Why don’t we start off by getting your take on the mixed quarter from Maruti Suzuki? They have spoken about the margins declining on high discounts, their exports have surged and their overall mid-compact segment has declined. How have you read into the quarterly performance?
Dipan Mehta: It has been a great Diwali so far. I know that there has been a correction, but from point to point, it has done really well for everybody in the stock market. Coming specifically to Maruti, this was to be expected and we are seeing a softer cyclical slowdown in automobile sales. But The Economic Times newspaper report says Mr Bhargava is a bit disturbed about the slowdown in the sub-Rs 10 lakh car sales and we need to just explore and track that a little closely, because if that is the situation, then certainly the medium-term prospects of the auto sector may get even more negative.
We should brace ourselves for three-four quarters of softer sales. And I have seen this pattern in Maruti and other auto shares, that one year, one-and-a-half year goes badly, then sales come back roaring because of new models, because of pent-up demand and overall demographics. So, as an investor, I would not want to buy more into stocks like Maruti, M&M and the new listing Hyundai. But if you are sitting on profit, as most investors are just now, it is better to wait out this rough period and this cyclical slowdown. Long-term prospects of the auto industry are very good. Having said that, we and our clients are invested in Maruti.
What exactly are you pencilling in L&T? Do you think we will continue to see muted order inflows into the coming quarters? And what would you like to hear from the management?
Dipan Mehta: It is the order flow. L&T has always been all about the order flow. And because they do not disclose the actual order value when they announce the receipt of an order, we have to wait for the management to finally give the figure for the quarter and that will be the key determinant.
This earning season has not been good at all. I would not call it a disaster, but it is certainly a big disappointment. And in line with that, you can expect some disappointment from L&T also. Base effect, overall slowdown, election has slowed down ordering as well as implementation. We should prepare ourselves for a softer quarter from L&T, maybe in terms of performance and in terms of order inflow also. What I said about Maruti is true over here as well, that there is a cyclical slowdown, it could be transient and the time to sell perhaps is gone. Just wait out this challenging period for the next two-three quarters and a company like L&T in a country like India has to prosper and grow considering how much demand there is for infrastructure projects. So, just wait for better times which could be two-three quarters down the line.
Do you think that is not quite the case with autos because over there, the softness in earnings has already been playing out. Especially in the passenger vehicle segment, the monthly sales data is also ebbing off, though the commentary from Maruti does not seem to be indicating that. Do you think much of the damage is behind us or do you sense that autos as a sector is going to languish for some more time?
Dipan Mehta: I will go with the latter, it is going to languish for some more time. As I said, considering the correction that has taken place and present valuations and looking at the long-term prospects, as an investor, I am not selling Maruti or M&M or any of the other auto shares. But I am not adding to the holdings as well as other investors also should not. Just wait out these three-four quarters. Nobody can precisely point out the quarter or month when the sales will start picking up, not even the company management. All we can say is that, it is a growing industry, penetration levels are low. And considering that we have a growing population and right demographics, somewhere, somewhere, somewhere, the long-term trajectory of the auto industry has to be a volume growth of a high single digit. We have seen that in the past and will come back in the future as well. So, from that point of view, we have to wait out these difficult times, if at all and at some point of time, you will see sales revival and then immediately operating leverages come into play and you may see performance coming through. There are certain triggers one can look forward to an auto as well. One big trigger could be a cut in interest rate whenever that comes.
The way the economy is moving and the slowdown which we are seeing, RBI may be looking at interest rate cuts sooner rather than later once inflation appears to be under control and that could be a trigger for the auto industry because a lot of automobiles are sold on financing. It could also be new models. So, I do not know what exactly the trigger is. But yes, definitely, long-term prospects are good and we need to wait out these slow demand scenarios.
Any view on the Swiggy IPO? I know you have not been big fans of IPOs to begin with. You want companies to report profitable growth on a consistent basis. But any initial views?
Dipan Mehta: No, not really. I would be careful of even applying for Swiggy because I just sense the sentiment is soaring, even at the retail side it is soaring. What we saw in Hyundai is an indication that retail investors are not going to lap up any and every IPO and there is already a Zomato, so for people who wanted to invest in a similar business model, they already have invested or looked at Zomato. So, I would be a bit cautious when it comes to Swiggy.
Waaree Energies was a different ballgame altogether. It was one of its kind listing of such a large company, which is into solar equipment in a sector which is growing phenomenally. So, it is a company that is in the right place at the right time.
But one should be a bit careful about Swiggy and other IPOs. I do not expect that the kind of stellar listings which we have seen in the last year, the last Samvat year, may continue going forward. I have been voicing caution in the market and I continue to maintain that view that we need to raise cash levels, reduce leverage positions and brace ourselves for some tough times going ahead. If you lower your expectations for returns for this year, then you will be able to manage the anticipated correction or softness time-wise, price-wise much better.
Is it time now to relook at Ola or would you completely skip it, especially in this market, and wait for them to come out with some material solutions and plans?
Dipan Mehta: Absolutely, just wait for Ola. All the new generation companies got listed with a big bang and then there was a steep correction and now they are regaining lost ground. Companies like Zomato had traded at all-time highs; it’s the same with Policybazaar.
So, what investors need to look for is that point of time when the management convinces them that, look, in this particular quarter or this particular year, they are going to turn the corner and start reporting solid profits. And once that uncertainty is out of the way, that is when you can see the bottom being formed. I do not see that yet in Ola Electric. I need to know and be sure that at this point of time onwards there is going to be a certain turnaround in the prospects of the company. Losses will stop and profitability will come back solidly and then we can project the future going forward. So, till that point of time, I would avoid Ola Electric.
Ola is very different compared to some of the platform companies. It is actually an auto company. It has got a lot of variable costs as well and it is not that just because you sell more, immediately you come into profitability. So, it will take a while for us, at least as conservative investors, to start warming up to Ola Electric. It has got a distance to go in terms of turning around and reporting solid profits. There is competitive pressure for Ola Electric as well. Right from Bajaj Auto, and TVS, they are reporting very decent sales of electric vehicle, electric two wheelers, and they are all upping their game.