Sabharwal pointed out that recent gains from various sectors indicate stability and even improvement. Axis Bank and Kotak Mahindra Bank’s banking results indicate a recovery in credit growth, while asset quality remains strong. UltraTech Cement reported robust third quarter volumes, growing faster than the industry, with overall cement demand up 9-10%, a remarkably healthy figure. On the consumption front, Godrej Consumer Products has also indicated a revival in demand.“I don’t think things are as negative as what the market screen or the market numbers reflect,” he said, adding that the correction has created buying opportunities. “Many stocks are much cheaper than they were a month or three months ago. In mid- and small-caps, some companies may be almost 50% cheaper today. This is definitely an opportunity to enter the markets rather than exit.”
However, Sabharwal acknowledged that picking the right stocks has become more complex following a broad earnings reset. While valuations may appear attractive, investors are now faced with a wide range of options, making selectivity crucial.
In the field of large caps, he called Larsen & Toubro a strong candidate. In banking, Axis Bank stands out both in terms of valuation and performance, while ICICI Bank remains a quality franchise despite some recent weakness in the numbers leading to a stock correction. On the consumption front, Sabharwal believes Godrej Consumer Products will deliver potential returns of 15 to 20% over the next 12 to 15 months, based on management commentary and demand trends.
He noted that many investors may remain cautious about the Union budget, although expectations of major positive surprises remain low. “There is a greater chance that not much will come from the budget, but that would not necessarily be negative. Many of the negative aspects are already included in the price,” he said. Globally, Sabharwal identified a broader diversification trade underway, with capital moving from equities into alternative assets such as commodities. He described the sharp movements in metals and precious commodities as extreme. “Gold rising 2-3% every day and silver rising 5-10% every day is completely unsustainable. These linear movements remind me of the tech bubble of 2000,” he warned.
He warned that retail investors who exited stocks after losses on overvalued mid- and small-cap stocks could now chase commodities at similarly high levels. “Where this will end is very difficult to say. A 10% rise in silver in one day is completely unnatural. People need to be careful.”
On the earnings growth front, Sabharwal believes there could be a meaningful recovery in FY27. With inflation expected to rise from near-zero levels to around 3-4% as indicated by the RBI, nominal growth should improve. “If inflation is zero or 1%, you can’t expect 15% earnings growth. Next year, earnings growth of 14 to 15% at low levels is realistically possible,” he said, although he added that it remains difficult to predict further.
He also highlighted the disruptions caused by the implementation of labor legislation and the pressure on margins in the banking sector, especially due to the compression of net interest margins. These factors should decline next year, he said, potentially boosting bank profits.
Within banks, Sabharwal prefers private sector lenders and remains selective among public sector banks. “In PSUs, we have only SBI. That is the only bank I buy in PSU banks,” he said, citing concerns over unpredictable asset quality issues and steady loss of market share on deposits in public sector banks. He noted that PSBs’ share of deposits has fallen from 63% five years ago to around 54-55% now, which could increase funding costs and hurt competitiveness.
While consolidation through further mergers could eventually address these challenges, Sabharwal believes the issues remain unresolved for now, reinforcing the need for caution and selectivity in PSU bank stocks.
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