Do you think that the allocation to the IT sector is now moving from largecap to the midcap space because of more positive results coming in from the midcap companies like Coforge, Persistent, and Mphasis?
Dipan Mehta: Yes, absolutely and this is not a recent trend. We have seen for many quarters that midcap IT has outperformed phenomenally over largecap IT. It is reflected in the stock returns. It is reflected in the PE multiple and this is something, a phenomenon of the last two-three years because in the past whenever there was a bull run in the IT stocks, it was led by the largecap IT stocks. They traded at a premium. Their performance also was better than a whole host of midcap IT companies.
But this is a clear reversal and it is here to stay because midcap IT companies are still able to find those opportunities, small $20-$30 million contracts make a huge difference. Also, they have developed certain very strong competitive advantages in the verticals or the technologies which they are focused on and from that point of view they are able to take on the largecap IT stocks in the market pretty well.
So, I would say that the best way to play software has to be through midcap IT. The list may keep on changing depending upon which company is doing well, which vertical is doing well, what the order of position is. But by and large, I would say avoid the largecap IT and buy a basket of midcap IT stocks that may do even better.
Do you think the competitive intensity in the power equipment space will increase with L&T’s entry? We are seeing negative move coming in for ABB, Siemens, and BHEL. In fact, BHEL used to have a 100% market share in the power equipment sector and with L&T’s entry now, the competitive intensity might increase further.
Dipan Mehta: There is always competition and thankfully, the Chinese competition seems to have reduced. Otherwise, there has always been competition within India. The likes of Siemens and ABB, have moved on and they are focusing on niche, high value-added products and they want to get the right projects and where there are adequate margins and there are enough opportunities from them as well looking at exports also.
L&T is just going from strength to strength. But I think that the order book position is not as strong as it was a few quarters ago purely because of elections and therefore, the ordering has been a bit slow. And again, base effect, valuations, keeping all of that in mind you need to be a bit careful. L&T may look good at the correction because of its size, because of its order book position, because of the value of the subsidiaries. But the likes of ABB, Siemens, I would be a bit cautious.What is the view on FMCG? We are all talking about a rural recovery, rains being good, election impact and all of that, it is not showing up in the number and for what it is worth, the festive season has not really kick started.
Dipan Mehta: What Nestle reported was very disappointing and urban demand is pretty slow. And also, a lot of products have reached maturity. Over the past 15-20 years, a lot of the fmcg companies have gone deeper and deeper into the rural markets and whatever distribution, expansion, advantage or growth is already I think more or less reported in the numbers and priced in. Now it has to be overall growth in the category. Since consumption also has reached a plateau, I would be a bit cautious on FMCG as well. You have to really look for the categories where there is still growth, like look at the way the numbers came from Varun Beverages, a company in which we and our clients are invested in. Then, there are other companies like Bikaji also where these are the niche companies, they are focused on certain segments where there is still growth coming in and that is where investors need to focus on rather than the HULs and the Nestle and the Colgates or the Daburs where the volume growth is low single digit.
So, there is no way that they can generate that minimum 15% bottom-line growth on a sustainable basis for long term basis for investors to be interested in them and 15% is the minimum benchmark that investors should have in terms of adding a new stock to their portfolio. Other than that, you are just about trading and not really looking at creating a lot of wealth.
One space which is outperforming over the course of the last 12 to 24 months were the PSU stocks. Is it undone now and is it time to just stay away or do you expect a bit of a pause and then the rally will resume?
Dipan Mehta: Tier II PSU banks have reported very good numbers and in fact, if you compare them to private sector banks and overall other banks as well, their growth rates, their net interest margins, their NPAs, cost to income ratio, all of those ratios have improved significantly and are more or less in line with the best in class and at the same time, they do not have this problem of too many consumer loans or personal loans or for that matter, microfinance, which is going to impact a lot of other banks.
So, within the PSU space, I see tier II banks with nice trading and investment opportunities as well. Although as a measure of disclosure, we have not invested in any of them as yet. We are looking at them. They are on our kind of a shopping list. But that is one segment which can do very well, right from smaller banks like Bank of Maharashtra, Central Bank of India, Punjab & Sind Bank all of these came, IOB came with very good set of numbers and that will see outperformance over there rather than the large private sector banks or even like a PSU behemoth like SBI. So, within the PSU space, the PSU banks are the other space to focus on.
What is the pharma sector looking like after a strong up move that we had seen on a YTD basis? Do you think that the valuations are now expensive and all the positives like the bottoming out of US price erosion, is playing out for the pharma space?
Dipan Mehta: You should be overweight pharma though valuations are on the higher side. It is a good place to hide when you have so much of earnings disappointment all around you and because of export market, because of slight improvement in US generic market in terms of competitive intensity and a whole host of new launches, domestic as well as in US generic market which a lot of pharma companies are targeting and better US FDA compliance means that next few quarters will be very good for pharma companies, largecap and midcap.
I think that could be one segment where investors should be overweight and that may surprise early on the earnings front as well. So, when you are buying a stock, investing, trading, you want to have that kind of comfort that the earnings are coming through thick and strong in pharma stocks and that is what is lacking in a whole host of other sectors.