Stocks to buy: Stay away from auto stocks for now: Sandip Sabharwal

If the three major factors on the health front, in the debt market and also on the currency front are against us, what explains the market resilience?
That is a question which all of us are asking ourselves. I think all traditional linkages seem to have broken down in the sense that typically you would think that if the dollar index rallies sharply, then we should see a selloff in emerging markets. The kind of fall we have seen in bonds, takes us into a space where today a lot of global bond funds are looking at giving a negative return if bond yields sustain at these levels for the full year. That has never happened in the last 50-60 years. And obviously there is the fear of Covid resurgence. I think a reverse logic works in the market these days. If things are not improving fast enough and liquidity will remain ample, interest rates will not be taken up, that will help sustain the market.

But if you actually look at FII flows and the data, we have seen that some impact of the dollar rally and FII flows have actually been negative in the recent past barring one or two days. A large amount of buying in the market seems to be coming from domestic institutions. I think it has to be some of the insurance companies because mutual funds are still seeing net outflows on a net basis. In this context, the result season becomes very important because unlike the last two quarters where expectations were low and companies delivered much better, now expectations are pretty high.

Many of the stocks are taking into account a continued significant improvement in profitability, which in the light of the commodity bull phase that we have seen and the squeeze on margins that could create is something which needs to be monitored.

Why are auto stocks and metal stocks moving up in a synchronised manner? What is good for steel is not good for autos and what is good for autos is not good for steel which is raw material prices?
Auto stocks actually saw a decent correction from the top. Most of the two- wheeler stocks are off 20-25% from the top. Stocks like Maruti or any of the other stocks are down between 10% and 25% from the top. Now it is a bounce back trade where people are seeing value given the reported numbers which are coming out for March. But I would say that these reported numbers of March should be taken with a pinch of salt because significant price hikes have been announced from April 1 by most of the auto companies after the price hikes in January. So there will obviously be a push of inventory into the market and pre-buying in March because a 3-5% price hike in auto is quite significant. The key will be to monitor data as it comes out from April where we will start seeing some softness. My guess is that the auto sector bounce back does not create an opportunity to buy afresh. It is best if we stay away as of now.

How much of the IT growth is yet to be pencilled in?
There are two factors to be considered in IT stocks. One is what is the kind of growth outlook that we are looking for? In my view 8-10% kind of growth is already factored into the stock prices. Whether these companies can see double digit growth or not, needs to be monitored and if they can do that, then we could see some more upside.

The second more important thing will be the margin outlook because if it is uncharacteristically strong vis-à-vis most of the other emerging market currencies and to that extent what is the impact of the rupee strength on their margins is something we will need to see. Cost savings will continue because travel is still restricted and that is one lever which these companies will still be able to use to do short-term margins. But the margin outlook will determine further moves in these stocks because most of the growth is more or less factored into these prices.