It is looking not great, but it is looking better than when we spoke last time. Has the storm come and gone?
Dipan Mehta: The thing about markets is you come to know about storms whether they have come and gone and bottoms have they been created or tops they have been created only after a few weeks. But I would say that this budget clearly is a step in the right direction in terms of reversing the slowdown which we have been seeing in the last two-three quarters or so. How much of an impact it will have, only time will tell. Also, largely the largecap stocks are reaching that reasonable valuation phase. There is still a lot of overvaluation in some of the midcap pockets, but I think that also will get corrected over time. So, we are not at the sweet spot as yet where valuations are mouthwatering and it is no brainer to go and buy stocks, but we seem to be getting over there.
When we spoke to you last, you were quite bearish actually. Your view was that raise cash, sell, do not buy. Has your view changed or it is still on the bearish side?
Dipan Mehta: I am still very cautious and I do not want to part with money that easily and if there are opportunities to raise cash levels, especially companies where we are seeing high valuation and slowdown in earnings, that opportunity also we are still persisting. It is just that we are watching the market.
This budget was, I think, very good in our opinion. We did not expect and I think nobody in the market expected a up to Rs 12 lakh income exemption, that is going to throw up a few opportunities.
We are trying to evaluate what opportunities do get thrown up. At the same time, we have seen a very deep correction in a lot of the capital goods companies, where there is still scope for these earnings to improve over there but valuations certainly have corrected a little bit over there. So, from a situation where it was highly overpriced, extremely expensive, we are getting to a lot of normal type of valuations for many businesses.
I saw you smiling when we were talking about Reliance versus Trent. Which side of the camp are you on?
Dipan Mehta: No, we are not going to take sides over here, both are great companies. But I do not think that that is the reason for Trent correcting. What Nikunj said, that it is expensive and we definitely will see a slowdown in earnings, it is just not sustainable, base effect will come into play and in markets like this certainly the high PE stocks are going to be targeted for correction.
A lot of players who have got into such momentum stocks look to exit, so we are seeing a correction. Reliance, it is getting clearer by the day that it is going to become more like a holding company and we do not prefer to buy holding companies.
When Jio’s IPO comes or retail IPO comes, that will be very exciting times for minority shareholders and that will be good opportunities for long-term investing. But at these levels in Reliance, I do not see any great trigger.
Whenever the IPO comes, some value unlocking will be there, but we will see migration of shareholders from the holding company to the new listed entities.
This whole talk that capex is over, consumption is the way forward, build India is over, buy India is the new theme, would you concur with that?
Dipan Mehta: Not really. See, what has kind of rattled the market is that the actual capital outlay for the government is not as exciting. But it is not the money which is at play over here, it is the actual execution. And even in this financial year, we have not been able to meet the capital expenditure targets of the government.
So, from that point of view, more reasonable amounts have been kept. And if the kind of execution improves, capital goods manufacturing companies will still do quite well and the correction which we have seen, as I said earlier, is an interesting opportunity and a lot of capital goods companies may be reaching that fair value.
One thing we need to note is that a lot of them are sitting on very good order book position and also, a lot of them are looking at international order inflows across the board, so that I think is we are reaching a nice sweet spot hopefully sooner over there especially given the earning visibility. And by the way if liquidity improves in the system, interest rates are reduced, then even more capital expenditure will take place and the government will certainly try and step up on its side.
So, anything that is looking interesting within the capex theme, which may have corrected a fair lot?
Dipan Mehta: See, according to us, first usual disclosure, we and our clients are invested, Larsen and Toubro came with a very good set of numbers and very strong order book position also and it is so well diversified order book position, projects within India, outside India as well and that is one stock which continues to show kind of compounding of earnings. And if you strip out all the kind of subsidiary companies which will never be unlocked still the valuations are reasonable.
I think Afcons is also interesting as a company to look at and so on and so forth. I was very impressed with KEC International also, numbers were pretty impressive, very strong order book position.
And stocks like ABB, Siemens, which was super expensive, they have seen a huge correction over there and I think that considering that they will always be expensive in terms of price to earnings multiple, at least there is that scope that they would have bottomed out and as earnings grow, these companies also will start showing stock returns in line with earnings.
Okay, consumption will do better, but diagnostic stocks going up after the budget, that is a bit too much?
Dipan Mehta: Yes, maybe you are right. But see, diagnostic stocks last two quarters the earnings have improved. Of course, base effect is benefiting them and these are stocks where the long-term growth trajectory also is very decent and valuations also have come up from what they were two-three years ago or so.
And investors looking for safe stories to play on. Now, FMCG is no longer a safe story from that point of view. So, from consumption and from safety point of view, diagnostic stocks fit that criteria.
What is your view on staples? I am purely talking about staples. There is a school of thought which says, okay, these are good companies, but still expensive. There is one school of thought which says that, look, they have corrected for two or three years. They will never become cheap. They will never come to PE multiple of 20, 30. So if you are waiting for these stocks to come to your desired PE multiple, then you can wait forever.
Dipan Mehta: From an investor’s perspective, unless you are convinced that the top line can grow at 15% compound for next three to five years, you should not be looking at that stock at all. And from that point of view, long-term growth rates of the entire FMCG industry have come to sub-double digit. The larger ones, it is more like 3% to 4% or so, the smaller ones, 7-8% or so and those kind of top line growth rates will not really get you into any great outperformance or superior returns.
But these companies are great in terms of protecting your capital. And I agree that the PE multiples they certainly not go down much further from these levels because there are a lot of shareholder loyalty, low floating stock as well and some investors do prefer the kind of dividends which they get and bonuses from time to time. But there is no growth. These are static companies.
They are stagnant companies and when you come to the equity market, you are looking for growth companies, you want to compound your portfolio return by at least 15-16% and I do not think these companies can provide you that kind of returns over the longer term, like three to five years or so.
What about the other leg of consumption and hospitality? Where within that do you find comfort to maybe add on to positions within the hotel space in particular?
Dipan Mehta: Hotel certainly and IndiGo is looking quite interesting as well. I know optically the numbers were disappointing, but that is because of a huge forex loss and management is working on that risk factor as well. If rupee stabilises, you will see very good bottom line numbers coming through from IndiGo and their strategies in terms of expansion globally and also in terms of moving up the value chain by offering premium position, that also has been pretty well received. And there a lot of pricing power certainly has come back to the entire airline industry and the consolidation is helping IndiGo as well. So, within the consumption space, travel, tourism, hospitality are kind of the new FMCG, so to speak new FMCG sectors that one could look at. And as a measure of disclosure, we are shareholders of InterGlobe Aviation, so our views could be biased to that extent.
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