Macro tailwinds pushed midcaps higher; largecaps a better play now: Dipen Sheth

There is a natural benefit available for listed and organized players. The big under-addressed and unpenetrated segment is 'pipes'. Both Skipper and Finolex become attractive plays, said Sheth.

Skipper revenue was hardly 15 percent in revenue in pipes and the rest were from transmission towers. But, particularly for Finolex, it holds a very big potential to grow its business.

“The market is about 20 lakh tonnes and about 40 percent is unorganised, and Finolex is the single largest brand which this country has. It is not operating at great margins, but maybe there are levers there," said Sheth.

Commenting on Havells India, Sheth said that the fundamental story for companies like Havells is bigger than short-term disruptions. “If there is a hit to be taken, it is likely to translate into slower revenue traction visible over the next few years, but revenue traction will be maintained,” he said.

Havells is likely to face multiple hurdles from the GST rates given its presence across categories. GST on insulated wires and cables will be 28 percent from the current rate of 18 percent.

RERA and real estate stocks

Most of the real estate stocks have run up in the recent past, and it is not very clear how Real Estate Regulatory Authority (RERA) will play out, said Sheth. Unlike GST, there is a lot of thinking behind its implication.

The headline is that it will clean up the system. A few thousand developers will get consolidated in a select few at the national level. "Whenever such consolidation happens then the long-term structural drivers, and pricing power comes back into the hands of developers which is positive," he said.

The long-term story is intact but in the short term, the run-up in prices do not give me comfort because the interest rates are falling but real estate prices have not moved much, barring Mumbai.

Macro tailwind pushed midcaps higher

When you have very large macro tailwind guiding you then it is always tempting to jump on to midcaps which can offer disproportionate gains.

“But, if you are already sitting on disproportionate gains, valuation looks stretched and then you have this tailwind going through. They will deliver, but hopes of multiple expansion don't exist as much as for largecaps,” said Sheth.

Below is the verbatim transcript of the interview.

Latha: The market is giving us a correction, you would use this dip, no worries about the larger bull trend?

A: I think certainly there is a long-term story in India that we have been talking about for a while and it is a consensus trade there in a global context. I think you are reacting to what has been happening on the last maybe half or one day or whatever it is. So, if you just pull out the charts, you will see that Nifty is up close to some 20 percent since Christmas, 18 percent odd. The midcap index, I heard your technical expert talking about a little bit of a sell-off there, that is up some 25 percent, the midcap 100.

So, for people who look at one or two month horizons, then the question them to ask is if we have taken not two but three steps forward then are we going to take one step back? Maybe we are and maybe the triggers are not yet visible and there is some profit taking which is happening. However, the triggers can come. So we were worried that the monsoon would not be so good, it looks like it is going to be a decent monsoon. Goods and services tax (GST) might lead to disruptions in supply chains.

So, as I keep saying uncertainty is the staple diet of the market and we should not let this worry us too much, you should look at stocks with individual margin of safety and solidity in the business model. Some clean investment argument and not just that it is moving up. It has to take a breather some time and that is how markets are. You have been rising almost continuously for the last five months odd.

Sonia: I wanted to ask you first about GST because you do track some of these companies that could eventually be beneficiaries of GST, the likes of Finolex, Skipper, etc. Tell us why you would be positive on them?

A: What GST does is that it enables formalisation of the supply chain, it enables a transparent way of trading and it eliminates the need for multiple stocking points and increases efficiencies in the supply chain. So, one, when there is increased efficiency in the supply chain, and two, when there is falling informalisation in the sense that the unorganised sector does not compete with you too well, there is a natural benefit available for organised players and particularly if they are listed, then we can play those stories.

So, we have seen this argument demonstrated earlier in the case of let us say Jamna Auto, or Exide which we have taken a close look at. However, increasingly it looks like the big under-addressed and under-penetrated spaces such as let us say pipes, PVC plastic pipes, so both Finolex and Skipper, so Skippers revenues are hardly about 15 percent in pipes. The remaining stuff is transmission towers, but particularly for Finolex, this holds a very big potential in terms of being able to grow its business.

So look at it this way, the market is about 20 lakh or 2 million if you will call it, in terms of pipe weight or volumes that is sold annually, about 40 percent of it is unorganised. Finolex is the single largest brand that this country has. It is not operating at great margins right now, 8-9 percent, but maybe there are levers there because it has been mostly in the agri space, it has not been present in the CPVC space so far and all of that is changing. Hence that is what makes us constructive on a story like Finolex.

Latha: We were discussing the Reserve Bank of India’s (RBI) announcement on bad loan resolution. At the moment Bank of Baroda (BoB) and such like are reacting negatively, in the sense there is a little bit of red on the PSU screen. What is your sense, is it time to buy any of them?

A: My take here is that for the first three years of this regime, there has been a lot of administrative noise and intent on resolving the bad asset problem and it has proved to be very sticky and difficult to undo. I don’t think it is going to vanish overnight, but the last few bits of struggle and administrative, or policy actions shall we say, indicate that finally the long waited heal might just be on the verge of coming.

You won’t see it in the way corporates will perform, you will see it in the way stressed assets resolution might play out in the last two years of this government. Remember there is an electoral message also to be sent out that we are cleaning up the system. Which banks would benefit disproportionately from this? The banks who can take the hits, the banks who can take the haircuts so to say, the banks which are high on capital, high on management quality, and credibility. So, State Bank of India (SBI) and BoB immediately come to mind.

You will obviously have the high alpha plays happening in some of the more stressed banks so you could pick on Oriental Bank of Commerce (OBC) that way, but I am not sure whether that is a very straight way to, very rational way to play this. So, obviously SBI and BoB, both look like prime contenders. I have been skeptical in the past and I am going to watch this space very closely and there is a lot of hype before the reality really hits us. However, I think this government has already begun to do the stuff that will make asset quality healing possible.

For full interview, watch video...