Defence is a multiyear theme! These 3 private sector companies are a good buy: Sandip Sabharwal

Companies in the defence sector could deliver strong earnings growth in the coming years, but Sabharwal advises investors to stay with private sector companies and stay away from PSU stocks, he told ET Now.

“Historically, we have seen that in PSUs, there will be growth, but there will be hiccups in between, and margins will not improve. I think whoever is playing a margin improvement story in PSU defence companies, you have to assume that margins might compress,” he said.

What has been powering rally in defence space? Growing order books from the government led to a rally in defence stocks in the recent past, he said.

Private sector companies are better placed to play this theme in the long run, suggests Sabharwal. The overall contribution of defence-related business might be small today but should grow in the next 5-10 years.

“There are other companies on the private sector side who will do good work, but for them, defence as a percentage of total revenue will be small now but might be big in 5-10 years,” highlights Sabharwal.

Sabharwal likes Bharat Forge, M&M and even to play the defence theme. “I typically do not buy too many PSUs in the sector,” he said.

IT and Metals – ‘Sell on Rally’

Commenting on sectors looking weak are Information Technology as well as metals, he said.

IT is likely to see a rub-off effect of the global slowdown in the economy worldwide. Hence, investors should avoid going overweight in this sector.

“Directionally, for IT, if the slowdown continues, then this year will be very tough for these companies. I think that this is a sector which is a sell-on rally. Same is with metals,” he said.

Metals benefit when the rupee depreciates because commodities are dollar-linked, but if global growth is subdued, these stocks might come under pressure, explains Sabharwal.

“We have seen some domestic uptick in steel and other metal prices because in rupee terms, the prices have gone up, although in dollar terms, they have actually been stable or declined,” he added.

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