Cautious now; not doing fresh purchases: Dipan Mehta

Dipan Mehta, Director, Elixir Equities, says “the likes of Tata Tech, KPIT and Tata Elxsi are trading at premium multiples as compared to other peer group companies, higher than the likes of TCS, Infosys, Wipro, HCL Tech as well. So, although the growth rates are good, some of it has got priced in and it is a sustainable business model, but to get a good return from these stocks you need to buy them maybe 15%, 20%, 25% cheaper which is possible if there is an overall correction in stock prices.”

Have you been buying in the last one week or so? Have you added on to some positions or looked carefully or not much activity, really?

Dipan Mehta: I think the view remains very cautious at this point of time and we are in a wait-and-watch kind of a scenario. I do feel that stock prices need to correct significantly before we can start to look at buying. Overall, the structure of the market has certainly weakened and there is a lot of concern around high valuations and what is happening globally as well in terms of inflation, interest rates. So, from that point of view, I just want to be a bit cautious. Right now, we are not at all in the market to do any fresh purchases.

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What is your thought on the IT sector as well? We have not seen much of a recovery coming in there. What is it that one should watch out for now? In the near term, anything looks exciting or maybe just wait out for FY25 now?

Dipan Mehta: IT eventually will start to do much better than the rest of the market. To an extent, it is under-owned and maybe they have got a problem for the next two-three quarters, maximum a year before IT spending comes back strongly and this new artificial intelligence is turning out to be another big wave for tech companies. So, from that point of view, intuitively, IT should do well in the rest of this year and next year as well.

I am just waiting for the right triggers and the right triggers will come when the companies announce their quarterly results maybe for March quarter or June quarter, I cannot say and managements are far more optimistic and we actually see progress in terms of billing from a lot of the large contracts that IT companies have won over the last two years or so.

One big difference about this slowdown in IT tech spending and IT industry per se is this time around the order book position is very strong. New engagements are growing. It is just that it is not translated to billing. Once that starts, you will see the growth rate surprising you. But right now, given their risk-return profile, the fact that billings have not started for a large number of new contracts, I want to wait and watch and hold on to our positive view and at an appropriate time, when we are sure that the volumes are now going to start picking up. That may be a good entry point.

Do you have any part of your portfolio in the startup universe or the unlisted side of the market because that is also buzzing a whole lot? I was speaking recently to a private equity guy and he was saying that when the economy does well, then huge dollops of liquidity get sucked into the unlisted part. It could be startup, it could be unlisted bigger companies. HNIs are moving towards that side

Dipan Mehta: I do not have the kind of understanding about the startup sector and what really ticks over there and which companies to buy. There is so much choice in the secondary market itself in the listed space. So many new listings are taking place in the last two years or so. So many concept stocks also have got listed. Intuitively, I feel that in the startup space, the valuations are even higher than in the listed space expectations are running high and there is a lot of money chasing I would say businesses within the unlisted space.

From that point of view, the best returns will still come from the listed space. You could get lucky and have a 100-bagger in a startup space but to do that you need to invest in maybe a few hundred such startups to get the right one and that is not everybody’s cup of tea.

I want to talk to you about engineering design companies like LTTS or Tata Technologies that got listed recently. They are not run-of-the-mill IT companies, but a very specific niche and their clients are doing well. Are you finding comfort in these stocks or will you stick to the traditional IT company business models?

Dipan Mehta: You could add Tata Elxsi also to that list. I feel that given the present situation these companies are in the right place at the right time. Because especially when it comes to Tata Technologies and Tata Elxsi, they are very much focused on the automobile sector where there is a huge, I would say, disruption taking place, a revolution is taking place

Electrification is the way forward and that has been well established and companies like Tata Technologies and Tata Elxsi are helping companies go on the path of electrification. There are many products. They have got certain patents also over there and they have good domain knowledge, which is why I think that even when there is an overall slowdown in spending, these companies should do well because all the projects are multi-year projects and they are transformational projects for their customers.

But, some of this optimism and higher growth is priced into these stocks. The likes of Tata Tech, KPIT and Tata Elxsi are trading at premium multiples as compared to other peer group companies, higher than the likes of TCS, Infosys, Wipro, HCL Tech as well. So, although the growth rates are good, some of it has got priced in and it is a sustainable business model, but to get a good return from these stocks you need to buy them maybe 15%, 20%, 25% cheaper which is possible if there is an overall correction in stock prices.

Let us just talk about some of these private banks. Everyone keeps talking about HDFC Bank now. But what are your thoughts on something like ICICI Bank, Axis Bank? You do not see those coming so many in terms of the names that come out there. Everyone only talks about HDFC Bank. What are your thoughts on private banking space?

Dipan Mehta: Private banks and all of these companies which you named are, I would say, amongst the few pockets in the market which are trading below their historical valuation ratios and that certainly gives an opportunity. It is just that to an extent they are over owned and there is certain stress in the banking sector in terms of raising resources because of a tight money policy followed by the RBI.

But over a longer period, two-three years, these companies will be outperformers. I cannot understand that if you are positive on the India story, how can you be negative on HDFC, Kodak Bank, ICICI Bank? Typically, banking sector does at least 30-40% higher growth rates than the average GDP growth rates and these are companies which have got the brand in place, their risk management systems, technical, technological platforms, human resources, a lot of the challenges they have faced and they have kind of conquered those challenges as well. They are well-managed companies. They have gone through a lot of turmoil in the past but now have emerged stronger. I am very positive on the private sector banks and even in a falling market I expect these banks to outperform by falling a little less than the rest of the market.

We have seen how this entire hospitality space got rerated in the last couple of years. Even largecaps have become multibaggers, like Taj Group Hotels, ITC. Now we are looking at SAMHI, Surrendra Park Hotels IPOs. One part of playing the travel bug phenomena is via these hotel stocks. But why has VIP halved in trade in the last six-eight months? It is the only listed company which is a pure play travel and baggage company. VIP in the last one year or so, slipped from Rs 700 odd to 460. Is it a good business to get into or have you looked at it?

Dipan Mehta: I like the story of VIP Industries and it is a perfect play on premiumisation. It is a great play on increasing the organised market, increasing their share from the unorganised market. And look at the way air travel and air passenger traffic is growing and that certainly generates demand for soft luggage and quality luggage players like VIP. So, it is a great story and they have had their challenges in terms of earning volatility because of demand mismatch and raw material prices.

But by and large, it is a well-managed company, a solid brand and I have not really checked at what valuation it is trading at, but I think at a reasonable price earnings growth, it is a good story to invest in and the most important company to buy in the travel space you have forgotten is InterGlobe Aviation and again disclosure we and our clients are invested in it.

It is India’s largest airline company with almost 60% market share. Okay, the next couple of quarters may be soft because of grounding of planes, but there is massive capacity addition happening in FY25 and beyond and it is a nice business now. There is a great deal of price discipline and I think this company in terms of valuation is at a very attractive trading price.

Roy Walsh

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