A gain of 20-30% over a year possible in IndiGo; Jubilant can be a short-term play: Sandip Sabharwal

“Till we get downgrades in earnings of IT companies, I do not think the entire bottoming phase will get over. My initial target for Infosys is around Rs 1,400, where I thought value would emerge,” says Sandip Sabharwal of asksandipsabharwal.com


On IndiGo
IndiGo is a very well positioned company and I would think that it will be able to take the competition quite well in the near term. We need to understand that they are also coming off a low base because international operations were suspended, domestic operations are not working so well and most of the new players will take a long time to establish themselves.

So the only negative for IndiGo at this stage is high fuel prices and if our case is that fuel prices will remain high forever and go up further, then it is not a good case to take a bet on. I would personally be positively inclined at this stage because I believe that it is one of the better reopening trades and it will take at least two-three years because it is a very different business where new players need to burn a lot of cash and then establish themselves.

I am not sure how long some of the new players will sustain. But if these new players were not there, the stock price target could have been much higher. The target reduces obviously. A gain of 20-30% over a year should not be difficult in IndiGo.

What about Asian Paints? Are stocks losing their mojo as a result of high PE multiples or is the specific news about Grasim damaging for Asian Paints?
It is both because Grasim has announced a Rs 10,000 crore investment and it is a huge investment. If you look at the gross block of Asian Paints, I do not think it will be Rs 10,000 crore. I do not think even they have invested so much money in the paints business. It is an aggressive move.

JSW Paints has also come in aggressively. They are investing. So the high margins which the existing paint players enjoy will come under pressure. They will lose some market share and they might hold on to their overall volume but they might not be able to grow for the next two-three years. That creates an issue especially for a stock which trades at 90 price earnings ratio.

If stock trades at a PE ratio of 90, even if it halves, it is 45 PE which is also not cheap. There were specific reasons why Asian Paints was trading at those valuations. I do not think they will exist in the future. It is a great company and it will remain a very good company, but it cannot trade at these valuations. I see substantial downside in Asian Paints over the next one or two years.

What is your take on Jubilant Food? That stock is on the brokerage radar. Jefferies has upgraded it with a Rs 580 target price, saying that concerns of opening up of the economy posed a threat to delivery. What is your view on the space as a whole ?
One can take it as a technical play with the possibility of a small bounce back. The stock has fallen almost 50%. It fell 50% from the top and obviously it can bounce back 20%. That is always possible.

But the slowing down of volume growth and margins pressure will remain and even at these prices it trades at, if I remember rightly, at 60-70 PE ratio. It is not really cheap. So, I would not be aggressively bullish. If at all someone has to play it, they can play it as a trading or short term play and exit on gains. I do not see a sustainable long term up move coming into Jubilant Food Works in the near future.

What is your take on what has been happening within the entire IT basket? There is a good risk reward within this basket.
The downgrades have not even started. So, I think, there is a downgrade in outlook but there is no downgrade in earnings. Till we get downgrades in earnings of IT companies, I do not think the entire bottoming phase will get over. My initial target for Infosys is around Rs 1,400, where I thought value would emerge. But various technology companies in the US have been reporting results, talking about a cutback in expenditure and that has already started. That will definitely have an impact on the IT budget.

I would think that we need to wait it out, look at what commentary comes out in the next results because companies have been very gung-ho on results. Is there any pressure coming in or the situation remains the same? At that time, it might be a better time to invest. I still think it is a very over owned sector and with investors just looking to buy this sector on dips, the psychology of investors for this sector has not changed. It is tough to make a case that it has bottomed out.

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