Investors should pick quality stocks: Dipan Mehta

Excerpts from Closing Bell on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Essar Oil BSE | NSE 01/06/12 Are Mutual Funds betting on Essar Oil? Other Stocks in this news Essar Steel | JSW Steel | Reliance Natural Resources | Reliance Power | Reliance Petroleum | Steel Authority of India | Tata Steel |

Speaking to CNBC-TV18, Dipan Mehta , Member, BSE and NSE said the market is getting into a trading pattern between 17,000 and 18,000. He added that so long as it is trading around those levels, the sentiment in the market will improve.

 

Mehta added that if global markets are stable, Indian markets could rally by 500 points and it all depends on how global markets trade over the next few trading sessions.

According to Mehta, investors must be extremely selective and pick only good quality stocks, which have got something different to offer, with good visibility and growth as markets will be volatile.

 

Excerpts from CNBC-TV18's exclusive interview with Dipan Mehta:

 

Q: Does it seem like the market is getting close to finding a base for itself now?

 

A: May be not a base but it is definitely getting set into a trading pattern between 17,000 and 18,000 or at worst 16,800-18,500. Although, there is lot of volatility within that range; so long as it is trading around these levels, we will gradually see confidence coming back and sentiment improving.

 

So, today's move is quite fantastic and clearly shows that there is a lot of appetite still left for Indian stocks- domestic and FII. Some of the short covering seems to be helping these stock prices move up today.

 

Q: What would you buy from among the entire metal space now? What did you make of all the news that came in on steel prices?

A: At the end of the day, steel companies have got a pretty decent deal although they have to roll back marginally. At the end of the day, they will be able to protect their margins going forward, according to our understanding.

 

Within the metals pack, we remain bullish on steel stocks. Within steel companies, our top bet is JSW Steel , where we see considerable capacity expansion going on stream for the next 12 months or so.

 

Even beyond that, over the next 3-4 years, the company should see significant increase in capacity through the organic route.

 

We also prefer Tata Steel to other steel companies like SAIL or Essar Steel . The results, which will come from Corus for this quarter as well as quarters going forward, will beat market expectations. When you consolidate both the companies, they will appear to be quite attractively valued as compared to their global peers as well as some of the other listed steel stocks.

 

Q: Do you think the dust has now settled on Reliance Power? Is it going to spend some time consolidating at this level? Will there still be some choppy moves in it?

A: It is difficult to answer. It is a problem how to set up a price point for a stock of Reliance Power , given that its returns and revenues will come 2-3 years down the line. So, on a fundamental basis, it is very difficult to take a call here, except that it is expensive and fair value is far lower than that.

 

The market is still extremely bullish on Reliance Group companies, both the companies of Anil and Mukesh. That is still reflected in stocks of Reliance Power as well as RNRL and RPL . Otherwise, one cannot explain trading of these stocks at these levels. But investors should move away from these stocks, which have got a long gestation period. There are gems available in midcaps and largecaps, where there is extremely good visibility, dynamic managements, growth prospects available at very decent and cheap discounting with adequate margin of safety as well. So, one needs to move away from these momentum counters.

 

Q: Are there any thoughts on what has been happening with Essar Oil ?

 

A: No, it is a project which will eventually go onstream. Then, you will see revenues and profits. It is a favourite with a lot of speculators and it is in the futures market. Therefore, a lot of the movement has to do with demand-supply in technical factors, rather than any changes that are taking place in the fundamental side.

 

Q: Do you think that this valuation game for a lot of these companies needs a re-look?

 

A: Liquidity is going to be scarce in the markets. The kind of money coming in will be from very intelligent investors who have a long-term view. Those are the ones who have perhaps sold off or are still sitting on cash.

 

The preference will be for companies that have got a very strong track record. The growth dynamics underlined for the industry and the company has to be decent. The price earnings to growth has to be attractive, at around 0.5 or lower. Therefore, there is a preference for these companies rather than stocks or companies where revenues are going to come three years down the line or where valuation is derived from subsidiaries.

 

The focus would come back on real earnings and cash earnings of the company's EV to EBITDA, price earning multiple, dividend yield, price to book value and so on. The real reason is that the players with the money are the ones who are going to look at those stories and not the other ones.

 

Q: If the Budget goes down as a neutral event, is there a case for the market to rally by way of sentiment?

 

A: No, it will rally up to the Budget. If there is nothing disappointing in the Budget, then we could see those gains being sustained or built upon. But the key event that the market players are looking for is not the Budget but the US economy and how the global markets stabilized. We have seen that in the past 4-5 trading sessions. At the time we have had stability in the global markets and rallies in global markets, we automatically started to outperform those markets, which is positive.

 

So, more than the Budget, it is global factors which are impacting the sentiment. On the days on which the global markets especially the Asian markets are down and we are also correcting; we are seeing negative FII flows. So, liquidity coming into our market is being determined by the movement we are seeing in overseas markets and especially Asian markets.

 

Until we don't see some stability over there and some large FIIs getting into the markets on a long-term basis and consistently buying, I would say there are some threats to this market.

 

But if we see a situation where there is continuous buying coming in from FIIs, then one would have to conclude that the bottom is in place and we could build from these levels.

 

Q: Do you think the market might move up higher from here?

 

A: I think turnover will pick up, but we want to have quality of turnover. Even as we speak, amongst the top 10, the companies like RNRL, Reliance Power, RPL, Essar Oil and even IFCI are seeing very heavy trading volumes.

 

So, ideally we would like to see more of the quality counters like L&T or BHEL, oil marketing companies and some of the engineering companies. You would like to see their share of volumes going up in the overall volumes of markets. That would convince a lot of players that genuine good quality money is coming in and the stock is moving into strong hands. Therefore, it could lead one to conclude that a foundation or base has been built and the US economy is not as bad as it turned out to be. It could scale back with levels, which we saw in middle of January.

 

Q: What would be the best advice for next week? Would you stay long or do you think that we are nearing resistance levels?

 

A: That is very difficult to answer. If you have a sharp correction in Asian markets, then this market will give up all its gains and will go back to 17,000 and 16,500 levels.

 

At the same time, if global markets are stable, they could rally by maybe 500 points. So, it all depends on how these global markets trade over the next few trading sessions. We are still moving in tandem with what is happening globally. Until we don't see some amount of decoupling, it is very difficult to say which way the market could go in the immediate short-term.

 

Q: For investors looking for investment picks, have they already waited too long or would you advice buying?

 

A: One has to be extremely selective. One of the investment themes, which worked very well in 2004-06 and largely in 2007 will not work in 2008. So, one has to be extremely selective.

 

We will see a very narrow kind of breadth in the market. Only good quality stocks, which have got something different to offer and where there is good visibility and growth, those are the businesses that will be favoured by investors. Those are the stocks which will do well. So, one has to be extremely selective in which stocks one is looking to buy and build a good amount of conviction because the markets are going to be volatile. Buy good quality stocks with conviction and be prepared to look at lower prices after you have bought the stocks as well.

 

Q: What would your bets be on?

A: The preference is more for some of the midcap stocks.  We feel that some of the investment teams, which are still working in the market, can best be played only through midcap stocks. Some of the industries which we are tracking and have investments and recommendations to our clients are typically in financial services.

 

Disclosure:

It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed.