Nifty may slip to 4800, govt should act now: Dipan Mehta

It was a rangebound session on the D-street. Global markets too have been trading in a range, giving little fillip to the Indian indices.

The Nifty, however, recovered after a slight dip to keep the 5,100 mark. The Sensex shut shop at 16,846 level. In an interview to CNBC-TV18, Dipan Mehta, member, BSE and NSE says, 4,800 or so is not out of the reach of the market, if nothing happens. "Government inaction will dampen the sentiment, rupee may go for a toss and it may impact FII flows. In any case, we are dealing with a poor monsoon and then the RBI policy also may not be at all conducive for the stock market. So, the picture will get more messy, if the central government does not go about increasing administered prices of petro products and show some action on other subsidies," he elaborates. According to him, the government should do something to show that it is back in control and is trying to steer the country through one of its trying periods over the past four-five years. He is bullish on midcap IT stocks like Polaris, MindTree, Zensar, and CMC. Also read: 5100 under threat if RBI disappoints on rate cut, says UR Bhat Below is the edited transcript of his interview on CNBC-TV18. Q: What would you do with HCL Tech now, after the numbers? A: I think investors are tanking up on HCL Tech at the expense of the other largecap IT companies. We would also suggest that strategy. But the real story in the IT industry is in the midcap like CMC. It came out with spectacular set of numbers. I think most IT companies have delivered a very good number quantitatively and also the qualitative aspects have been much better. Given the kind of environment they have been operating in, they have been able to navigate pretty well and deliver very good set of numbers. Even the commentary coming from them is far more positive. So, I would say that if you want to be in the IT industry then the best place continues to remain the midcap IT sto ks. Maybe for one more quarter or so, you will see this outperformance versus the industry big wigs as well as the market as a whole. If you still want to be in largecap IT, I think HCL Tech is the right choice over there. I think all the strategies and acquisitions and all the various policies, which they have incorporated over the last two-three years, seem to be paying off. I think the stock price has been a clear outperformer within the IT industry. Q: What about Polaris? What did you make of the numbers and the communication from the management? A: I think I was pretty pleased with the numbers maybe because our expectations were slightly on the lower side. But as compared to some of the other midcap IT companies, which have got exposures to some of the other verticals, Polaris has concentrated on the BFSI segment. That just adds an extra element of risk, given the kind of situation we are seeing with large banks and financial services companies abroad. For that reason also I think Polaris is trading at a slight discount to its peer group as well. You strip off the cash and the excess land it has, Polaris and some of the other midcap IT are available at extremely attractive valuations. Just look at the return on equity or return on investment, the kind of transparency, the corporate governance standards and also the fact that there will be hardly any equity dilution, within the entire IT industry, no new IPOs coming in. So, I think there is going to be some amount of pressure on the stocks in terms of shortage. So, given the full picture, I think that whether it’s a Polaris, MindTree, Zensar, CMC, I think they are going to be giving returns in about 3-5% band within each other. _PAGEBREAK_ Q: How much lower do you think the market could head from the 5,100 level, if we do not hear anything from the government in the next couple of weeks? A: I think that’s a difficult question to answer. But if were to hazard a guess then maybe 4,800 or so is not out of the reach of the market, if nothing happens. Government inaction will dampen the sentiment, rupee may go for a toss and it may impact FII flows. In any case, we are dealing with a poor monsoon and then the RBI policy also may not be at all conducive for the stock market. So, the picture will get more messy, if the central government does not go about increasing administered prices of petro products and show some action on other subsidies. It should do something to show that it is back in control and is trying to steer the country through one of its trying periods over the past four-five years, that kind of a leadership is required and to be demonstrated. Unless it doesn’t flow through then there are no tops and no bottoms in the market. I am just saying 4,800 because that was one of the bottoms that we had seen earlier. But it could be anything over there. The earnings are doing as much as they can. Now, we physically have a two tier market where there are these good quality companies delivering results, performing at 25-30% kind of growth rates. They are clearly at a 35 PE multiple or thereabouts. So, there is no scope for PE expansion over there. Unless there is some sea change in the economy and better growth rates in our country, I think the cyclicals will continue to remain ignored and market will get even more polarised. So, it's getting a bit murky and let's just hope that common sense prevails and some action does flow through. Q: You track Jubilant Foodworks, what did you make of the numbers? Given current valuation, would you continue to own the stock or hold it? A: It’s difficult to answer because the stock continues to deliver spectacular numbers and excellent returns. At the same time, the valuation is scary. So, if your purchase prices is on the lower side then it’s best to stay put. But I wouldn’t advice fresh buying at these levels because there is scope for PE multiples to compress, but that may more than be offset by higher growth rates coming in through the EPS. On a qualitative basis, we like the results and also the fact that another growth avenues opening up for the company, Dunkin Donuts. That would mean that this kind of growth rates, which the company has been maintaining for the past three-four quarters and give or take 1-2 percentage points here or there, certainly is possible to maintain. In a market like this where investors are looking for growth stocks and growth stories and secular stories then I think Jubilant Foodworks certainly fits the bill. _PAGEBREAK_ Q: Tomorrow is a big day for numbers. What are you expecting BHEL to do? A: It is difficult to say. We are not really tracking that company that closely more onto midcap stocks. But, by and large, in terms of valuation, BHEL has reached attractive levels. Considering the cash it has on its books as also the fact that there could be some kind of corporate action on government’s part, I wouldn’t be too negative on that stock. Now that the custom duty also has been hiked, on the whole, I think that it may have some weakness or some sort of disappointment in the short-term. But in the long-term I think this company has a great future. I think after a long time valuation also is quite attractive. So, if you are a bit of a contrarian long-term investor with a two-three year kind of a horizon then I think that BHEL definitely would outperform the market.