Mkt focus on exports; bet on IT, pharma: Dipan Mehta

Due to depreciation in the rupee, the market will start to focus on exports instead of rate-sensitives ahead of the RBI policy on June 17, says Dipan Mehta, member, BSE & NSE.

In an interview to CNBC-TV18, Dipan Mehta does not expect the RBI policy to act as a trigger for the market. He advises investors to bet on IT and the pharmaceutical sector where exports constitute a significant portion of revenues.

Below is the edited transcript of the interview on CNBC-TV18

Q: How difficult will it be for companies with high dollar-debt high now that the rupee has depreciated so much? And within that segment, what are the stocks that concern you the most?

A: The depreciation in the rupee is certainly going to cause a lot of damage to the balance-sheets of companies with high dollar-debt. And depending on what accounting policies some of these companies follow, the adverse impact will flow to the P&L as well. In any case, given the current environment, I don’t think these companies would have any problem with respect to refinancing of debt. The performance of these companies also has much to be desired in terms of their capacity to raise more equity.

So, I would advise investors to clearly avoid such companies. Unless there is improvement in the current account and trade deficit it is highly unlikely that the RBI will follow an easy money policy. I think the markets will now focus on exports rather than interest-rate sensitives.

Q: What do you expect the Reserve Bank of India (RBI) to announce in its monetary policy?

A: I think it is unlikely to expect an additional cut in the repo rate. But RBI does tend to throw surprises. The fall in the government securities (Gsec) yields offered some indication of a rate-cut, but even those levels have started to harden. So, these two factors do indicate that the RBI may do nothing in this particular policy.

The RBI’s focus will certainly be on the rupee. By and large, at least for June, the market, especially the equity market, will not be posting any rally based on expectation of a repo rate cut.

Q: What about Opto Circuits?

A: I have no view on the stock at all. There have been concerns regarding corporate governance in company and the earnings declared were difficult to understand.

Q: Will the RBI policy act as a trigger for the market?

A: No, I don’t think so. With the way the rupee has gone, the chances of any easing in monetary policy have diminished significantly. So, the focus will be on what the RBI has to say and most of the central bank’s discussion will be on the rupee. I don’t think it is going to have much of an effect on the markets and the market’s focus may shift to the monsoon and thereafter the earnings season in July. For the time being , I don’t see any major trigger or expect any trigger for the upside.

Q: What kind of impact will the depreciation in the rupee have on IT companies such as Hexaware which stated that the fall in the rupee impacted its margins by 100 bps?

A: IT companies that lost favour earlier in the year have come back into reckoning thanks to the depreciation in the rupee. The June-to-September quarter may be a very good period for IT companies and market will start discounting this well in advance. So, investors are best to focus on the IT companies which have actually performed and delivered good earnings for the past 2-to-3 quarters.

Within the large-cap, investors could enter TCS and HCL Tech which have declared excellent earnings for the past several quarters. Within the midcap segment, Mindtree, CMC and KPIT Cummins  are good buys. Along with the IT sector, the export-oriented sector will also come back into the reckoning.

At some point of time, I think investors could also look at the pharmaceutical companies because they are huge exporters — Sun Pharma, Dr Reddy's, Wockhardt and Cadila. All these companies record huge incomes in forex and will benefit from any depreciation in the rupee.