Keep cash in hand to buy on dips: Sandip Sabharwal | Economic Times

There is a greater probability of further downside in the market and that will create opportunities to buy which we have not been seeing for some time, says Sandip Sabharwal, analyst, asksandipsabharwal.com. One was anticipating this fall but is this the big correction that everyone has been waiting for or do you think this is soon going to get arrested?That is a tough thing to break because it depends on a lot of global factors but that said., it was very clear that valuations in India were unattractive and that is now getting reflected as the company results come out. So wherever there is disappointment, wherever there are elevated estimates -- like yesterday what happened with Jubilant Foodworks, today what happened with Havells and Asian Paints. So wherever valuations are so high that they are tough to justify, we will see a bigger cut. Also, these stocks are over owned as well. For example, Asian Paints even after the fall trades at 100 times current year earnings! Even at 50 times earnings, stocks are concerned to be expensive and this is at 100 times! So does it mean that it can fall 50%? Unlikely, but the results are putting a cap on many of the fancied stocks. It will be tough for those stocks to move up beyond a particular point of time. Now certain brokerages, who cater to a lot of FIIs, are also turning cautious on Indian equities. That could lead to more outflows. So the probability that we will see more downside overall are much greater and that will create opportunities to buy which we have not been seeing for some time. These are quality companies and there is no dearth of demand out there. The only devil is in raw material cost and that is taking a toll on their margins. When do you look at buying these stocks again -- be it Havells or Asian Paints? These are must haves in a portfolio and should those who are holding them already in their portfolio book out quickly or at least ease off a part of their holdings?That depends on how much of a particular stock you are holding. For example if you are holding 15-20% of a stock in your portfolio and your portfolio’s performance depends on that stock, then in any case you should not be holding so much. You should cut out some of the holdings and these results put a cap on many of these stocks. So, to that extent, it might make sense to get into some cash and then look for opportunities as the correction plays out. The other factor is many of these companies are saying we will take deliberated price hikes which will eventually will get some of the margins back and many of these companies have got these margins despite not spending too much on advertisement. For example, Havells’ advertisement costs were really low in the second quarter and still they got this margin hit and they expect that ad costs are going to go up in the second half during the festival season. So many of these companies have not increased their prices, so that it does not impact consumer demand. But what happens when they increase prices? That could impact the volume growth. So if there is no operating leverage, then even if they are increasing prices, the margins might not come back the way it has been expected. That is the issue with this market. The issue with this market is not that many of these companies are not doing well but the issue is very elevated expectations which are unlikely to be met. Those expectations will ebb off as the results come out and people come back to the ground vis-à-vis what actually the economy can deliver. That will be the time we look at opportunities to buy. Should one buy this decline across the board? Has the bull market got challenged or is what we are seeing just an aberration in an intact bull market?Longer term bull market does not seem to be a challenge at this stage, but we have to remember that Indian markets are hardly off from the top. There is hardly any correction whereas many of the other emerging markets corrected 8% to 20%, 20% to 25% from the top. If we look at the valuation gap, many of these markets are trading at single digit valuation whereas Indian market is at 25 times earnings assuming the elevated earnings expectations are met. So they have to give up. The same stock, the same sector might not lead the next rally. Different opportunities might come up. We need to evaluate and so we are looking at a set of largecap stocks. At the time when we think that market correction should have played out, we will see what are looking more attractive from the standpoint of providing absolute return from those levels. That is how we have to take a decision. It is very tough to predict big stocks. If we are getting Asian Paints at Rs 2,000, then we would obviously buy that but are we going to get it at a price that looks unlikely. There are different scenarios we have to play under.