Asian Paints a good play on rising consumer spends: Dipan Mehta

Asian Paints is a fabulous play on rising consumer spending. The opportunity for the company is phenomenal, he said. The quality of management also plays a role, he said. They have been able to maintain their market share and on the whole, you can’t find any issue with Asian paints, he said.

Within Nifty, there are a few stocks that offer exposure to consumers and it will continue to enjoy premium valuation, he added.Below is the verbatim transcript of Dipan Mehta’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: First up Axis Bank. Will the blow now fall on ICICI Bank now?

A: I think a certain amount of uncertainty will creep in to ICICI. However, the kind of excitement which was there post the deal of Essar and expectations that the numbers from ICICI for this quarter and going forward would not be as bad. Their excitement certainly will abate.

However, Axis Bank per se, a very disappointing set of numbers and in part, the problem with expectation management as far as the board is concerned, they kept on guiding for the end to come close as far as non-performing asset (NPA) provisioning is concerned and quarter after quarter, the NPA provisioning kept on increasing. But apart from that, there was disappointment in the key parameters also in terms of net interest income (NII) growth and some of the other financials which you look out for in terms of fee income growth also, growth in advances, growth in the current and savings accounts (CASA), I think well below some of its peer group private sector banks. So, on the whole, a very disappointing set of financials from Axis Bank.

Sonia: The stock has fallen almost 20 percent from the highs of Rs 630 that it was trading at in the month of September. How much of the disappointment is already factored into the price you think?

A: The stock may have some more way to go down and clearly this number is out of the blue and to that extent, it has not yet been factored in or priced in. So, maybe another 5-10 percent correction, if not today, over the next few weeks should certainly be on the cards.

Latha: I wanted to know. ICICI is the one that has been defying gravity and going towards the Rs 300 mark. Will the market start now, discounting ICICI Bank’s numbers also on the negative?

A: Certainly, this result puts a kind of a ceiling as far as ICICI’s stock price is concerned, at least until the results are out and the results will be out pretty much soon so we will have that available for analysis and what happened in Axis Bank need not recur in ICICI Bank. But the caution will be far more and if investors and traders were expecting to take a long position or a trading position on the long side prior to the numbers, they will rethink that strategy.

Latha: Let me come to the others that were good, Bharti Airtel. After looking at those numbers, would you call for a buy? Would you rethink telecom strategy stocks?

A: Pleasantly surprised with Bharti’s numbers and investors and traders would now watch this company quite closely. The way the entire telecom industry, the journey, if you see over the past 2-3 years, it has been mired with a lot of uncertainty, controversy, new entrants, pricing pressure, the entire shift from voice to data. Now, this entire uncertainty and turmoil is coming to an end as far as telecom industry is concerned and within the next six months, we will know the effect of Reliance Jio on the entire telecom sector. But the numbers which have come from Bharti Airtel for the past couple of quarters do suggest that it will remain a very important relevant and a growth player within the telecom industry. So, I just want to wait for Reliance Jio effect to get subsided as far as the telecom industry is concerned and then the first of the block would be Bharti Airtel, well placed above Idea Cellular or even Reliance Industries for that matter.

Sonia: The other good set of numbers that came in yesterday was from Asian Paints. In a slowing environment, in a traditionally weak quarter, doing double digit growth in a decorative segment is no mean feat. Is this a stock that you would top up on incrementally?

A: At every correction if investors have missed Asian Paints, every correction, 10-15 percent from its last high is a good price point to get into Asian Paints. It is a fabulous play on rising consumer spending and it has the kind of pricing power and the market share which it has in the decorative paint side and the opportunity which is there for the company is quite phenomenal and quality of the management also plays an important role where despite increasing competition in the decorative side, they have been able to consistently maintain their market share and grow the entire business, keep costs well under control and very good control over capital costs as well. Therefore, on the whole, you cannot find any specific issue with Asian Paints except for its valuation which historically has been very high and going forward also will remain on the higher side.

However, at the same time, investors need to keep in mind that within the Nifty, there are very few stocks which offer this particular exposure to rising consumer spending and goods and services tax (GST) and Seventh Pay Commission, good monsoon. If you want to play that theme, there are very few companies in the Nifty 50 and Asian Paints is one of them and which is why it will continue to enjoy premium valuations and may remain part of the core holdings for most portfolios that are invested in them.Latha: Like Delta Corp, a bunch of midcap numbers has also given good Q2 earnings, anything that you liked so far in the results season?

A: Symphony came up with a spectacular set of numbers and despite rising base effect, the company continues deliver year-on-year (Y-o-Y), quarter-on-quarter (Q-o-Q). And with the kind of operations, the way they run asset light, cash only on delivery, very hard focused on brands and also considering that despite so much of competitions, new entrants, Voltas has come into the field, they continue to maintain and grow their market share.

However, what is most impressive is going forward, if goods and services tax (GST) does get implemented in true spirit, then Symphony will be one of the major beneficiaries because it would have an even sharper edge as compared to some of the unorganised players within the industry. No doubt, it is expensive as all good quality stocks are, but very impressive set of numbers coming in from Symphony.

Sonia: What are your thoughts on Arvind because that company is at an inflection point and now, there is so much by way of wealth creation, value unlocking after selling its stake yesterday to multiples. How bullish would you be on the branded business of Arvind and do you expect to see more upsides for the stock?

A: All the strategy which Arvind has been trying to implement in terms of going up the value chain and tying up with all the global brands, initial first few years, it did not seem to be playing out because the numbers were just not coming through. Growth was tepid, profit margins were under stress, but now that the business has gained scale, we are clearly seeing that value has got created almost overnight in the past few months or so and going forward also, very positive on Arvind and the branded garments is going to be the growth engine for the future for the company.

This is a stock which I would like to buy because it gives you a great exposure to rising Indian consumerism, which is a very powerful investment theme and we have been trying to find stocks over there. So, with the way the Arvind results have come out and the deal which took place, going forward a lot of expectations from Arvind and certainly there is a case for rerating of the company as far as price-earnings ratio (P/E) multiples are concerned. So, you have a situation where earnings also would grow and the street will be compelled to pay even higher P/E multiple because of the quality of the earnings and its sustainability.

Sonia: Just wanted to get your thoughts on non-banking finance companies (NBFCs). The ones that came out, L&T Finance Holdings, Mahindra & Mahindra Financial Services and Shriram Transport Finance, seems like L&T Finance was the only impressive one. Anything you like from that space?

A: We continue to remain very positive on the retail lenders especially housing finance companies, gold finance companies, microfinance companies and consumer finance companies and there is a lot of choice over there. These companies are in secular growth mode, have very good asset quality, have displayed consistent performance over the past several quarters or so. As against something like L&T Finance or M&M Finance which have a bit of a chequered financial performance history. So, we would like to go where the companies have been steadily performing even despite challenging environment and have been able to maintain a very decent quality of the balance sheet and still considerable scope for them to grow given the kind of sectors in which they are operating. So, investors should gradually try and include a lot of non-banking finance companies (NBFC) also in part when they are trying to allocate the entire banking financial services segment within their portfolio and many exciting NBFCs still available, but valuations may be a bit on the higher side. So at corrections or post results, it may be a good idea to look at these NBFCs in new light.