market strategy: Have markets bottomed out? Dipan Mehta weighs in on the road ahead

When everybody was, in a sense, worried about FII flows, what will happen to Donald Trump, what will happen to dollar index, markets have bottomed out. But have they bottomed out, that is the question.
Dipan Mehta: Have they bottomed out?

It looks they have bottomed out, they can come back down again.
Dipan Mehta: If there is no further bad news, then you can say that you have a bottom. But we live in dangerous world and interesting time. So, there could be any blowout at any point of time anywhere in the world, which may impact the sentiment. But all the bad news so far, that has got discounted and some of the concerns around slowing growth, they also have been gradually addressed.

So, we should see improvement in markets from this point on. And the focus should be on India growth stories or domestic oriented businesses because this Trump tariff is still remaining a big kind of a sword on a lot of industries which are externally focused. So, I would say that maybe the worst is over unless there is additional bad news and certainly, investors should raise their exposure to equities.

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So, the obvious next question is, where within the equity pool would you raise exposure?
Dipan Mehta: So, four sectors we have identified. First is banks and NBFCs, more preference for NBFCs than banks. Second is, surprise, surprise, cement. I have never been very positive on cement for the last several-several years or so. But this time round, it looks to be a good trading opportunity. The third is retail, especially speciality retail or tier II retail companies.

And last is engineering construction companies, the likes of Larsen & Toubro, Afcons, ITD Cementation, those kind of stocks. So, these are the four sectors where we want to be overweight.

In fact, investors can have 70-80% of their portfolio within these four sectors and that can, I would say, high degree of them outperforming the broader indices or some of the other benchmarks.

So, again, what within cement, the largest of the players or would you say have a basket approach?
Dipan Mehta: No, the two cement companies are really interesting at this point of time, ACC and Ambuja. And the reason for that is that amongst all the cement results which came for December quarter, they had the best in class.

Secondly, the productivity gains and the logistic efficiencies are really showing up in the numbers of these companies and they are very aggressive when it comes to M&A as well and valuation most importantly, I would say quite reasonable. So, I would put a preference for these two companies. Risk-return profile also is quite attractive.

But you also talked about as to how you are more bullish on NBFCs other than banks. Again, where within NBFCs do you think one should add positions? Would it be the obvious Bajaj Finance and Shriram?
Dipan Mehta: Not Shriram, but Bajaj Finance and Chola, Cholamandalam Investment and Finance, these two companies, first disclosure, we have investment in both these companies so our views could be biased.

But both these companies have managed all the kind of volatility and stress within the NBFC sector far better and especially their NPA collection has been pretty decent. Balance sheet size does matter in NBFC as also the fact that both have a pretty diversified product offering.

Bajaj Finance more than Cholamandalam as well and that means that by buying Bajaj Finance or Chola you get access or exposure to all the segments within the NBFC. So, very positive on these two companies, but I am sure some of the smaller ones also will do equally well, the likes of say IIFL Finance or Poonawalla Fincorp and some of the other smaller, L&T Finance also could do pretty well because the basic environment for NBFCs has improved, the reduction in risk weightage means that liquidity will improve, their interest rates may come off, and with the economy picking up and consumption expenditures picking up at the family and household level, there will be more opportunities to lend for the NBFCs.

It has been well-established that when it comes to the four-wheeler and the farm equipment space, it is clearly M&M which has managed to rule the roost. But do you think Tata Motors is looking attractive after the recent fall in the stock?
Dipan Mehta: See, certainly valuation-wise, it is attractive. But it has just got too many moving parts over there. And if Trump were to impose any tariffs on JLR, then that would certainly impact the sentiment. Also, within the global auto industry, which is what Tata Motors caters to, the entire shift is towards EVs and Chinese vehicles and from that point of view, I do not think that JLR has such an exciting portfolio on the EV side that it can match what the Chinese are offering. And within the domestic market also there is some amount of staleness coming into the models as well.

If you look at the M&M offering, it is far more interesting and far more exciting on the EV side and the non-EV side.
So, I would say that my preference is for M&M. Also, in M&M’s case, the tractor and the farm equipment divisions also have started to do well and this year if the monsoons are decent and reservoir levels are high, then tractor demand may also remain pretty steady. So, I would feel that from that point of view M&M is a better pick than Tata Motors.

What is your take on Jio Financials? Do you believe that at this price point and given the news flow for now that the company is gearing up for their major entry into the insurance business, is this a good time to enter into Jio Financials and what is your read-through from this news flow?
Dipan Mehta: See, although we are positive on NBFC and financial services, not that much on Jio Finance. A bit disappointed with the scale-up of operations and there are better opportunities elsewhere. So, I would feel that better to go with the Bajaj Finance or Cholamandalam or even L&T Finance, IIFL, they have better risk-return profiles than Jio.
And it is getting into many things at one point of time. So, many businesses are getting incubated in Jio Finance and all these businesses have certain startup-related costs which impact the bottom line. So, from a valuation perspective also Jio Finance does not appear to be that attractive.

That brings me to Reliance as well and especially I know Kunal says that the stock has a typical behaviour, it does not really move up in a bull market or fall in a bear market, it has a trajectory of its own where it goes into very-very long phases of consolidation and even underperformance, if you will. But what could be really that big trigger which will actually move Reliance from this kind of range that it has been stuck in for so long?
Dipan Mehta: Well, one of course is performance. So, every time if the performance is beyond what street is expecting, then that could cause a trigger. But more importantly, there are structural issues with Reliance with lack of clarity on how they are going to list the businesses, that is the telecom business, Jio, and the retail business.

So, unless there is clarity over there, this stock will continue to underperform. And more and more it does appear that they want to do IPOs for both these subsidiaries and that is not very good for Reliance shareholders because then Reliance becomes purely a holding company and then the holding company discounts start to creep in for businesses which are listed separately.

I would be a bit cautious on Reliance and growth rates also have been slowing down. So, I would say that there are better stocks within the large cap, no doubt a great company, but not necessarily a great investment at this point of time.

Sure, that is for fresh investments. But I mean, this is one of those core portfolio stocks. If you already have it and if you are in the money, do you exit is the question.
Dipan Mehta: See, first of all, if you are benchmarking the Nifty and the Sensex, then you have to have a holding in Reliance maybe underweight compared to its overall weightage in these indices. But from an investor’s perspective, where they are looking for absolute returns, I do not think it matters whether you are in largecap, smallcap, and do not need to necessarily have Reliance in your portfolio. There are many other stocks within the midcap space, largecap space also which have far better growth rates than maybe Reliance Industries.