Oct 08, 2012, 09.09 AM | Source: CNBC-TV18

Dipan Mehta bets on banks, capital goods; picks stocks

Dipan Mehta, member, BSE & NSE says the economy will start improving gradually because of government’s actions. According to him, over the next three-six months or so, banks will start doing well.

The government has taken a lot of bold measures over the last many days. That has provided impetus to the Indian market.

On CNBC-TV18’s special show ‘Informed Investor’, Dipan Mehta, member, BSE & NSE says the economy will start improving gradually because of government’s actions.

According to him, over the next three-six months or so, banks will start doing well. “Banks may again regain their leadership position. Second, I think capital good manufacturers also may start doing better. So, it may be a good idea to buy stocks like Larsen and Toubro or even BHEL ,” he adds.

Within the banks, he says, the preference should be for private sector banks like HDFC Bank , Axis Bank , Yes Bank , and IndusInd Bank . He also feels a large percentage of the portfolio still should be in the FMCG companies, software and pharmaceutical industry.

Also read: Nifty can slip to 5650; get expert's stock advice here

Below is the edited transcript of his interview.

Q: When first time investors want to enter equity markets, what is the good rule of thumb for them?

A: We suggest a rule of thumb to all our investors. It is devised by the founder of the Vanguard Mutual Funds, largest mutual funds. Subtract your age from 90, that percentage of amount should be invested in risk assets, mainly equities. That is a good thumb rule to start with.

I would like to add one thing before you start investing in equities, it is very important to be yourself financially secured. Peter Lynch who was the fund managers of Magellan Fund said, ‘Before you start looking at buying equities, buy a house atleast.’

Make yourself financially secured and make sure that all your immediate financial commitments are taken care of. You don’t require that money for three to five years. You should allocate that money towards equities and try and be committed to it. Buy equities through the ups and downs of the market and you will find that equity is a magic.

Q: Investor had stock of ITC and that was age old with my dad. What happened was, we saw that ITC was not moving ahead for quite sometime - 11 months and so and in this time real estate prices were going up. In 2010-11 the time came that the ITC hit the all-time high. I thought this is a good price to sell, maybe it will come down. I will invest this in real estate. While I did that, I sold the stock and immediately I saw that instead of going back the ITC went up. While I was trying to invest in real estate I again tried investing back in ITC. So, where do you see this stock going up awhile?

A: That’s a billion dollar question to figure out when is the top, when is the bottom. ITC has been a great performer. It generally delivers a 15-20 percent kind of an earnings growth, which means its profits grow by 15-20 percent at an average. It has been doing that consistently for 30-40 years now, because people keep on smoking and the younger generation keeps on growing and as affluence increases people move from beedis to cigarettes.

So, they have a fabulous business model which grows by 20 percent every year. Because the profits grow by 20 percent, as a thumb rule, whatever your profit growth is, that will be the increase in the stock price. That’s the thumb rule over 5-10-15-20 year period. So, ITC per se is like your fair weather friend or ultimate friend. You can keep on buying it whenever you have some money set aside. It could be among the top holding which has been for you in your portfolio. Although in some cycles you may see the stock price correcting, but by and large it is still on a fabulous upswing.

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