See signs of capex recovery on decent cap goods Q4: Dipan Mehta

Good fourth quarter earnings so far in the capital goods space, particularly from electrical equipments companies like Siemens, ABB, KEC International among others, hints at first signs of recovery in investment cycle, feels Dipan Mehta, Member of BSE and NSE.  

Mehta is positive on listed Indian players in the electrical equipments and FMCG sectors on better demand outlook and decent valuations. Among FMCG’s he prefers Dabur India and Emami over HUL or Colgate.

Mehta feels investors wanting to put their money in the microfinance space should stick with the leader SKS Microfinance (now renamed Bharat Financial Inclusion Ltd.).

He advises staying away from public sector banking and sugar stocks even if tempted by intermittent spurts in their prices.On paper Thyrocare looked expensive, he says, adding, as a matter of policy, he refrains from expressing his view on freshly listed stocks or initial public offerings.Below is the verbatim transcript of Dipan Mehta’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18.Ekta: First wanted your thoughts on the turnaround or rather the incremental gains that we are seeing on stocks such as YES Bank, HDFC Bank as well as IndusInd Bank? HDFC and IndusInd for example are at fresh highs as we speak.A: HDFC Bank a bit surprising and difficult to answer because you are not particularly impressed with the results. If you strip out the onetime gain on selling of the stake in the insurance subsidiary, the core operations clearly are kind of flattish and way below their growth trajectory we have seen in the past. IndusInd and YES Bank they came out with stellar set of numbers and market has been rewarding them since then. Investors would like to put about 25 percent or thereabout of their portfolio in banks and financial services. The top picks remain HDFC Bank, IndusInd Bank and YES Bank, so I am not surprised with the move in YES Bank and IndusInd Bank but HDFC, one need to go bit deeper.Anuj: The stock of the day of course is the listing of the year Thyrocare Technologies. At current valuation what is the call now? Do you think it is still good for more or is there temptation to now book some profit and may be enter later?A: As a general rule we don’t track the IPOs and we would like to give them at least 8 to 12 months for us to really understand the fundamentals and the long-term growth prospects of the company. Around the IPO time there is a lot of froth and lot of speculation taking place and that is difficult to exactly assess what is the true value of the company, so I wouldn’t want to comment on Thyrocare this point of time. All I can say is that on paper it appears to be quite expensive. Ekta: Talking about something like a Siemens which surprised on the margins did you take a look at the numbers and what you thought of that?A: Good set of numbers coming in from all the electrical equipment companies. It is not just Siemens; we saw ABB Engineering also, KEC International and some of the smaller ones also like V-Guard Industries and the other home electrical companies also have done pretty well, so this is what we are seeing. All the time we are hearing about green shoots and pick up in the economy and capex cycle also about to get revive, I think these are first signs that investment perhaps is finally picking up. Many of the larger sectors be it infrastructure, be it railways there they seem to be gathering momentum which is why we are seeing these kinds of numbers coming in from Siemens. Also I think what is benefiting the entire capital good structure is lower commodity prices. That also is driving demand and helping these companies maintain margins. However, my preference again over here would be for the Indian electrical equipments companies. There they are reasonably priced and decent order book position as compared to the likes of say Siemens or ABB or Alstom which are quite expensive. If you consider that their track record has been pretty volatile and patchy in terms of topline and bottom-line then these companies, especially the MNC electrical equipment companies do not see that great prospects in them.Anuj: We are expecting numbers from Hindustan Unilever (HUL) and you don’t expect a great quarter for HUL. What is your call on the stock and do you preferred picks apart from Lever in this space?A: In the FMCG industry the investor has to be in the segments where there is high growth and not in the segments which have maturity. So, you have to avoid the soap companies, the toothpaste companies and the detergent companies and focus on companies which are in food or personal care or hair oil or insecticides businesses. If you take that particular strategy in mind then the likes of Colgate-Palmolive and HUL have to be avoided and you have to go for the Indian FMCG companies the like of say Emami or Godrej Consumer or Dabur for that matter. Clearly, we have seen over the last five to six years or so the Indian FMCG companies have grown at a much faster pace than the MNC FMCG companies and that is where the preference has to be. The likes of Hindustan Unilever and Colgate and all don’t see great growth rates over there and they may have one or two good months or good quarters. However, long-term growth prospects are certainly not as good as or as bright as the Indian FMCG companies. So, when you are looking for allocation in the FMCG industry you have to be in the Indian FMCG companies and as such the likes of HUL and all we are expecting flattish performance over the next several quarters. Ekta: Wanted your thoughts in terms of two companies Equitas Holdings as well as SKS Microfinance? Equitas came out with what was a good set of numbers, net interest income (NII) up around 39 percent odd but net interest margins were a bit sluggish so maybe that is why this stock is down around 2 percent odd. SKS Microfinance came out with what was another stellar quarter in terms of disbursements, asset quality etc, if you had to chose between the two would you?A: That is a no brainer. You have to go for SKS Microfinance. Investors keep making this mistake trying to go for tier-II, tier-III companies in the same sector, whereas the market leader clearly continuous to outperform and deliver spectacular returns to investors. We have seen that in HDFC Bank as compared to other banks in tier-II, tier-III banks HDFC Bank has performed exceedingly well. This is the trend across the board in several industries and now just because we have a choice in the microfinance segment doesn’t mean that investor should sell SKS Microfinance and go for the like of Equitas, some of the other new listings or the IPOs which are coming through. The growth rates of SKS Microfinance remain exceedingly top of the line as far as the industry is concerned. In a way Indirectly the fact that it is not a bank that plays out in favour of the investors because a lot of the macro finance companies which are turning into banks they are going to face major challenges in terms of managing their profit and loss (P&L) and all the provisioning which they have to make from time to time for Cash reserve Ratio (CRR), statutory liquidity ratio (SLR) as well as the entire transition from an NBFC to bank is not going to be that smooth.We are seeing it in IDFC Bank itself where we were also gung ho about the prospect of it becoming a bank but then a performance last couple of quarters has been disappointing. So, I would say stick with the market leader, stick with SKS Micro, you will get better returns over there. Having said that SKS Micro remains our top holdings within our own portfolios and that of our clients.Anuj: Anything that you would want to avoid right now completely?A: PSU Banks, they have been beaten down and on and off we do keep hearing measures to improve their non-performing assets (NPA) position and the latest bankruptcy laws certainly will help. However, this is a sector which is clearly losing importance, losing ground, losing market share and that has to be completely avoided. Temptation to buy into a stock just because it has dropped 70-80 percent and rallies 10-15 percent has to be curtailed at least as far as investors are concerned. Traders can go with the momentum, go with PSU banks or any other such poor quality businesses. So, that is one sector which has to be clearly avoided.Second are the commodities, the metal companies, sugar to an extent, they are seeing a cyclical upswing some kind of government action also has helped them. Investors if they are invested in those sectors should consider exiting out of them may be not at one shot but certainly, gradually. This upswing which we are seeing in those sectors with beaten down sectors may be a good opportunity to exit completely out of these companies where the long term prospects are not that great and prior stats record has been extremely poor.