“Defense stocks went through a bullish phase two to three years ago. Then we saw a correction and now we are in a phase where moves will be selective,” said Sabharwal.Commenting on Hindustan Aeronautics (HAL) and its forays into civil aviation, Sabharwal sounded cautious and pointed out implementation issues.
“HAL is underperforming in terms of execution. They have orders, but execution is lagging behind. Civil aviation is still four to five years away, so I wouldn’t be too excited about HAL per se,” he said.
Instead, he favors companies with a stronger track record of execution.
“Companies with a strong execution cycle like Bharat Electronics, which also posted good results, could continue to do well. We have to be careful while investing in defence,” he added.CV cycle becomes supportive despite cost pressure
On Tata Motors’ commercial vehicle (CV) business, Sabharwal said recent results were broadly in line, with some pressure from rising commodity prices.
“As commodity prices have increased, there has been some margin impact,” he said.
However, he noted that most auto companies are confident in passing on cost increases. “They’ll be able to pass it on because they’ll have to increase prices by maybe one to one and a half percent. It’s not the whole basket that has gone up,” he explained.
Sabharwal remains constructive on the CV cycle, citing improving demand trends.
“The CV cycle is on an upward trend and Tata Motors’ commercial vehicles have done well. The outlook remains positive for the next two years with replacement and new demand coming in,” he said.
He added that sustainable economic activity will be crucial.
“If IIP growth remains at 7.5% to 8%, we could see high single-digit or perhaps low double-digit growth in the CV segment, which will be positive for the industry.”
Valuations: Ashok Leyland expensive, Tata Motors CV more attractive
From a valuation perspective, Sabharwal says that while Ashok Leyland is operationally strong, it appears fully priced.
“Ashok Leyland has been the favorite pure-play CV stock, but the move has been significant and valuations are not really attractive at the moment,” he said.
He prefers Tata Motors CV because of its relative valuation.
“Tata Motors CV could still get more efficiency gains. In terms of corrections, that could be a better bet from a valuation perspective,” he added.
ITC seen as a value purchase
At ITC, Sabharwal described results as solid across all segments, including cigarettes and FMCG. “The results were quite decent, both in cigarettes and FMCG,” he said. He also emphasized the positive impact of dividends.
“The dividend announcement is positive. It is a dividend yield of almost 2% on the current share price,” he noted. Although recent sentiment has turned cautious, he sees valuation comfort.
“At these valuations, the stock is about 18 times next year’s earnings, which is not expensive for an established consumer company. There is a buying opportunity here,” he said.
However, he cautioned that volume trends will be closely watched following rate changes.
“There will be some skepticism in the first two to three months about how volumes develop. It’s not a stock that will rise sharply, but it could build with a return expectation of perhaps 12-15%.”
Swiggy is facing competitive and profitability challenges
On Swiggy, Sabharwal emphasized the difficult trade-off between growth and profitability. “Either you slow growth to improve margins, or you continue to grow at a blistering pace and incur even more losses,” he said.
He pointed out that moderating growth could also impact valuation stories. “If growth slows down, it becomes a question of how to value the company because most analysts are optimistic due to high growth,” he said.
Sabharwal also noted increasing competition. “This is a very competitive market and I don’t think the intensity of competition will decrease. Players like Reliance, Amazon and Zepto are becoming more aggressive,” he said.
He expressed skepticism about ambitious price targets.
“What companies say about reducing losses is more about what they hope to do than what can actually be expected. It is very difficult to invest in these companies, and I don’t know how brokers come up with targets of around 550 levels,” he added.
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