budget 2024: Market can only go up now irrespective of Budget. Here’s why

Just when you think that the market is getting a little toppish, it moves a little bit more and now it is the private banks that have taken charges. But what next? Do you think it is time for some consolidation ahead of the Budget in the run-up to the Budget at least?

Dipan Mehta: We are seeing consolidation underway and this is the full power of money coming into the market which is visible on the screens over here, that there has not been a reaction or a steep correction for many quarters and it may continue like this for many more quarters ahead as well because there are no triggers for the market to correct. We are in a complete blue-sky scenario which I have not seen in years or decades if I may say.

Irrespective of whatever comes in the Budget, the markets can only scale higher and higher and valuations can only go higher and higher because of the force of the money which is coming into Indian equities. And fortunately or whichever way you look at it, depending on whether you are a bull or a bear, there are not so many mega IPOs also happening. And whatever supply is coming in in form of QIPs or promoter selling or new listings, new IPOs, all of that is getting more than easily absorbed by the massive quantum of money coming into our equity markets. So, this is no longer markets going up purely on fundamentals. It is a market going up because of the force of liquidity which is coming into it.The underlying theme seems to be the fact that rural recovery is high on the agenda, and is a high priority item for the government right now. If you had to play that theme of rural recovery, which is the best way to play that?Dipan Mehta: The best way to play that as well as a good monsoon is the agrochemical companies and the fertiliser companies like Zuari or Coromandel International. Dhanuka Pesticides also comes to mind. PI Industries, is a great company focused on contract manufacturing for global markets and has got a very solid Indian business as well. So, I would say that rural recovery and good monsoons are the best way to play would be through these two companies.

Then, in auto, there is Mahindra & Mahindra, which is India’s largest farm equipment company, and tractors and farm equipment have been a laggard, and despite that the company has displayed such exceptional financial performance. So, when the tractor market also starts to move higher, then that also starts to contribute to the company’s top line and bottom line. So, there are a few choices for investors available when it comes to rural play. I would even add microfinance companies to the list. They are also trading at extremely attractive valuations and there are a few pockets of concern about loan waivers, that ugly trend has raised its head, but the microfinance industry has been dealing with it for the last several decades and I am sure this time also they will be able to manage that particular risk factor. But these are all companies which have if you see the last three-four years except M&M, they have broadly underperformed the market. But now I think there are solid triggers in place for them to start outperforming.What is your view on the FMCG plays? Is this just a tactical move or would you say that there is something constructive here and there are more legs to the rural recovery play?
Dipan Mehta: FMCG also benefits from higher rural spends and there could always be premiumisation play in the rural markets, up-trading instead of down-trading, which may benefit FMCG stocks. But I am not a great fan of FMCG at this time. A lot of their categories are, I would say, mature categories, soaps, detergents, hair oil, shampoos. I think more or less their growth rates will be in line with population growth rates and I am not that bullish on these companies. We want to buy businesses that can grow at a solid 15-20% type of top-line growth rates. I do not see that happening in a lot of the FMCG stocks, so I would like to avoid them. There are many choices when it comes to rural play. You could even add two-wheelers to the list as well as fertilisers, pesticides, and M&M. So, there are so many choices that are available and I would say focus over them rather than the FMCG stocks.

What do you make of this latest SEBI circular on uniform pricing? Do you think this could have a long-lasting damaging impact with the kind of zero brokerages and discounting going away and do you think that could hamper the investment environment in the country?
Dipan Mehta: No, not at all. It will go a long way towards improving the investment and trading environment and provide a level playing field and some of the practices which were not so desirable will get curbed. And on the whole, it is very positive. Even for the discount brokers, it is positive because then they will look at charging more fairly and I would say more transparent manner. And it is not the only source of revenue for brokerages, but they will work around it.

The broking industry has had so many challenges in the last 15-20 years and still has gone from strength to strength all thanks to the market. So, this is a great time for the regulator to make such changes because we are in a bull market situation and all of these damages and costs can be easily absorbed. So, it is a step in the right direction. I completely welcome it. There will be a few stock brokerages that will be impacted, but they are very strong and they will find ways and means to cover that revenue gap.

Any high hopes from IT this quarter? Do you think that finally, the earnings could have bottomed out?

Dipan Mehta: That is a difficult call. Let us just wait and watch. We are getting into earnings season; IT is always first off the block and let us see what the managements have to say. I am not going with great expectations. I think that software service companies are more of a FY25, 26 story. And some amount of buying will come before that. But the real earnings growth will come only in that in the next fiscal. And most importantly as we did in the last earnings season, we should be tracking how big this AI opportunity is for the IT services industry. I did not have any clear answers in the last earnings season, but then it is a very fast-paced kind of vertical. Let us see what managements have to say this time around.

What about defence and manufacturing as a theme? Do you think there is a risk that perhaps if there is not as much part of government focus as the Street is expecting in the Budget, some of these stocks can get de-rated or do you think it is a fundamental structural story of India that it is going from strength to strength as far as the manufacturing ecosystem is concerned?
Dipan Mehta: Defence manufacturing stocks largely have been well discovered. They are trading at really fancy multiples, whether it is private sector, or public sector, and some of them are, of course, delivering on the numbers as well. But the Street has discounted these stocks too much into the future. Of course, there is earning visibility, but that also has been discounted. It is a fast-moving train; it does not make sense to get onto that train at this point. After 25-30% correction for whatever reason, they may be worth it, but at these levels, I would not advocate getting into any of these defence or railway stocks.

How much more leg is there to the realty rally? And does it seem like there is value on the table right now also to add perhaps into any of these real estate names?
Dipan Mehta: No, I would be a bit cautious on real estate also. The last 12 months being in that segment has been amongst the best-performing vertical within the entire stock market and valuations are on the higher side over there. No doubt they are keeping on adding new projects and new opportunities are coming their way. The turnover per se, new home sales, and resale, I think all are shaping up very well. Prices also are holding up very well.

I have not seen such great trends in the real estate industry in decades. But a lot of it has been captured in the stock price and for an industry that is cyclical and mind you it is cyclical to start paying very high price to earnings, price to book multiples is not a wise strategy. So, I just want to wait and watch. Real estate being cyclical, you will have a phase where there could be correction because of an actual slowdown in new home sales on new projects and that may be a good entry point with a long-term view, but not just now.

Have you looked at these latest IPOs that are underway and quite a few at that? For now, we have Bansal Wire, which has been fully subscribed on day one itself and even Emcure has got a great amount of traction. Have you looked at either of the names?
Dipan Mehta: Emcure will be on our watch list because we are very positive about pharmaceutical companies. I think that the pharma industry seems to have entered a new growth phase. Domestic formulation sales are steady. US generic market, there is slightly lesser competitive intensity, newer opportunities opening up over there, and Indian companies can manage US FDA inspections far better.

Even global pharmaceutical markets are looking up and the rest of the world excluding the US also revenues are pretty strong. Raw material prices are pretty stable for the industry as a whole. So, very bullish on pharma, and in the event of there being some turmoil in the Indian economy or Indian equity markets, pharma is a great defensive play. So, any pharma company, and especially I would say a major player like Emcure will be on our market watch list. But I think the IPO is coming at expensive valuations. Let us see six months, one year down the line, post reporting two to three quarters of earnings where the valuations are standing at.