We are getting into a broad-based rally: Dipan Mehta

If stock prices are doing well, an economic recovery is perhaps a few months down the line, says Dipan Mehta, Founder & Director, Elixir Equities. Excerpts from an interview with ETNOW. Is it true that Nifty is 500 points away from an all-time high, the market breadth has stabilised, FIIs have stopped selling and finally HNIs have also started buying?What can I say, acche din aa gaye (good days are here). But are good days really here or is this momentary rise, not a rally?Stock markets are lead indicators and if stock prices are doing well, an economic recovery is perhaps a few months down the line. By and large, there are cycles and this particular base cycle seems to be over and going forward, if there is no incremental bad news and in the financial front, there are no blow outs as far as fresh slippages are concerned, gradually the economy will start improving and that will get reflected in stock prices as well. The corporate tax cut has been a game changer and it is now pretty evident in the earnings which are coming through. You may keep on arguing that PBT profits are same but at the PAT levels, the earnings per share which is the most important data point for analysts for valuation those are improving significantly even where companies have been reporting flat to negative growth rates. Yes, margins have gone higher, cash flows have improved and corporate can now start spending.Absolutely yes. All these factors put together give a lot of confidence and in any case, there was always money waiting on the sidelines globally as well as in India. It just needed the right tipping point and that came with the September 20th announcements. The markets have clearly turned. The challenge is Nifty has been fooling us. We may be up 10-11% over last one year, but it has all been about the 5-6-7 stocks. If you bought those stocks, it is great. But crowded trades are seldom over-owned trades. Should we stop looking at the Nifty for now?You can do that at your own pedal. Fact is that we all benchmark ourselves to the Nifty. Mutual funds, fund managers look at the Nifty. It is a major global index and if it is going up and those five stocks are taking it up, then so be it, you cannot argue against that. But I do feel that we are getting into a more broad-based rally. Across-the-board sectors are starting to do better, take cement for example. Now auto, auto ancillary has also turned around. So by and large we are getting the rhythm back in the market. Of course, there is still a concentration of trade in the good quality 10-15 stocks, but it is percolating to the rest of the market and this trend will only gather more. Everybody knows that those 15 stocks are expensive but nobody wants to touch the tier II, tier III stocks because of various uncertainties -- earnings balance sheet, corporate governance, whatever. But incremental flows will find their way into the tier II, tier III stocks and the gap which has been widening, has started narrowing already and this trend will gather momentum. Looking at BPCL, you want to do a bit of a double take. The government’s divestment drive has taken off. Do you think a lot more strategic stake sale is required or the fact that they are even have got this on their priority list is a major positive?It is a reform process and the market thinks that it is the beginning of a major reform process as far as PSUs are concerned. The problem with the PSUs is that there is excessive control by the government over the PSUs and these are in businesses where they should not be. Because of whatever reasons, they are not as efficient as the private sector and if a disinvestment like BPCL goes through successfully and the political fallout is manageable, then it will embolden the government to do more such disinvestments. In order to do that, they will have to first clean up the PSUs as far as control, corporate governance, efficiency, all these factors are concerned, make them attractive for the foreign or local investors who want to look into it. The whole process is a very powerful investment theme and many investors will like to ride on it. Also what favours PSU is low valuation, businesses are great businesses in terms of monopolies. Balance sheet wise, they are all excellent, at least the listed ones and they have very high return ratio. They are great businesses in the wrong hands and if those hands are changing, or if there is a subtle change in the way as those PSUs are being managed, then there is a great scope for PSUs to rally even further from this side. The classic, the best stocks to buy are the ones where we see earnings increasing and the PE is expanding and that is possible in the PSUs where the earnings also move up and the PE multiples kind of shoot up.While Air India, BPCL are very large disinvestments and some of them are of strategic importance, do you think government will be easily able to slip a Concor or BHEL out?It should be, let us see how this plays out. Right now, it is all up in the air. Let one disinvestment get done in the right spirit because in the past government has tended to sell its own stake from one PSU to another. … ONGC, HPCL or PFC and REC…It is an evolving situation and if it happens in true earnest, we have to see what is the political fallout. But just to start buying stocks based on the idea that they will eventually get disinvested, is like taking a punt. It may work out, you may take a small exposure to it but the likes of BHEL or even BPCL for that matter can never be part of the absolute core holding. The top five holdings cannot be these companies because we have seen in the past that the government goes back on its entire plan of disinvestment and then these stocks end up going nowhere like a BHEL. I do not know what is the scope in terms of earnings growth and other factors we value it on, but if you disinvest it, then the new player who comes in will sell the land, will reorganise the business, focus on the right products and turn around the company and extract its full value which the government cannot do. Also keep in mind that the PSUs have got very strong labour unions as well. How that plays out also is extremely important. It is early days as far as India’s strategic disinvestment programme is concerned. Let us see how it plays out that is what I should say. What do you make of the move in auto names post the festive season? Double digit sales growth that has come in, strong commentary from the likes of Anand Mahindra. Can we say that they are safely out of danger zone or would you attribute this purely to festive demand?The turnaround in auto was long overdue and it is great that we are seeing these kind of pickup, especially in the festive season. Most analysts and industry observers say let us see what happens in November, December or so. The advantage in auto is that we get quality data month after month and we are getting even registration data these days, although that is not as accurate. As an investor in auto industry, I would like to see a few more months of double digit growth rates, see how that is playing out before deciding on the increasing exposure to auto. But I tell you one thing I am not happy with is the long-term trajectory of the auto industry. It is not a sector which is going to be a market favourite over three-four years or so. The reasons are partly structural, partly comparative intensity, partly disruption which is taking place within the sector. I would be very careful to play the auto shares going forward. They are great trading bets because they had been oversold, under owned and now you have some positive news flow, so you will quickly have that upswing. But can they scale to their previous highs and give returns from that on a consistent secular basis? I am not so sure.

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