IT, pharma looking good on Re fall; buy Titan: Dipan Mehta

A positive fallout of depreciation of the rupee is that the macroeconomic situation of the IT and pharmaceutical sectors, which traditionally have very good corporate governance standards, clean balance sheets and excellent track record, will improve, says Dipan Mehta, member, BSE and NSE.

Also read: Nifty may hold 5500 in July; sell on rise: Angel Broking Talking to CNBC-TV18, he says investors should stay away from investing in tier-II companies and the time has come to focus on quality companies. While he is bullish on Titan and asks investors to buy the stock on declines, he advises against investing in Tata Motors. Below is the edited transcript of his interview with CNBC-TV18: Q: I wanted your thoughts on how you would approach Tata Motors now. That stock has been slipping quite a bit. Do you think this is a good opportunity to buy into this stock after the positive commentary that we heard from the management earlier or do you foresee more weakness there? A: It is a difficult question to answer because Tata Motors per se is no longer an India play and a lot mainly depends upon how Jaguar Land Rover (JLR) performs overseas. One thing that does go in favour of Tata Motors is the rupee depreciation, because when they start consolidating the JLR numbers, convert them to Indian rupees,  then obviously to that extent the exchange rate decline will benefit Tata Motors. But by and large, there is not much in terms of positive expectations from Tata Motors and I would say that it is a better idea to go for some of the solid export-oriented businesses within the IT and the pharmaceuticals space. Suddenly some amount of uncertainty has crept in even as far as JLR is concerned, given the challenges in the Chinese economy and in India too. I think Tata Motors is undergoing a very disturbing phase given the comments coming in from their various vendours. So I would say that although the stock is cheap compared to historical valuations, I would like to wait and watch. Maybe after this June quarter results, we could have a more informed view of the company. Q: What is happening with Titan? Now there are some reports emerging that they could be diversifying their business streams as well into different products in order to move away from just jewellery as well as gold? But how do you be placed in terms of the fundamentals of the stock itself and would it be a buy on dips opportunity? A: I think that we should be in for some disappointment as far as Titan’s performance is concerned over the next two-three quarters or so because of all the changes, which have taken place as far as gold purchasing policies have been concerned and all these diversifications, which Titan has been doing will take a considerable time before they gain traction and form a large part of the business. But per se, the company is in the right direction and it is going to emerge as one of India’s, if not as India’s largest luxury products retailer and that particular theme is quite strong and if one is a long-term investor and believes in the India story and rising domestic consumption then Titan has to be a part of your core holding. So, I would say that at declines Titan certainly makes an attractive buy. But one has to be patient in this stock and hold it for a long period of time, maybe two-three years or so. Let this intermittent problem situation just pass over. But as I said next two-three quarters could be a bit challenging for Titan and maybe part of it is getting discount in the stock price itself given the massive correction, which we have seen over the past few weeks. Q: Are you also advising your clients to stick with many of these bluechip credible names at a time like this or do you think that some nibbling should be done in any of these beaten-down names that still have good quality businesses, but have been beaten down so much? A: I think that this is the two-tier market. There are other companies which have got good balance sheets visibility of earnings, good track record, good corporate governance and we have seen a slight bit reduction in their valuation in the past few weeks or so given the massive correction, which we have seen. Then there the rest of the market, which is challenged by corporate governance issues, question mark on promoters, extremely poor quality of balance sheet, desperate need to raise capital or reduce debt and those companies were slowly coming into the forefront until the time the rupee started depreciating. At that point of time we were all hoping for interest rate reduction in markets scaling to new highs. But now that particular expectation has vanished because of the rupee depreciation and the pause at the RBI level as far as interest rates are concerned. We are seeing a massive sell off in the tier-II or the rest of the market, which is challenged by balance sheet and corporate governance issues and there I think an investor should not be in that pool at all and again the time has come to improve the quality of the portfolio and focus on the quality companies. One of the positive fallouts of the rupee depreciation is that the entire IT and pharmaceutical sectors, which traditionally have very good corporate governance standards and very clean balance sheets and excellent track record, the entire macroeconomic situation for these sector improves. So while some of these sectors go out of the reckoning, new sectors in IT, pharma and some of the export-oriented businesses they will come back into reckoning and investors could easily focus over there. We are seeing good traction coming into some of the midcap IT stocks. These will also tend to benefit even if volumes are same or slightly lower they will benefit from the rupee movement and then of course pharmaceutical shares, I think that pharma industry benefits even more than IT, given that pricing pressure is not as much in dollar terms for them. Q: How would you approach the Bank Nifty now and what would you do with some of these heavyweight banking stocks? A: I think that one needs to put a pause button as far as the banks are concerned and that applies even to some of the private sector banks. One would have to scale down their growth expectations going forward given the situation we are in. So, I would say that you would see banks underperforming as against to them being the leadership position a few months ago. I think they will be the laggards in the market. One has to also keep in mind that there is a bit of over ownership as far as the banking sectors is concerned, especially within the private sector banks and few other private sector banks are looking at or have done equity dilution as well. So, I would say that the sector should see some amount of under performance and focus will gradually shift to some of the export oriented companies, software, pharmaceutical companies maybe even some of the auto ancillaries which have been beaten down considerably. So, that reshuffling and shifting from one sector to another sector will be the theme at least for the next two three months or so. Then come July we have the earnings season and we will have a lot to deal at that point of time with the way the rupee has moved. So, I am sure it is going to be a very interesting earnings season not only in terms of what the performance of the company is as far as profit and loss (P&L) is concerned but what the damage is going to come through from various balance sheet issues in terms of ECBs or overseas subsidiaries, overseas borrowings and some of the other commitments which the companies may have had maybe in terms of what forex cover or hedges they may have taken. Q: We did get that current account deficit (CAD) number for FY13 as well today, which stood again at a record high for the second consecutive year for FY12 and then for FY13. Do you think things will possibly recede going forward for the CAD situation going into FY14? A: The real problem is with gold and what earlier the thinking was that with gold prices coming off the pressure on the CAD would lower. But it seems that more the gold prices drift lower, the more purchases Indian consumers are making, at least that was a situation as far as April and May was concerned. Although, gold shipments have declined over the past few weeks or so, but gold prices have again corrected internationally and even in local market despite the rupee appreciation gold prices have not moved up and if this kind of gold buying continues from the Indian market, from the Indian consumer then all the benefits of a lower gold price also are going to evaporate and you will see the continued pressure on the rupee. So, it is a bit kind of a difficult to say whether the CAD will come off going forward or not and one would like to have this particular problem well behind us and have some kind of a certainty as far as CAD or as far as fuel prices are concerned and what the effect of the recent rupee depreciation has been on inflation. So, from a situation where there was a great deal of certainty about these macro parameters, we are in a situation just now where there is a great deal of uncertainty. So, I would say just wait and watch and let us not get into an action that much more quickly. Q: What is your expectation from the Cabinet Committee on Economic Affairs (CCEA) meet which starts at 5:30 pm on Thursday evening? A: That is very difficult to call because they have their own thought processes. There are a lot of pulls and pressures and one really doesn’t know but given the track record of the government we should brace ourselves for disappointment rather than any kind of bold path breaking announcement or policy formations.