HDFC Bank Stocks | Volatility: Sit on the sidelines and let the volatility play out: Dipan Mehta

When there is so much upheaval happening, it is better to just wait it out and sit on the sidelines, looking for investment opportunities where major corrections have taken place. The long-term fundamentals are still intact and one has some valuation comfort. I do not have any stock in mind. The earning season will start and that is the time to analyse what has happened for the past year and what the management commentaries are and take a well informed decision. But for the time being, it is best to stay on the sidelines and let this particular volatility play out. In the past, I have seen that when one tries to trade in such a market, one invariably ends up making mistakes.

Do you see the kind of moves that you saw on HDFC, HDFC Bank as well as Infosys as an opportunity to enter these stocks? What are your recommendations?
The problem is that most people including us are already well invested in Infosys and HDFC, HDFC Bank. Now, whether you have HDFC or HDFC Bank, it is the same thing. So, it is just the disappointment of seeing your notional profits getting compressed because of the decline over the past few trading sessions. Maybe there is a one-off soft quarter that happens in investing, especially long-term investing.

One has to live with such quarters where managements miss estimates for transient reasons because nothing major has gone wrong in the long term trajectory as far as growth and earnings are concerned for both these companies. One has to live out this kind of a mild bearish period and hope that the next couple of quarters turn out to be better than what we have seen in the last quarter. Markets eventually will recognise that and stocks start to regain lost territory.

So one is a long term investor, one has to be prepared for two-three such soft quarters but eventually, these are great companies. The managements are taking a long-term view and long- term strategies which will take some time to play out. I am not that concerned about the correction in the stocks but we are not buying into them because we and our clients, more or less are mostly invested. In terms of individual stock weightage, there is no scope to extend holdings.

The large and liquid midcap IT stocks like Mindtree, Persistent and even the L&T twins are trading at a premium to Infosys and Tech Mahindra. Will that sustain? When the rally in IT started, these were high growth midcap companies. Now as growth and margins are contracting, can markets justify this gap?
Absolutely. I do not think that this valuation gap is unjustified if you are going to have higher growth rates with similar levels of corporate governance, balance sheet standards, return ratios, and capital allocation policies. Then midcap IT will continue to trade at a premium to largecap IT.

Also, now these midcap IT companies have been around for decades and the clients and the overall technology space has recognised their rule. There was a time when Fortune 500 companies would favour only the largecap global IT companies, but now they are seeing merit in giving projects even transmissional project to midcap IT companies which have a pricing advantage, a technology edge, which are more nimble footed and which can offer more value for money. I think that is a level of maturity as far as tech spending is concerned.

I have been watching this sector for the last 15-20 years and it is the first time I have seen that midcap IT on a sustained basis growing at a much faster rate than the largecap IT. This time this may continue for a few more quarters. Their small size certainly benefits them because even if they get $50-100 million contracts, it makes a big difference to their quarter on quarter and year on year growth rates whereas the likes of TCS and Infosys now really need billion dollar type of deals to make the needle move.

That I think plays out in favour of midcap IT and because of scarcity value, because of the great track record which they have and excellent communication, good level of guidance and understanding, I expect that midcap IT will continue to trade at a premium. But for the record midcap IT also has corrected significantly and if you look at the trailing 12 month PE ratios or even which is forecast for next couple of years or so, they are not as expensive as they were may be a month or two months ago at the peak of 18,000 where the Nifty was trading.

They have been in a corrective mode. Give two-three quarters or so and midcap IT remains at these levels will have many analysts coming in and saying that they are now at reasonable, almost attractive valuations and are great investment prospects. The key thing is visibility and visibility of earnings and sustainability of this earnings growth for the next several quarters.

If the Holcim India assets sale goes through, what will it mean for the cement sector and the smaller cement companies?
There is no point in speculating about what will happen because the new owners of this company if at all also do matter. For example, if an existing large cement player acquires these companies, then it will mean more consolidation and even better price discipline. Already the sector is legendary when it comes to pricing and price discipline. So when an existing player takes it over, then it changes the dynamics for the cement industry for the better.

If it is private equity, then also it is perfectly fine. But all I can say is that any change of ownership in ACC and Ambuja will be beneficial for minority shareholders. Both these companies have lost ground over the past decade or so since Holcim has taken over and what really is required is more entrepreneurial drive, more aggressive strategies on the part of these two companies to regain lost market share and grow at above industry growth rates.

Both these companies have got excellent assets. They have got a good distribution network and very good brands, It is just that management aggression was lacking and we saw many players which were well behind ACC, Ambuja having grown their capacity significantly, gained a lot of market share. With a change of ownership, the least one can expect is a change of that scenario.

Concerns remain in terms of supply side issues, semiconductor shortage, a fall in rural demand for the auto sector. Can the section really get over this speed bump?
Some segments in the auto industry are already doing well and some companies are also performing quite well within the segments. Commercial vehicles growth has already picked up very well and the likes of Ashok Leyland has seen good performance coming through. They are not that much impacted by the semiconductor shortage. It is a matter of time before the likes of Maruti and Mahindra & Mahindra start showing meaningful growth rates as base effect comes into play and as they start to manage their supply chain related issues.

Across-the-board, auto companies have taken price increases in a gradual manner and they are trying to get their margins back to what they were prior to this inflationary surge. Our top pick remains Eicher Motors as well as Maruti. The usual disclosure is that we and our clients are invested and we feel that once there is more visibility as far as supply chain issues are concerned. Also both these companies are sitting on very good order booking and volume should certainly pick up.

In both these cases also exports are doing pretty well and that provides a new avenue for growth for these companies and valuations at reasonable levels all along but I think auto companies have underperformed significantly and it is a very critical sector with high growth dynamics, good underlying fundamentals. It is only a matter of time before these companies start to deliver decent growth rates and that will pull their PE multiples also higher. The best pick remains Maruti and Eicher Motors which have excellent products and many other positive strengths going for them.

For the JSW Group what could it mean if their bid for Holcim India assets were to succeed?
It does not really impact the JSW Group companies which are listed and this is more on the private side. So let us see how it actually plays out and I think there will be many interesting suitors for such a valuable asset. Even the existing cement companies maybe interested in tying up or doing it by themselves and even a complete takeover by a private equity cannot be ruled out because wherever there is such large deals taking place, private equities play a very critical role in acquiring the company. They have the financial muscle and they rejig the management and try and get the company to perform much faster and far better. So, that cannot be ruled out.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)