Not bullish on hospital stocks in near-term; FMCG stocks good to buy on dips: Sandip Sabharwal

Sandip Sabharwal, asksandipsabharwal.com, says The overall hospital space is well-placed long-term. Near-term, given the way many of the stocks have moved, like the leaders sort of like Apollo Hospitals, Fortis, etc, the valuations have become a bit excessive, so that is the near-term concern. The valuations of Narayana Health have remained a bit subdued vis-à-vis the rest of the hospitals. As they are going for large-scale acquisition in a developed market, it would not be incrementally positive for the near-term stock price movement

Let’s talk about the insurance space, given the murmurs around the fact that the regulator IRDAI is going to look at capping the limit in the bancassurance channel. How are you looking at this insurance space or the news related to that space right now?
Sandip Sabharwal: There are two things. One, the overall performance of the insurance companies as such. The insurance was supposed to be a sunrise sector, supposed to grow rapidly because of low penetration. Companies are supposed to make decent margins. But many of those stories have not planned out the way it was expected. Growth has been moderate. Profitability has been up and down and very unclear on the entire VNB and the accretion to the overall valuations of the insurance companies.


The news flow is not so fundamental because, once channel restrictions are placed, if the growth is there, it can go through some other channels. But the bigger issue for insurance companies as long-term wealth creators has been the other fundamental parts and those keep the sector down. So, I do not find the stocks in the sector exciting per se.

What has been exciting of late is the entire action in the hospital space. Of course, that news is coming in as far as Aster DM and that potential deal with Blackstone is concerned and the other one we are tracking is Narayana Health, which is on an acquisition spree to beef up its international business. Do you track these ones closely and a word on the hospital space?
Sandip Sabharwal: Overall, the hospital space has been doing well because of the fact that they have got significant pricing power. People want to go to the known chains and because of the penetration of insurance, the preference of people to go into established hospitals and spend as much as required because they are covered by insurance has been increasing. The overall space is well-placed long-term. Near-term, given the way many of the stocks have moved, like the leaders sort of like Apollo Hospitals, Fortis, etc, the valuations have become a bit excessive, so that is the near-term concern.

Of course, the valuations of Narayana have remained a bit subdued vis-à-vis the rest of the hospitals. So, for them to go and make a large-scale acquisition in a developed market is slightly intriguing and to that extent I would think that it would not be incrementally positive for the near-term stock price movement.

What is your view on HUL?
Sandip Sabharwal: Like most of the FMCG companies, HUL has also corrected over the last few months. So, there was an expectation that there will be a revival of consumer demand post monsoons, but that revival obviously has got delayed. We have seen the way Britannia plummeted or you see across the board, Tata Consumer, HUL, Dabur, all of them have fallen 20% to 30% from the top. So, normally when most of these consumer stocks fall around 30% from the top, it does become a good level to buy because these are long-term growth stories and after two years of slow consumer demand, a consumer demand revival should be imminent at some stage.

Once the revival starts, it usually would last two to three years. I would think these are reasonably placed, upside to downside, and reward to risk should be favourable. HUL, I was looking for near Rs 2200-2250 to buy, let us see how it goes. But many of the other names also seem to be offering reward to risk where downside risk could be 5-7%, but upside could be 15-20%.

What is your take on Divi’s Laboratories because this one has had a very rough patch in between, isn't it?
Sandip Sabharwal: Yes, the performance of the company has been volatile. It was a company which did very well for many years, then it went through a rough patch for some time where the management continued to guide for higher profit margins and growth, but it did not come through. And now we are again at a point of time in the cycle where some of the products which it has developed in collaboration with the larger pharma companies could go into commercial operation and the next couple of years could see growth coming for that.

I think that has led to optimism and the way the stocks moved. So, the stocks moved up substantially. So, the challenge is to buy the stock at levels where the valuations are excessive and then a period of low returns from the stock could start. So, people should wait out, for many of these stocks it is better to wait out for some bad news, some bad result or where the stock on such news tends to correct very sharply and then take an exposure rather than take an exposure when it has trended up so sharply.

You said you will wait when you talk about Divi’s, but in the pharma space, is there any stock that you are liking right now?
Sandip Sabharwal: In pharma, the stocks which we have traditionally liked and which we have held include Sun Pharma, Lupin, etc. Among the larger names, I do not invest so much into smaller pharma companies because it is tough to evaluate their business model as it is challenging to evaluate some of their balance sheets where cash flows do not seem to be there but profits get reported. I would like to stick to the larger names from my perspective.