Dipan Mehta, Director, Elixir Equities
It is still not raining gains on D-Street?
Just be patient. We will have those days as well when it is raining outside and it is raining money in the market as well. So just be patient. This is a classic bear market or a deep correction in the bull market and investors have to just wait it out. There will be a silver lining in all these cloudy skies. We just need to hang in over there and there are some positive signs coming through. The way crude oil has corrected is very beneficial to the inflation fighting strategies which a lot of these central banks are undertaking. I am generally optimistic but I feel that we may have some more way to go. This is not a short quick kind of a correction and is going to drag on for a longer period of time.
Where have you been a buyer or would buy once the poison is out of the system? Also, what have you sold in the recent market decline?
We are generally trying to be a little light as far as commodities are concerned. I have not been a great fan of metal stocks per se and other commodities as well and that is what we have been generally underweight on. It has played out pretty well because the commodities stocks have corrected at the highest over the past few trading sessions.
Apart from that, a very important earning season is coming up and typically I would like to buy after seeing what the managements have to say in terms of how the quarter was and what their outlook is for the rest of the year. Right now, it is the best time to just wait and watch for long term investors, especially those following fundamentals and see how the earning releases are coming through and how companies have actually managed the kind of inflationary environment which they are in.
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The most important question is whether there has been any impact on demand or not. That was not visible at least till the last quarter but higher prices had an impact on demand. So that is the key question that we will be asking businesses which are domestic focussed businesses. We are also externally focussed export-oriented businesses whether they are getting any feedback from their clients about how they would slow down on spending because of the emerging recession that may happen because of the Fed action.
If you bought metal stocks when their price to book had gone down to 0.6-0.7 times, you have made money. Will that logic hold true again?
That may hold true but when you start buying metal stocks, then your energies are focussed just over there. You get too many high frequency indicators and that gets you drawn in more and more into these stocks and to may be trading or investing.
There is a whole fantastic market outside of metals which may not be as cheap in price to earnings but may deliver fabulous returns. I would like to focus over there. It could be banks, it could be technology, consumption oriented stocks, automobiles, engineering and construction. There is a whole world of non-commodity based businesses which will benefit tremendously with lower commodity prices and which may be the situation going ahead and those stocks also have corrected.
These are great businesses with very high ROIs and very strong moats. This is the time to look at buying very strong businesses which may now be available at reasonable valuations and that of course is the key to getting alpha in your portfolio. Nobody has got great returns if you look at the last 20-30 years or so buying into commodity stocks but if you bought into software, banks and consumption stocks, that is where you got the multibaggers and that is how you created a lot of wealth in the stock markets. This is a great time to focus on those sectors and stocks than metal companies where there is always news flow which gets you drawn into them.
With the way the rupee has been performing, is there a case for rerating the pharma companies? Are things looking better from a Dr Reddy’s to a Cipla?
Pharma is all about being highly selective. I would still avoid companies which have got a large portion of their revenues coming from the US generic market. There are too many risk factors over there; the USFDA inspection being one further correction trigger and product prices being the other one.
I would like to go a bit cautious with companies where more than 25%-30% revenues come from the US generic market. One needs to be a bit cautious. The only exception is
which follows a slightly differentiated strategy and is focussing on specialty products in the US and that can be a big money spinner for them.
Within the pharma space we should like to focus on companies focussed on branded generics in India like Alchem Laboratories or
which are predominantly focussed on the Indian pharmaceutical segment. Then we have the contract manufacturers and we are still quite bullish on the likes of Divi’s Laboratories. If one has a longer term two-three year view, even companies like should do pretty well because they are sitting on good molecules in terms of order book position as well as what may go from phase three to phase four for contract manufacturing companies.
So one needs to be a bit selective and the key mantra is to avoid companies which have got too much exposure to US generic markets.
You are sticking to , , Coforge, . Did you accumulate positions recently?
We are still very positive on these companies. The usual disclosure is we and our clients have invested in them. The logic is that I have been tracking the IT industry since 2000 or thereabouts and that is almost 24 years. After a long time, I am seeing that the growth rates of the midcap IT companies is equal to or higher than the growth rates of the largecap IT. That is a very rare phenomenon ans it has hardly ever happened.
If you look into the history of software companies like Infosys, Wipro and TCS, they always grew at a faster rate than the likes of
, Mphasis or any of the other IT companies per se. But this time around, there is a sea change and the midcap IT companies are able to deliver a solid high teens type of a growth rates year on year whereas the large cap IT are still struggling with low double digit type of growth rate and that is a phenomenal opportunity to buy into these good quality midcap IT companies.
You get the same benefits and attributes as largecap IT in terms of return on investment, corporate governance standards and dynamic management. But the growth rates are higher and for higher growth rates, one needs to be prepared for higher PE multiples. That is the thumb rule over here. So yes, very positive on these companies and they have found a space for themselves within this industry. The next three-four years look exceptionally good for midcap IT companies where they will continue to grow at a pace higher than the largecap IT. That is where the opportunity is.
You track the media space very carefully. Now with all these IPL rights etc coming, which media stocks are looking attractive to you?
Media is not a clear picture at this point of time. These companies are struggling with advertising revenues and all of these media companies which have got into OTT ventures, are not shaping up as well as they would like to.
A considerable amount of investment is required in content and that is eating into the profit margins of media companies. By and large, we are neutral to underweight on media stocks. No doubt they are cheap compared to what their historical valuations have been but there is no linear growth rate in these companies as of now and entertainment patterns are changing.
These companies are facing tremendous disruption and competition from new generation OTT players the likes of Netflix and Amazon Prime and some of the other international OTT players which are all present in India. When there is so much uncertainty, I would like to avoid the sector. If you still want to play the media or entertainment, PVR Inox seems to be a good bet. The exchanges have recently approved their merger and if they get the approval of the Competition Commission, then the merger entity could be quite an interesting one.
It could have a lot of pricing power and a lot of negotiating power with the producers as well. I think with Covid well behind us, as far as blockbuster releases are concerned, we could see some very good numbers coming through from the combined entity. So that is one event which we should watch out for and in any case we are quite positive on consumption oriented stocks and these companies could do pretty well over the next maybe a couple of years or so.
Three foreign brokerages have come up with a buy on LIC. It started with JP Morgan. Yesterday, there was a buy report from Goldman Sachs also. What is your view on LIC?
At these levels, it is not very difficult to justify a buy on LIC. It is perhaps trading at below it’s enterprise value as well and fortunately the management did not declare its enterprise value when it announced the numbers. That for me was extremely disappointing and something which was not factored in. How can an insurance company declare results and say we will do the enterprise value a few weeks later or so? It is not just done. I think you would never accept that with private sector insurance companies like
or . If you do not have the enterprise value, how can one value an insurance company and that is my simple question.
I think intuitively you feel that LIC is attractive at these values and you may get a 15-20% type of a trading rally in it as well but in markets like this, we want to buy stocks which when the bulls come back will give three to five, 10 times returns over the next three, four years or so.
I have seen this happen in this pattern in the past. In a bear market, if you are careful and have done your hard work and have bought good quality companies with strong managements and strong growth prospects, then they can do wonders two, three years down the line. That is how you get the alpha in your portfolio. I do not think LIC fits that kind of a criteria, given its size and given the way the management has handled its disclosure requirement, it does not give a good feeling at this point of time. Right now, our focus is more on small and midcap stocks.
How are you shopping? Are you looking at value stocks? Are you looking at growth stocks? Are you looking at new winners? Are you betting on new industries which are getting created because there are a lot of ways to prepare your portfolio?
Only three things work in the market; growth, growth and growth. That is all. We are chasing that and at this point of time, growth is available at reasonable valuation. It is a simple mantra one can follow and one cannot go wrong over there. So where is the growth going to be? We have discussed midcap IT. We are pretty certain that these companies can deliver a 15-20% type of top line growth rate and if they are at reasonable valuations around 20-25 times, those are good levels to enter.
Auto OEMs look good but even more interesting is the auto ancillary space. They have been through a long bear market because of what the OEMs have gone through but they are not impacted by the EV disruption which is taking place and a lot of the Indian auto ancillary companies are suppliers to EV products as well. Minda Corp,
, Bharat Forge, – all these companies will be at a different level in the next three to five years.
Third is the banks. We have the advantage of buying largecap banks like HDFC, ICICI,
, . These companies will be the market leaders over the next three to five years or so and one you could expect excellent returns; I am not saying multibaggers but 25-30% type of returns can come through from the large cap banks per se. One could add even to that list given how much correction has taken place.
A nice capex cycle is also taking place right now. So engineering, construction companies the likes of L&T and and going down the line,
should also do exceptionally well. Right now our focus is more on good quality businesses, high ROI, low debt, dynamic managements available at reasonable valuations. That kind of a strategy will do wonders for the next three to five years delivering a portfolio return of at least 25-30% compounded over the next three years or so.