Bullish on interest-rate sensitives, after banks, the auto sector and real estate also will tend to benefit, says Dipan Mehta, member BSE/NSE. In the auto sector, the outlook could be positive for M&M and valuations are pretty reasonable at this point of time, he says. Apart from M&M, his second pick within the sector would be Maruti. He feels high beta stocks will continue to disappoint, so advises investors to exit if prices rally a little bit.
Here is the edited transcript of his interview with CNBC-TV18
Q: Mahindra and Mahindra (M&M) was the big mover today on the back of good set of numbers on the operational front as well as the topline. How would you approach that stock now?
A: We are generally positive on interest-rate sensitives. After banks, the auto sector and real estate also will tend to benefit. Within the auto sector, one has to be with the four wheelers - Maruti Suzuki and M&M - the way they have consistently performed and gained market share over the past two, three quarters or so.
So, the outlook could be positive for M&M and valuations also are pretty reasonable at this point of time and this entire trend towards the four wheeler market going towards more and more of utility vehicles just tends to benefit M&M.
No doubt competition is increasing but the company has got its business model right in terms new product launches from time to time. There is also this hope that the Ssangyong Motors that they have acquired that could be also big turnaround that could take place. So, I would say very positive on M&M and second pick within the sector would be Maruti.
Q: What is your view in terms of a lot of these high beta stocks, say something like a GMR Infrastructure, IVRCL and Unitech. All of them are expected to come out with numbers. Do you think any of them can possibly surprise on the upside?
A: Seems a bit unlikely because they haven’t done anything for the past three, four quarters or so. Consistently they have underperformed and we are seeing negative surprises from the entire space.
Interest cost have not come off nor have they been able to repair their balance sheet by issuances of fresh capital or restructuring of debt with lower interest rate loans. So, my sense is that they will continue to disappoint and if stock prices rally a little bit maybe a good opportunity to exit out of these stocks.
Unless we see rock bottom interest rates and lot of activity in the primary market and some activity in terms of appetite rather in terms of their existing assets which are up for sale and they are able to finally consolidate and repair their balance sheet these companies have more or less been written off by investors.
Q: What is your view on Polaris? How would you approach that stock now?
A: If Polaris does end up selling its services business then the question would be - what will they do with the cash because as it is they have considerable cash on their balance sheet and with this particular sale also the cash would just increase by a huge multiple.
It showed what is the utilisation for that particular cash,considering that the residual business does not have any cash requirement. My sense is that there would be a huge dividend payout or some sort of a buyback.
That would be very positive for minority shareholders because the stocks is trading at a very low price earning multiple and maybe at or around below book value as well.
It would be a huge value unlocking proposition for the minority shareholders as well as the management and maybe some of it could get passed on to some of the other midcap IT stocks.
This may be a good trend. If Mphasis and Polaris which have been generally underperformers within the midcap space, if they take pragmatic decisions to exit out of their businesses, there are large companies like Infosys or Cognizant can add far better value to those businesses than these companies have been trying to do so far.
Hopefully it is a trend and if the multiples at which they may get done it would mean that other midcap IT companies could also be the targets or at least the valuations or PE multiples could justify expansion.
Q: What would your thoughts be on the gross domestic product (GDP) data which is out on Friday? What are you working with in possible estimates or what are you hearing as the most likely number which could come out, and do you think that it is going to be market moving?
A: I don’t think it is going to be market moving. The biggest event to look forward to would be the Reserve Bank of India (RBI) policy again and unfortunately the rupee has depreciated significantly from the last RBI policy to the next one. Just on that count the RBI would take a pause on the interest rate cut which it has done so for the past two meetings.
So, that would be a major event to watch out for as would be the onset of the monsoons. However, the GDP numbers by and large historical in nature and if they are negative there will be calls for interest rate cuts and if it is positive also then also it doesn’t mean very much because the actual improvement would not be quite material.
The real growth in GDP would come perhaps only when interest rates are cut by another 50-100 basis points or we have an improvement in the overall business confidence post the Lok Sabha elections.