Not high on Just Dial; bet on midcap IT stocks: Dipan Mehta

Investors need to allow Just Dial time to perform and declare strong earning. They should not buy the stock based on sentiment seen in the first few days of the company's IPO, advises Dipan Mehta, member, BSE and NSE.

Speaking to CNBC-TV18, Dipan Mehta says that the months ahead are going to be eventful with political parties gearing up for general elections next year, the RBI policy on June 17. He warns investors not to expect much from the Reliance AGM scheduled for Thursday and suggests bets on midcap IT stocks dependent on exports to the US due to the depreciating rupee. Below is an edited transcript of the interview on CNBC-TV18 Q: What are your views on Just Dial and what are  recommendations after the first day of listing? A: Normally, I do not track new issues. Typically, there is a pop in the stock on the first day of listing but the real stress comes a few months down the line, especially when the results start flowing in, the corporate governance standards set and based on consistency communication from the management. On the face of it the stock certainly appears to be expensive despite its fantastic business model and a one-off its type kind of listing. So, I would say that it is a stock that needs to be assessed only after two-to-three quarters after the company comes out with results and announces its plans for the future. Q: What is your outlook on Reliance Industries ahead of the annual general meeting (AGM) tomorrow? A: Though some important announcements are made at the Reliance AGM, investors should not expect too much this time and accept that there will be a turnaround in the stock price on announcement of more gas finds as well as the prospects of gas prices being increased for the industry as a whole. So, there are few positives for Reliance and if those events follow-through, then it certainly improve the fundamentals of Reliance. Apart from these two aspects, there are expectations that the exploration business will contribute and there will be no growth in the volumes of the core-refining or petrochemical business. So, the growth driver for the company has to be from the exploration business and as and when some announcements regarding finds, there could be some rerating in the stock. But I would still say that despite these recent positive developments, there are better stocks in the market to invest in. Q: What would those investment opportunities look like either from the frontliners or from the broader market? A: There are two themes which could yield good returns to investors. One, interest-sensitive stocks especially banks because although I do not expect interest rate reduction in the Reserve Bank of India’s (RBI) policy in June, but if inflation stays under control later in the year and the trade deficit falls, there could be a 50-75 bps reduction in interest rates and that could be positive for the banks, the auto sector, real estate and capital-goods. So, that is one theme that investor should play for the rest of the year. Second, with the way the rupee is moving does provide some buffer to the exporters —technology and pharmaceuticals companies will be the major beneficiaries. If the trade deficit continues to rise, then rupee will depreciate even further and to that extent export-oriented businesses should deliver better results. At the same time, if the rupee were to depreciate then that would allow the RBI a little less room to cut interest rates and that would of course negatively impact interest-rate sensitives. So, a combination of these two investment-themes are the best play at this point of time. Q: In your opinion what do you think would be the next trigger for the markets? Would it be the Reserve Bank of India (RBI) policy come June 17 or do you think that it is going to be more global in nature? A: There are three variables that the market is watching —the monsoon, the RBI policy and global markets. With the end of the tepid earnings season it is fair to assume that the rate of growth certainly hasn’t improved as expected. There is a lot of work to be done by the government and the RBI in terms of reducing interest rates. As the Parliament monsoon session nears, politics and the general and state elections will be another trigger. So, the months ahead are going to be action-packed and the markets will react to the newsflow whether it is positive or negative. However, the key trend to watch out for, from the market’s point of view, is interest rate because that has the capacity to trigger significant upmoves. Q: What is your call on the real estate sector after the Cabinet’s approval of the Real Estate Regulator Bill? A: I think it is a very positive development for the industry as a whole and will certainly benefit the organised segment, most of whom are listed and will meet the investment community demands for better corporate governance standards and transparency. But investors one can’t increase exposure to real estate stocks just because the regulator has been formed because there are many other aspects to look forward to. The most important one being of course is the interest rate, the demand-supply situation and the status of their projects. So, one can’t paint the entire real estate industry with a single brush. There are companies which will tend to perform better and certain regions will see more activity than other regions. So the prospects differ from company-to-company. On the whole, I am not positive on the sector due to poor corporate governance standards, high degree of volatility in earnings, extremely dismal track record in terms of value creation and absolutely lack of transparency. Q: After the dip in auto stocks, is there any auto stock that you would buy? A: Within the auto space clearly, my preference is for four-wheeler stocks such as Maruti and Mahindra and Mahindra (M&M) which have performed exceedingly well at the markets as well as in terms of earnings. Although the current fiscal is going to be challenging, I feel that both these companies will be able to maintain and maybe increase their market share. And if interest rates are reduced later in the year, it will give a boost to the entire industry and definitely cause a surge in performance of these companies as well. Investors are suggested to avoid the two-wheelers as well as the commercial vehicle manufacturers because the trends in both continue to remain pretty much negative. Investors could expect a turnaround in the commercial vehicles if interest rates do go down, but I think the best bets within the industry have to be the four-wheelers Q: What is your view on Tech Mahindra? A: Most of the midcap IT stocks will tend to perform better as the rupee depreciates. Tech Mahindra was amongst the few that delivered a good set of earnings for the March quarter. So, I would be positively inclined towards both Tech Mahindra as well as Mahindra Satyam. Post the formal merger, investors should expect a bit of re-rating of the PE multiples as well and some amount of stability or consistency coming through in the earnings of the combined entity. So, I would say that that is a good stock to watch out for while keeping an eye on the rupee. If the rupee depreciates further, it could bode well for the entire IT industry in the September quarter. If US economy does tend to get better, that will be an added boost for the entire sector. So, I am positive on IT and midcap IT stocks as well but only the strong performers like Tech Mahindra, KPIT Cummins  and MindTree.