market crash: Expect a deeper correction; not buying anything at this point of time: Dipan Mehta

Dipan Mehta, Director, Elixir Equities, says “while not selling out completely, you should at least trim your positions across the board and don’t invest any further money at these levels.”

Mehta further says” “other than largecap IT where there were hardly any expectations and even just about beating the expectations of the investors and the analysts led to a rally in stocks, by and large it is going to be a tough earnings season and you can expect this kind of volatility.”

What do you make of this weakness that you are seeing in the market? HDFC Bank, of course, is the starting point, but across the board, there is a lot of weakness. Does it give you the opportunity to buy into it or do you think this is just the start of the fall, we were just waiting for a trigger and it has only started?
Dipan Mehta: This is something which I think I had articulated as well that the earnings season may turn out to be a bit of a disappointment purely because of base effect and very heightened expectations and I think HDFC Bank has just been the first result, which I think proves this hypothesis that the earnings, although they are pretty much decent, but just the expectations are running high and earnings may be slightly muted on a year-on-year basis because the base effect will catch up.

This trend will continue right throughout the earnings season for many of the blue chip companies which have run up significantly. Only exception, of course, is largecap IT where there were hardly any expectations and even just about beating the expectations of the investors and the analysts led to a rally in stocks, but by and large it is going to be a tough earnings season and you can expect this kind of volatility. I do not think the market will stop at these levels. You can see a deeper correction, so I am not buying anything at this point of time.

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But how are you protecting capital? Would you say that book profits and this time not just be restricted to small and midcaps, but even largecaps perhaps?
Dipan Mehta: It is a good idea to book some profit at this point of time, especially in slightly not so great fundamental stocks, especially the ones which have run up significantly and are trading at very rich multiples where the track record or the corporate governance standards are a bit of a suspect, so those should be targeted first.

You may not sell out completely, but at least you should trim your positions across the board and one other important decision is that not to invest any further money at these levels. See, most investors keep getting some amount of incremental cash flows which they want to deploy into equities, I think that they should pause at this point of time. My expectation, and I reserve the right to be wrong, is that you will see the markets trade much lower from these levels as the earnings season progresses.

Do you think financials which was expected to see a bit of a pickup given the underperformance we had seen last year, that case is getting challenged now because for the initial set of numbers that we have seen there is clearly going to be increased fight for deposits and the credit cost is something which might come under pressure, do you think this is getting reflected in the stock prices well enough?
Dipan Mehta: I think there is somewhat of extrapolation from HDFC Bank’s numbers on to the rest of the banks and NBFCs and yes, certainly, there are some minor headwinds as regards net interest margin ratios and marginal increases in NPAs. But I do not think that the longer term bull market or the longer term positive trends in NBFC, banks is going to materially change and also same holds true for a lot of the other earnings in other sectors as well.

All I am trying to say over here is that expect one or two quarters of slightly softer earnings which on a standalone basis without considering the stock price performance and the investor expectation will be decent. But it is just that for stock prices to move up from these levels, not only you need companies to beat their earnings expectations significantly but also for investors to lower their expectations and that is not happening.

So, it is just a bit of expectation mismatch which will cause a correction in the market and that correction could easily be 8% to 10% on the broad market indices from these levels or so. It is not that this multi-year bull market is now over or something, it is just that this phase, I think, of the bull market would perhaps end as this earning season gathers momentum.But given the fact that the long-term bull market is still intact, I am sure at some point of time one needs to keep the buying list ready to deploy, maybe if not today, over the course of next two-three weeks because obviously it is impossible to time the bottom. If you had to keep your shopping list ready, which are the sectors and stocks that you would watch out for?
Dipan Mehta: See, I do not want to answer that question and I am going to duck it for the simple reason that we have an earning season coming up and a lot of companies will come with good numbers and not so good numbers and disappointments as well and we are just too close to this earning season. So, I would just like to wait and watch. Normally, I advise clients and we ourselves do not do any major investing or trading activity during the earning season. Like for example, say a week ago I told you about HDFC Bank and mind you HDFC Bank had been on the buy list of almost every fund manager and analyst and we had a number like this, then there was no point making that recommendation at that point of time. So, it is better that you see the results, analyse it, see what the management has to say, where is the price turning multiple at this point of time and then maybe make a more informed investment decision.

But we all know the larger investment themes in India, that is the capital goods sector, the consumption-oriented sectors, and to an extent I think IT also is revving up pretty well. So, broadly, these are the three investment themes that we are presently invested in and looking for new ideas over there. It is just that we want to see the results and then take a plunge.

And that is the other thing that this fear that you are seeing after HDFC Bank play out amongst the market, it is rubbing off on ICICI Bank and IndusInd also which are due to report their numbers later this week.
Dipan Mehta: Yes, I think it is natural. You see also there is a lot of trading activity and there is a lot of F&O positions as well in the market at this point of time and kind of a perceived to be bad number like HDFC is going to have an impact on other peer group companies as well. But it does not mean that the results per se of IndusInd or ICICI Bank may be as bad as HDFC Bank because there are different considerations with HDFC Bank, the merger being the most important one.

But I still maintain that the numbers will be decent if you look at them in a manner…, if you remove the expectations from the number they will be decent and it will show that these companies are on course, they are following the path, they are more or less within the kind of internal management estimates. It is just that I have never seen the market enter earnings season with this kind of an expectation that earnings will go up as fabulously as the street is expecting, that may not materialise.

Reliance is due to report its numbers. We have seen the rally that has played out in the last one week or so on Reliance. On Wednesday, of course, a lot of it is getting undone, thanks to the overall market weakness. But what is the expectation from the earnings on Friday?
Dipan Mehta: I think there will be a decent set of earnings. More or less, the numbers will be quite good. But as I said, expectations are running a bit high. You could expect a better quarter as far as Jio is concerned considering the kind of increases in ARPUs that we have seen and new subscriber additions as well. But a lot of questions will be on the new investments and new energy which Reliance is making and, of course, every time we do ask this question about unlocking of the value of the subsidiaries, that is Jio, as well as the retail business, how that is being unlocked, is it going to be an IPO or split in the company I think that is the most important question that management needs to answer.

But as a tactical call, since you do anticipate that the market is going to get a little bit weaker from here, what is the call on PSUs at large, ex banks? Do you need to profit take there?
Dipan Mehta: If you are overweight PSUs, then just stay put. But if you are underweight PSU stocks and these stocks also will correct in line with the market, then it is a good entry point to try and get equal weight or slightly overweight on PSU, including PSU banks also I think look at Bank of Maharashtra numbers, I was personally quite impressed with the numbers in terms of credit growth, net interest income, and even their NPA levels.

So, more and more we are seeing the PSU banks’ behaviour and numbers and qualitative factors catching up with private sector banks, that is one. Then, the large part of the PSUs are the ones engaged in capital goods, those also will do very well. They have got great earning visibility, be it in defence, be it in railways because of bulging order book position. So, at corrections, if they correct by 15-20% or so, then they are great entry points.

Lastly, of course, are the oil marketing companies, those I would just kind of wait and watch. Although if there is a correction there, you could expect a trading rally because the environment is certainly improving for them in terms of lower oil prices. So, I think more or less if a portfolio is underweight PSU, then this correction is a good time to kind of get equal to overweight.

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