Next year to be very tough for Infosys; HDFC Bank to underperform: Sandip Sabharwal

“My guess is that HDFC Bank. which I had actually thought should start outperforming as their standalone numbers look decent in the pre-release, again goes back into a phase of underperformance,” says Sandip Sabharwal of asksandipsabharwal.com.

The Infosys ADR was down 9%. Now ADRs tend to be illiquid. Should we read into the ADR price action as an indication of the future of the stock?
The results were bad and so there is no positive consolation in that. Growth was lower. Margins were lower. Although they have guided for decent growth going forward, but the margin pressures are for real. Also, wage hikes are yet to happen this year. It mostly happens at the end of the first quarter and this time they could be twice that of the previous two years and it will hit margins further.

I read a lot of brokerage reports. Most of them are projecting a 15% earnings growth for Infosys this year. I remember last year which was one of their very good years for them, the quarter ended March year, they grew earnings by 15%. So in a year where there are going to be severe margin pressure, how is earning growth going to be 15%? It is impossible.

My view is that earnings growth for Infosys this year will be nearer 0% to 5%. So investors need to factor that in while taking a decision. Valuations are not cheap. If we take a 5% earnings growth, then valuations are around 30 times earnings which is pretty expensive. So my guess is that there will be a selloff. There will be a phase of consolidation, and I see the next one year being very tough for Infosys in particular and the IT industry in general.

What did you make of the HDFC Bank numbers that we also saw during the long weekend?
HDFC Bank results were bad again because the NIMs contracted significantly. They are going in for a huge branch expansion cycle. Their digital network has had issues in the past and that remains a challenge. The net interest margins underperformed very significantly vis-a-vis expectations by almost Rs 800-900 crore. The fee income was flat. The entire growth in net profit came just because of lower provisions.

The advantage of lower provisions for banks gets over this March. They need a growth in core income for earnings to grow and in my view NIMs will further contract going forward and this entire merger with HDFC, is very dilutive in terms of shareholder returns because it is happening due to compulsions as HDFC standalone is going to have a tough time going forward.

All in all, it is not a very pretty picture in the near term. My guess is that HDFC Bank. which I had actually thought should start outperforming as their standalone numbers look decent in the pre-release, again goes back into a phase of underperformance.

On Holcim planning to exit India and putting Ambuja and ACC on the block
The cement sector is already consolidated. It might not mean a great deal for the sectr unless and until the deal happens which in my view would be unlikely given the valuation premium at which Ambuja, ACC trade. So on one hand, we could take it slightly negatively as MNCs want to exit India, a high growth country which could be the best large country over the next decade or so.


On the other hand, it would have given opportunity for some deep pocket company. It will be tough for another MNC to come in and buy and so it will have to be an Indian company which wants to enter the cement sector. But the sector has already consolidated and to that extent, a positive impact on the stock price is unlikely in the near term.

If this deal goes through, there could be an open offer. Could this lead to re-rating of smaller cement companies – Dalmia, Shree, India Cement, JK? Is that a better play?
Yes some of the smaller ones could get a positive impact but not necessarily Shree Cement because that is already valued very highly. Some of the rest of the cement companies which got sold out recently because of the cost pressures on the cement industry and expected bad results over the next one or two quarters, could see some rub off effect.

What about the other cement companies? They have been in focus, we have seen the run up in share prices as well. UltraTech is set to increase capacity. Radhakrishan Damani has hiked his holding in India Cement. Puneet Dalmia of Dalmia Cement has been talking about consolidation in the sector as well?
There are two, three parts; one the industry is reasonably consolidated now vis-à-vis what it used to be but to that extent a very high consolidation from the current levels I think in my view is unlikely.

Secondly, there was an expectation of strong volume growth and improving profitability in the cement sector and now that volume growth has remained muted and cost pressures have been very high, the next few quarters will be tough for the cement industry. Longer term I am positive on cement but I would think that the right kind of buy levels for many of the stocks will be lower than current levels.

Some of the smaller companies because of an expected M&A valuation rerating, could do well but among the larger ones where there is no M&A possibility. I do see any near term upside.