3 sectors Dipan Mehta is bullish on for near term

” I would like to just buy these midcap IT stocks at slightly more reasonable price to earnings multiples so there is margin of safety,” says Dipan Mehta, Director, Elixir Equities.

At what point in time IT becomes what banks were in 2021. 2021, nobody liked banks. Everybody was worried about the impact of impact of Covid. Everybody was worried about what essentially will happen to their balance sheets. But those who bought banks in 2021 they had a home run in 2022 and 2023. Are we reaching that point in IT where there is a lot of disbelief, nobody likes them and it is time to now pick up your bargains?
You are right but they are not really cheap as well. I mean, if I want to strategize for IT for the next five years or even longer, clearly my preference has to be for midcap IT. The likes of Persistent Systems or Tata Elxsi, Coforge, those sort of companies which have really grown significantly in the last 3 to 5 years, have shown solid 20% plus type of revenue growth rates and steadfastly maintained their operating profit margins, managed the entire environment and also the kind of attrition pretty well and created very strong niches for themselves.But these companies are still trading at a very high PE multiples premium to the larger ones, like Infosys and Wipro, HCL Tech, Tech Mahindra. So while you get the comfort that maybe one or two quarters may still be bad for IT companies, but then it is not that they are really cheap and way back in 2020 banks were really attractive PE multiples as well. So it is just kind of a wait and watch and see how this thing plays out and maybe if you find that these midcap stocks go nowhere for maybe a year or so and earnings go up by 20-25% or so then that could be a good entry point.

I would like to just buy these midcap IT stocks at slightly more reasonable price to earnings multiples so there is margin of safety.

Can Tech Mahindra be the dark horse? There is a change of guard there. This is one company where the intent of the promoter group is to turn it around. They have turned, Mahindra & Mahindra, they turned around M&M Finance. They have turned the auto business. Tech is where they have a scope. It is like work in progress. The company is not lived up to the Mahindra brand. Could next five years be different for Tech Mahindra?
I think I will wait for the results to speak for themselves. They are in the telecom space and we are seeing that 5G will eventually drive tech spending within the telecom space but that is not visible so far and the company clearly has lagged its peer group.

So I would just like to wait for more consistent numbers, industry outperformance before I look at Tech Mahindra again. As I said, right now, the focus is on a lot of the midcap IT stocks.

We are trying to find the next maybe Persistent Systems or KPIT Or Tata Elxsi, for that matter because really, these midcap IT companies are creating very strong niches and they are able to compete very well with the large cap IT on their turf.

Even as the industry matures, I think there is clearly understanding that midcap IT stocks do bring value to even the largest of the Fortune 500 customers. And midcap IT I think in small acquisitions 30-40 million dollar orders, very specific position in a particular vertical could be auto or could be IoT or EI or any specific niche vertical also ensures that they grow at 15-20% thereabout top line. And that is what we are looking for in a company.

ONDC, now this is something which is path breaking. While there are banks which will benefit, there are merchants who would benefit what happens to Swiggy and Zomato, there are a lot of screenshots which are flying around in social media and WhatsApp groups that suddenly the ONDC network if you order a burger, it is 30 rupees cheaper?
That is right. I think that certainly does open a risk factor for Zomato but it also opens an opportunity as well because the ONDC, as I understand, you still need delivery partners and maybe Zomato could offer just its delivery services over there.

So I think it is a very volatile and fluid situation. And the success of ONDC also needs to be tracked very closely because quality assurance is a big, big factor on ONDC, which other platform companies be it Swiggy be it Amazon do offer and the comfort level is higher with such platform companies than newly established ONDC.

So I think it will go through its phase of maturity. It will go through its phase of understanding and acceptance but for the time being, I think Zomato and Swiggy going from strength to strength. It is a fabulous duopoly and they are changing habits as far as consumption is concerned. Eventually, it is going to become more and more mainstream ordering food from outside than cooking at home, especially with the millennials and the generation Z.

So I am still quite positive on Zomato at its present valuation but yes, you have to keep an eye on all the disruptions which are taking place within the sector. So I mean, Zomato was a disruptor itself who knows it could disrupted by something else like in ONDC.

And it is not that you are going to bet the bank on a stock like Zomato, it is just that you want to have a small position in it because eventually if they are able to show profits and go fabulously in the black, then this stock could be a multi bagger over a 5-10 year period.

Let us say if you have to bet the bank or have a very high, disproportionate allocation for the next three years, what are those names where you would say, look, the index weightage is five, I will keep 10 or I have had a 5% weightage historically, I am happy to make it 15. What are those two, three names where you think you want to be overweight or have a disproportionate amount of weightage?
First we have to have very strong disclosure in place that if I am going to say these names, then I have a personal positive bias for these companies, recommendations for investors to buy but at least we are putting our faith in these companies as of now. So on the top of the list is L&T. We did not go to the reasons except to say that it is in a fabulously sweet spot. And with the way the capex cycle is playing out, elections down the line, government spending going up, this is one company which will benefit significantly from whatever was happening in the environment, a lot of value being created in the subsidiaries as well.

So this is like and I would create it as among the core holdings. The second company, I think which comes to mind, is Cholamandalam. We have been consistently following this company for several years, very impressed with the way they handle the IL&FS crisis and thereafter the Covid crisis. And it is a fabulous lender, very good systems when it comes to managing, the risk compared them with Shriram Transport and M&M Finance and you will realise how good they are in terms of managing their risk.

The third company which comes to mind is Eicher Motors again, we have discussed it extensively. We like the premiumisation story which is taking place within the two wheeler space and exports a huge opportunity for Eicher Motors. It is not as much being, I would say the threat of EV is not as severe for Eicher as say for Bajaj or TVS or Hero MotoCorp, for that matter.

And Eicher, of course, has its own plans as far as EVs are concerned. So that is the third company that we are quite positive on. And I can go on, there is Praj Industries that we like a lot given its position and the ethanol blending program is going from strength to strength and massive capacities need to come up as far as distilleries are concerned and that is where Praj has a very important role to play.

I think like that our basic preference is capital goods, banks, automobiles. I think these are the three engines or I would say verticals, which we are quite optimistic on. We are trying to find the best companies within these three industries.

I look at Trent and I say wow. I mean, look at the way how they are running West Side or taking their brands higher. But Aditya Birla Fashion is just moving into everything?
You look at Trent and you say wow. But you look at the PE multiple also and you say wow-wow, again. I mean, it is trading at significantly higher PE multiple. I know the growth rates although they are superior they justify that kind of price to earnings multiple and we have seen this play out within the retail industry with D-Mart as well where valuations were absolutely skyrocket at sky levels.

And then as the growth rate started to slow down, we have seen the stock underperform. And therefore, PE multiples also eventually compressed although earnings have been pretty much what steady 15%-20%, maybe slightly higher as well.

But if you ask my opinion, I think the best way to play retail is through speciality retail companies. And you spoke about one of them just now, Go Fashion. There are many companies like this. I think I have seven-eight companies like Go Fashion. There is Manyavar, there is Metro Brands, you could add even Landmark Cars to it, Ethos. I think all of these companies the common thread is that they are focused on a specific product category. There is a huge runway for growth for them. They just have to expand their network. The balance sheets are strong, and they can support a network expansion. And we are seeing that they are ahead of the changing consumer trends preferences which is why I think their growth rates will be significantly higher than the likes of Aditya Birla Fashion or Shoppers Stop or even some of the other retail companies or so.

They are in highly value-added products trying to build a brand as well and create a moat for themselves. But of course, I think these companies are also pretty much expensive. I think that is where investors will find the next group of winners within the retail space and not large format department stores which are going to be competing heavily against online players as well.

I know that these companies I mentioned also have threat from online players. But their position is such that I would say the threat is significantly less than the likes of some of the large format companies.