Are you riding the wave in the market or is there anything where you have profit taken or maybe even added positions?
Dipan Mehta: We are just pretty much quiet in the market at this point. The valuations are not comforting and we are sitting on a reasonable amount of cash for the time being waiting for a correction. Since COVID we have not seen a serious correction and markets have absorbed all the positive news flow. We do feel that there could be some technical correction also could take place.
Whenever it does, we are ready with our stock list and ready with our cash to invest, but chasing values at these levels does not make sense and I speak more out of experience having seen so many bull markets that if you buy at the tops, then two-three years down the line the, returns tend to deteriorate. Right now, valuations are rich for a lot of good quality businesses, and finding new stock ideas is a challenge as well.
At a time when you are saying it is difficult to find value and a lot of stocks have run up, some banking names are available at a price that is much cheaper than what the peak has been. Some of these stocks have practically given no returns for the last 12 months. Would you be a buyer on dips for these stocks then?
Not really because a lot of stocks already are over-owned and in a lot of portfolios including ours, there are a lot of banks. Optically, they are cheap, but these stock prices have gone nowhere because A) they are over-owned. B) They are the favourite counters for FIIs to target their selling when they are trying to liquidate their holdings in India. The third aspect is that growth rates certainly have slowed down, and a sense of stagnancy has come through.
In the case of banks, the key parameter to measure growth is pre-provisioning profits and those have flattened out for various reasons and even the growth rates, credit growth, and deposit growth have slowed down. So, in a slowing environment, you can expect the PE multiple, price to book to get compressed. But I am still hopeful of the long-term prospects of the banking sector and we remain invested in top banks be it PSU, or the private sector, and wait for the cycle to turn around for these banks, and at that point, they can again get leadership positions.
But for the time being, it is best to stay cautious. But if you are underweight banks and you are sitting on some cash, then this is a good contrarian play and you could look at buying into some of the banking shares as well.As limited as the listed space may be when it comes to smart meters, clearly this is one space where small players like Genus Power are now becoming big and of course, you have big mega corporates like Adanis in the same business. Should one not look at valuations and the run-up in the stocks?
Dipan Mehta: Genus Power has been a great wealth creator and it is a multi-bagger. A lot of investors did write this particular stock and the key aspect of course is the multi-year kind of order book position which provides a lot of earning visibility and they have been good at execution also which is reflected in good appreciation or increase in the turnover and profits as well. Maybe at an opportune time when it is available, the reasonable valuation, when there is an overall correction in the market, that may be a good entry point. But what Genus Power does, very few other companies are in the same line of business. It cannot be compared to Adani or any other utility company.
We are seeing a huge menace of power theft and companies like Genus Power have a very important role in trying to improve the yields or realisations which transmission companies can get from their network.
It has a long, great runway for growth and excellent prospects and I am just astonished at the order book position and surprised there are not more players in this business.
What is your take on autos because that sector was doing very well? We were all talking about the SUV craze that had taken over, the EV tailwind, and all of that, but there are chinks in the armour now. Inventory seems to be piling up. There are murmurs of higher discounts. How should one weigh in on the auto sector right now?
Dipan Mehta: Yes, and you could add that monthly volume figures have certainly come off. The benign raw material scenario cannot last going forward as well, there could be pressure on the bottom line. A lot of the premiumisation play also is over and done with. But this is a bull market and a lot of positive news is getting…, rather the negative news is being ignored.
I am very cautious about the auto shares now. There could be a cyclical downswing, it could take two to four quarters. Long-term prospects are great because of low penetration. But we should expect lower profits or flat profits for almost all auto companies over the next year or so and I do not think that has completely been factored in the stock price.
So, we could expect auto to underperform. But if one has a long-term view – 3, 5, 10 years or so, then you are still fine. But you need to keep in mind that there is a huge disruption taking place within the auto industry in terms of competition from EVs. How that shapes up is a key monitorable.