing. Most of the AMC products have been typically underperformers and that is also leading to investors moving out and looking at other avenues. So they are incrementally losing market share although the SIP inflows continue to be strong. From the brokerage’s perspective, there is very little to distinguish one from the other. Everyone is just going for the lowest brokerage, given the fact that new SEBI regulations, your funds, etc. are relatively safe. So it is not that the brokerages can turn rogue and run away with your money. So to that extent, there is very little to distinguish from one broker to the other. So I do not like brokerage stocks because I do not think they have any real moat going for them. I am not looking to invest in these sectors at all.

You have liked Bharat Forge in the past, time to revisit that one?
I think so. I think it is reasonably priced. It had a run up above 900. Then there were some disappointing result prints as well as the news flow from the US related to Class 8 truck orders, which has incrementally a lesser play these days for Bharat Forge but that is what somehow the analysts in the market seem to be tracking.

So I think it is reasonably priced. It needs some trigger for it to perform as in from some good quarterly result, etc. But strategically, what the company is doing in terms of diversification into various other spaces like defence or aerospace or other industries, I think that will bear fruit going forward. I would think that it should be a decent play at the current prices.

Do you think the worst for some of these Paytm, PB Fintech, etc. is behind us?
Worst in terms of performance, yes, one could say that the kind of losses they were making, I think the losses will come down but does that create an opportunity for investors to make a sustainable play? It is still doubtful because of their business models. For example, Paytm, if you see the entire improvement in profitability or whatever they are talking of is coming from their loan origination where they earn commissions on originating loans. That is not a high PE business because it is just like a commission agent working like a commission agent. So I do not see these companies getting built in a manner where one can say that they will have some sort of moat for years to come. I would be sceptical buying into these companies.

I wonder if you track both of these counters and what the outlook is on HEG and Graphite?
I think it is going to be a challenging time for them, especially given the fact that if you look at where the steel cycle is going, steel prices in China are back to 2022 lows after rallying more than 20% from there. That will put pressure on global, all the incremental sort of ancillary industries and we could also see production cuts etc. coming up. So I do not think there is any big story in these stocks at this stage.
The real go-to area right now is the entire urban luxury or the niche consumption space, whether it is watches, cars, wine company like Sula. What looks interesting in that space because typically how economies move is that the niche consumption which is dominated by the affluent class, that in a growing economy always does well? And if India is headed towards what happened to US in terms of an economy, these categories and some of the specific categories are only going to explode.
Yes, I think niche consumption will do well. Unfortunately, most of it tends to be in global brands and to that extent what we are seeing is premium global brands on the consumption space are doing much better now in India than some of the medium to lower priced products.
But I think giving specific example that the stage is tough, so I think from the companies which recently listed maybe something like a Vedant Fashion could be a gainer in this but there also the valuation at this stage seems to be a bit excessive.

Sula Vineyard etc. although the wine consumption is growing but if you look at the pace of their growth etc I think it is not so exciting that we give very high PEs to that.

What you are advising when it comes to the entire cement basket?
Cement is an intriguing space at this stage because on one hand we are seeing that the cement companies are unable to pass on price hikes. So they try but the prices come back because supply is so strong. On the other hand we have got good demand trends and a complete collapse of sort of input cost pressures and which will aid their profitability. And that is the reason why the stocks have also gone up so much. It is a very tough sector to call frankly. So there are tailwinds which at this stage look better than the fact that they are unable to increase prices. So I would say that people can buy these stocks but I think at somewhat lower valuations.