He said the defence sector has gone through multiple phases, from broad-based rallies to corrections, and is now entering a more selective stage.
“Defence stocks had a phase two-three years ago where everything moved up. Then we saw a correction and now we are at a phase where moves are going to be selective,” Sabharwal said.
Commenting on Hindustan Aeronautics (HAL) and its civil aviation foray, Sabharwal sounded cautious, pointing to execution challenges.
“HAL has been an underachiever in terms of execution. They have orders, but execution has lagged. The civil aviation thing is four-five years away, so I would not be so excited on HAL per se,” he said.
Instead, he prefers companies with stronger execution records.“Companies with a strong execution cycle like Bharat Electronics, which also came out with good results, could continue to do well. We need to be careful where we are investing in defence,” he added.CV Cycle Turns Supportive Despite Cost PressuresOn Tata Motors’ commercial vehicle (CV) business, Sabharwal said recent results were broadly in line, with some pressure from rising commodity prices.
“Because commodity prices have moved up, some margin impact is there,” he said.
However, he noted that most auto companies are confident about passing on cost increases. “They will be able to pass it on because they need to increase prices by maybe one to one-and-a-half percent. It is not the entire basket which has moved up,” he explained.
Sabharwal remains constructive on the CV cycle, citing improving demand trends.
“The CV cycle is on an up cycle and Tata Motors commercial vehicles have done well. The outlook remains positive for the next two years with replacement demand and fresh demand coming in,” he said.
He added that sustained economic activity will be key.
“If IIP growth continues at 7.5% to 8%, we could see high single-digit or maybe low double-digit growth in the CV segment, which will be positive for the sector.”
Valuations: Ashok Leyland Expensive, Tata Motors CV More AttractiveFrom a valuation perspective, Sabharwal said Ashok Leyland, while operationally strong, appears fully priced.
“Ashok Leyland has been the preferred pure-play CV stock, but the move has been significant and valuations are not really attractive right now,” he said.
He prefers Tata Motors CV on relative valuation.
“Tata Motors CV still could have more efficiency gains. On corrections, that could be a better bet from a valuation standpoint,” he added.
ITC Seen as Value BuyOn ITC, Sabharwal described the results as solid across segments, including cigarettes and FMCG. “Results were pretty decent on both the cigarette and FMCG side,” he said. He also highlighted the positive impact of dividends.
“The dividend announcement is positive. It is almost a 2% dividend yield on the current stock price,” he noted. Despite recent sentiment turning cautious, he sees valuation comfort.
“At these valuations, the stock is around 18 times next year earnings, which is not expensive for an established consumer company. There is a value buying opportunity here,” he said.
However, he cautioned that volume trends will be closely watched after duty changes.
“There will be slight scepticism in the first two-three months on how volumes play out. It is not a stock that will run up sharply, but it could be accumulated with a return expectation of maybe 12-15%.”
Swiggy Faces Competitive and Profitability ChallengesOn Swiggy, Sabharwal highlighted the difficult trade-off between growth and profitability. “You either slow down growth to improve margins or continue to grow at a blistering pace and make more losses,” he said.
He pointed out that moderating growth could also impact valuation narratives. “If growth moderates, then how to value the company becomes a question because most analysts are bullish due to high growth,” he said.
Sabharwal also flagged intensifying competition. “This is a very competitive market and I do not think the competitive intensity is going to go down. Players like Reliance, Amazon and Zepto are becoming more aggressive,” he said.
He expressed scepticism over ambitious price targets.
“What companies indicate about reducing losses is more about what they hope to do rather than what can actually be expected. It is very tough to invest in these companies, and I do not know how brokerages come up with targets of 550-odd levels,” he added.
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