Forget cowboy antics, be defensive: Dipan Mehta

“Some of the sheen of is off and investors will trade in it a bit more cautiously going ahead and so will investors. Our view is generally negative on LIC but it is not the right time to sell as well,” says Dipan Mehta, Director, Elixir Equities.






Do you think it is a cowboy attitude to try and jump in and catch the fall right now wherein there is so much uncertainty around the global markets?

We are not in the right kind of frame of mind to take a plunge at this point of time because this bear market or a correction in a bull market – whatever you call it – is just getting elongated. If it was a typical correction, then one would have seen the markets starting to turn around but there are no such visible signs and even the reasons for which we are seeing this recent correction or bear market, there is no visibility of a timeline as to when they will end.

Take inflation for example, we do not know from which month onwards it will come back to mean which is 1% in the US and 3-4% in India. We do not even know at what point of time that will happen. No doubt the base effect will start to kick in but that is at least six-seven months away.

The second big risk factor is the war in Ukraine and its associated impact on the oil market. Even there there is no visibility as to when and how it will end and whether oil prices will correct after that. There are too many unanswered questions and in such times, it is better to not to have a cowboy attitude and just be on the safer side and take defensive positions and create as much cash as and when you have an opportunity to do so.

With money getting expensive, how do you approach banks? I know you have been a fan of the big private banks, but would you extend your list to the smaller ones by any chance?

No I do not think so. The larger banks are well equipped to handle the increasing interest rate scenario. They are sitting on very good CASA and so when the market gets competitive, they have the advantage of CASA, low cost deposits and that certainly will help them outprice the mid and small-sized banks.

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The way credit growth is improving and the kind of system that the large banks and the kind of network and the technology edge which they have ensure that even on a larger base, they can grow at or faster than the industry growth rates and gain market share at the expense of the mid-sized banks and midcap banks which intrinsically have got fundamental problems. FOr example,

is too much into micro finance; there are uncertainties around RBL’s top level management and NPAs;

does well only when micro finance and some of the vehicle lending does well.

So if you go down the line with individual tier II banks, you will find that they have many chinks in their armour and many pain points which tend to come out when the going gets tough. So I think there is safety as well as growth in the largecap banks and that is where I would like to stick to. The track record of the past 5-10-15-20 years show that the larger banks have created more value than some of the midcap banks which keep getting into trouble every few years or so.

What is your view on pharma?

Pharma is in a bit of a pickle at this point of time and one cannot paint all the companies with a single brush. One could be extremely selective as far as pharma is concerned and focus on the companies which are in spaces where there is still growth and less competitive intensity and I would rate that pharma companies which are focussed on the Indian domestic pharma market they are far better placed than the ones which derive 40-50% of the revenues from the US generic market.

Companies which fit that kind of criteria are

,

and to an extent among the larger ones,

as well as Dr Reddy’s which have got large exposure to Indian domestic market and speciality products as far as US markets are concerned. Then there is the dark horse

where we are very impressed with the kind of progress made on the specialty branded products business. As and when that starts to scale up, we will see more certainty, more visibility in earnings and that will trigger a higher price to earnings multiple.

One has to be very selective as far as pharma is concerned and avoid stocks which have got large exposure to the US generic market. That is one market which is causing a lot of stress and the competitive pressures over there are not going to ease in the near future. But valuations have come off and rupee depreciation generally benefits overall pharma companies. One should keep that in mind as well.

What is your take regarding LIC? Should one sell out or continue holding the stock?

Overall LIC has been a big disappointment and the clear reason in my opinion is that postponement of declaring the enterprise value to 30th June and not when the results were declared. That is a question that we need to ask the management. This is something they should have figured out before going public because if every other insurance company is coming out with its EV at the time of its results, then why not LIC?

We are going to value insurance companies based on their enterprise value only and not on PE multiple or price to book. We do not have that very important number to value LIC and that has disappointed many investors especially us.

There is no point in selling LIC stock and booking a huge loss at these levels. So we might as well just stick around, stay invested and hope for the markets to start doing well, because the enterprise value of LIC is very sensitive to overall market conditions as well. As and when we see the market conditions improve and better disclosures from LIC and how they are making progress on some of the strategies which they outlined during the IPO, then perhaps we could see an upswing in the stock price.

But by and large I think some of the sheen of LIC is off and investors will trade in it a bit more cautiously going ahead and so will investors. Our view is generally negative on LIC but it is not the right time to sell as well.

Do you have a shopping list ready for when the market falls and the dust settles down or the poison gets out of the system? Are there any names other than the largecaps which we have spoken about?

I think it is the usual names. India has got a plethora of

companies and one can look at those companies once you are certain that this particular trend is over and done with. When we are looking out for a situation where instead of lower tops and lower bottoms, we have higher tops and higher bottoms, we know that the worst is over. At that point of time, in every sector, one should buy the market leader or a company which has got a slightly differentiated business model over there and that should do well.

This formula has worked well over the past 25-30 years or so and there is no reason why it should not do well in future as well. We spoke about the banks, the top four, five banks are good.

In the technology space

,

look good but I would put my money in midcap IT where valuations are now reaching reasonable levels and they will continue to grow at a higher pace than some of the largecap IT companies like

,

,

,

.

All of them are on a very strong wicket. Then there are the auto companies which may get into a nice zone over there because most of the problems are behind the auto companies and especially the passenger vehicles and commercial vehicles. Those may come into reckoning. And of course there is the engineering and construction because the capex cycle has moved up. So L&T needs to be mentioned over here.

Look at the top 10-15-20 Indian stocks and once you are sure the market has turned around, these will be the first off the block. What is really happening is that till now, there is no major threat as far as corporate profitability is concerned and all we are waiting to see is how they are managing this inflation environment and how much they are able to pass on per se and they are making progress over there.

Once we have some handle on inflation and global outflows and this risk-off trade, then India will be in a very good space and one could see a lot of companies start to do very well on the fundamental side and automatically it will reflect in the stock price as well.

Harry Byrne

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