IT stocks: Bullish on PSU Banks and Cement; avoid IT stocks: Dipan Mehta

Is it a good time to buy some of these brokerage stocks which have come down because of the changes which have happened in the brokerage activity because volumes are down, profits are down? Is it time to buy that bad news in a Motilal Oswal or Angel or some other brokerage stock?
Dipan Mehta: See, I would consider Motilal Oswal although it is a brokerage, but large parts of revenues are now coming from asset management, wealth management, and portfolio management and those fees are quite stable and the aum over there also is growing really well. So, it is like a company which has got steady profitability coming in from businesses which are annuity in nature and then, whenever the market does well, the broking revenues and related funding revenues also start to come off quite strongly.

The only issue is that there is the earnings volatility because of the investments which they have made, they have to do mark to market every quarter. But if you see beyond that mark to market provisions, underlying the growth is very strong and valuations also are very reasonable.

So, amongst the brokerages, my preference would be for Motilal Oswal. Angel, also is great no doubt about it, but it will have more earnings volatility and its dependency on options volume, on futures volume is much-much higher than a Motilal Oswal.

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After this recent run-up and looking at where the market positioning is, where are you shopping, where are you taking some chips off the table, and where are you completely inactive assuming that you will not touch that end of your portfolio?
Dipan Mehta: Well, the latter part is easy. We are completely avoiding the software services companies and rightly so because we are not sure about the Trump policies and how it will impact US economy and what effect it will have on tech spends.Sectors we want to slightly get overweight in is in the banks, but in the banks it is very clear that we need to get overweight in the PSU banks. If you do a quick screener of all the bank numbers which have come through, you will realise that the PSU banks are the clear-cut winners over there and their gap as compared to private sector banks on all parameters whether it is NPA or the growth in their credit growth or deposit growth, casa ratios, they are up very well to their private sector competitors, yet valuations are pretty attractive. So, within the banks if you still have space in your portfolio, if you are not adequately exposed to banks, then PSU banks is something which one can look at certainly expanding and then select companies here and there which are engaged in concept businesses, could be recycling, could be data centre, or could be platform businesses, no specific sector per se in which we are positive.

But another sector which investor should consider is getting slightly overweight in is cement as well, I mean I am surprised that for so many years I am getting positive on cement, but look the numbers are good and eventually the profitability and revenues also will go up as the volumes for this sector, so that is where we are trying to playing, kind of strategizing for the next few months. But as I said I think it is going to be challenging to find new stock ideas.

Wanted to get your opinion as well, the much cherished stock all the way from 40 to 230, in fact 300 kind of levels and then from there it has just been languishing.
Dipan Mehta: Yes, that is right and first a disclosure, we and our clients are invested and the reason for that is this competition which has come in quick commerce has just postponed the breakeven for that particular business, but we still remain quite positive on the company and its strategy and it is right for their management to invest, even more aggressively in quick commerce to gain an edge against competition and at some point of time as we saw in the food aggregation, the food delivery business, the quick commerce also will breakeven and start to get profitable and that point will be the inflection point for this stock.

Look, there are very few sectors and stocks which have got growth at this point of time and Zomato is one of them. So, I would remain invested in Zomato, maybe at corrections look at buying into it, but look this stock is for the long haul and you need to have a 5-10-year vision to be invested in Zomato and you cannot really evaluate on a quarter on quarter or a yearly basis as well.

I want to get back to Bharti , I mean well operationally, of course, things look fabulous, but the capex is extremely high for the quarter at 14,400 odd crore rupees, at 1800 on the CMP you think the stock is for now priced to perfection?
Dipan Mehta: No, again the disclosure, we are invested. If you are looking for largecap stocks with growth, certainly Bharti fits that criteria and even at these levels if you are benchmarking your portfolio against the Sensex, Nifty, then you should be overweight Bharti. It is one of the few rare largecap index stocks which has delivered high teens type of earnings growth for the last 10 years, very few businesses have been able to do that and 17% increase in ARPU is very impressive and still there is a way for the ARPUs or yields to go up higher from these levels and concerns around capex will gradually dissipate as it completes a large capex round and then going forward cash flows will improve even further. So, I would say that this stock is certainly worth investing in, but as I said we are invested in it, so our views could be biased.

I want you to analyse the entire chemicals space or rather speciality chemicals pool for us and how do you think in these tariff times this could be an opportunity for India and whether you like any companies here?
Dipan Mehta: See, first of all I am at a disadvantage and really, I feel I wish I had understood this sector better. But one of the few winning sectors in this earning season are these speciality chemical companies right from SRF to Navin Fluorine, Aether Industries. There are so many speciality chemical companies or I would say even (15L17) AP companies which have done really well at this point of time. It is difficult to really judge what their prospects are, but tariff notwithstanding they are getting into a better cycle going forward. So, you should be looking for more ideas within the speciality chemical space and what happened with UPL we will see many other speciality chemical companies do as well.

If you go for the larger companies, the SRF and Navin, they should outperform and deliver good returns going forward, but if somebody understands this sector better and it is quite technical in nature, this is certainly one sector where you can find a lot of winners and many stocks are trading at attractive valuations but one does not really know what the potential is because of the complexity of the business that they are in.