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Last Updated : Sep 09, 2015 01:01 PM IST | Source: CNBC-TV18

Negative on largecap IT; like Motherson Sumi: Dipan Mehta

On JP ventures Limited and JSW Energy deal, Dipan Mehta, Member of BSE and NSE says that the sale is not going to bring a long-term merit for the two companies because power sector gives low rate of return (RoI) and has muted growth.

Despite the rupee depreciation advantage, Dipan Mehta, member of BSE and NSE, is negative on large cap IT companies as he believes the largecap space will face pricing pressure going forward.

However, he is bullish on midcap, small cap IT companies, as feels the earnings growth will be stronger. Targetting niche markets, doing intelligent acquisitions or acquiring strategic customers are the most sensible things these companies are doing, Mehta tells CNBC-TV18.

On Jaiprakash Power Ventures Limited and JSW Energy deal, he says that the sale is not going to bring them a long-term merit because power sector gives low rate of return (RoI) and has muted growth.

In auto ancillaries, he prefers Bharat Forge,on its cost advantage and Motherson Sumi on its strategic acquisitions, adding that the two companies will be many times their size and will offer good RoI, in the coming 2-3 years.

Below is the transcript of Dipan Mehta's interview with Anuj Singhal & Ekta Batra on CNBC-TV18.

Anuj: First word on metals, we have seen big rally over the last couple of days. Tata Steel for example is up 10 percent in 2 days. We have seen big moves in Vedanta, Hindalco, some of these stocks today. Do you think it is a bit of a trading pop and should you participate in that or would you be willing to taken even investment call in some of these names considering that we have seen a brutal fall in most of these names?

A: The medium to long term prospects for metal industry is extremely bleak and considering the overcapacity and the way Chinese economy is going, of course these stocks are gone into heavily oversold position and what we are seeing now could be some brand new buying. Some of them are quoting below their book value and some short covering as well.

But from an investment perspective, these are still to be avoided and if they rally even further may be 15-20 percent from these levels, then investors at least long-term investors who are still stuck to these counters, they could look at that as an exit opportunity.

Ekta: The latest news that we have been dealing with is the strategic debt restructuring which now seems to be picking up pace, now we are learning about the same for ABG Shipyard on a likelihood of it possibly taking place. What is your sense in terms of how helpful an Strategic Debt Conversion (SDR) scheme would be for banks eventually?

A: It is a very positive developemt and we have never had these kind of situations or these kind of actions being taken by the banking sector ever in the past and this non-performing assets (NPA) problem keeps popping up every year 2-3 decades or so and this particular scheme which is put in place is very positive for banks.

Eventually it will be more positive for PSU banks than private sector banks and it will overall improve the lending practices which these banks are presently following and some amount of discipline will also come in to the corporate sector when it comes to setting up new projects or taking on additional debt.

So, it is a great thing for the Indian economy and long-term it will be very positive.

Maybe from an investment view point, some of these companies which are in fact being taken over, there could be special situation opportunities over there because you could get turnaround specialists over there and generally when it comes to reducing the debt, a new management can do a far better job than the existing management considering that they are ones who have gotten into the problem in the first place.

So, I would look at all these stocks undergoing debt restructuring or strategic takeovers in positive light-of course it will go case by case and overall the trend is very positive for the banking sector and Indian economy.

Anuj: Do you get a sense that Infosys or IT stocks are set to lead the market from here on? Today also we have seen Infosys up about close to 3 percent and we have seen couple of other IT stocks also do well?

A: In IT my views are fairly well known and that we remain extremely negative on large cap IT more on account of the base effect as also the fact that they are facing pricing pressure and volumes are not growing at the scale at which they should and really the global economy is not in the best of shape, so there are going to be demand issues as well.

So, the best way to play IT still remains through midcap and smallcap IT where there are niches and these companies are doing intelligent acquisitions or acquiring strategic customers and are still able to grow at that 15-25 percent kind of topline bottomline growth which the large cap IT isn’t able to do so.

So, no doubt I think that some positives have come through rupee depreciation but still the best way to invest in the IT sector would be to buy into a basket of small and midcap IT stocks and I don’t think that this slowdown in the world economy is more or less over as done with and that pressure will be felt more by the large cap It companies and some of the other exporters rather than midcap IT.

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First Published on Sep 9, 2015 12:18 pm
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