Should you buy the slam dunk in Nazara & Delta? Dipan Mehta answers

After the new GST rejig which was announced last evening, is it literally game over for the likes of Nazara and Delta? A 28% tax has been slapped with no distinction between games of skill and chance.
I do not think Nazara is impacted as much. The management has come and said that their revenues are about 5% from gaming and EBITDA contribution is 10%. From that point of view, Nazara has been conservative and they have avoided getting full on into this real money or any other form of gaming products per se and the other strength of Nazara is that they are not focussed or not concentrated in any single product or any single segment in the gaming industry and even geographically also they are quite well dispersed.

So, from that point of view, I do not think it is going to get impacted. Of course, it will be sentimentally negative for Nazara and to an extent, the kind of opportunities which they could have pursued has certainly narrowed down for them. But from an absolute result or performance perspective, I do not think the impact will be much. But yes, sentimentally, it is certainly going to affect the Nazara stock price.

Delta is a different cup of tea altogether and this may hit them really hard, waiting for the management’s comment on how they react to this particular development because it speaks about 28% on the chips which are purchased, there can be ways of working around that thing as well considering that the chips return, how is that to be considered from the tax perspective? So, we are waiting for a response from them and then we can evaluate. But sentimentally, it is negative for both the stocks and you may see a slam dunk or downward tick for these companies.

But the question is will you buy that slam dunk? Would you use that opportunity to buy the likes of Delta and Nazara because for Nazara it might be a lot more sentimental than actual because it is just 5% and Delta also is perhaps a good buying opportunity?

No, not really. I think I have seen in past situations like this when there is so much adverse news flow and so much uncertainty as to how the consumers will react to these kinds of tax structures. It is better to just stay away for two-three quarters. Let the dust settle down. Let us see what the real numbers are and how the impact has been and then take a call.

It is not that both these companies had a phenomenal growth path and generated 50-60% growth rates and were in the centres of the entire gaming revolution which was taking place. From that point of view, I just want to wait and watch. Nazara, in any case, is very expensive considering its traditional metrics like price to earnings or price to book ratio and again they want to go ahead and raise capital and dilute equity as well so that is another aspect to consider. I would avoid both these companies. A disclosure: we have investments in both Nazara and Delta and I will have to take a bit of a knock on that holding over there early in the morning today.
But what about the IT sector? I am guessing you hold TCS as well, if not HCL Tech. What would be the expectations there?
Yes, I own a lot of IT stocks and I am prepared to ride out this soft spot they are in. I remain fully committed that the long-term prospects of the IT industry are fantastic. They have certainly improved with the advent of AI and ChatGPT and all the more, those kinds of projects may come to these companies. It seems to be like a new tech wave for the entire software industry and it is just a matter of time that tech spend start to improve once the macroeconomic headwinds recede.

So, I am very positive on the longer-term prospects and the time to sell is frankly gone as far as a lot of the tech stocks are concerned. They have corrected significantly from their highs as well, the largecap ones at least. We just have to wait out this soft period. I have seen many such points of time in the history of the software industry where they go through such phases, where the growth is flattish or slightly declining and then it just comes roaring back as well. But my concern is more on the midcap IT stocks, the likes of Tata Elxsi or Persistent Systems, KPIT, Coforge. They are trading at very rich multiples and any kind of miss on the earnings over there could have a very extended adverse impact on their stock prices and we are invested as a matter of disclosure in all of these companies as well. I am bracing for a tough quarter when it comes to software and may react on the stock prices once the actual numbers are out.

What is your take on the entire cement space given that demand continues to remain strong and lower costs as well are coming in as a positive. Do you think that perhaps the only major concern for this sector would be valuations continue to remain very high?
My view on cement has been negative for a very long time, but I feel that there could be a trading rally in cement when numbers are announced for the June quarter. It could be a strong quarter, volumes have been holding up pretty well and definitely benefits of lower cost will accrue to the industry.

However, the longer-term prospects seem a bit blurred considering the kind of capacity expansion which is taking place. So, there is real risk of a glut and that could lead to depressed prices, that is one. Secondly, overall, over a longer period of time, we may see multiples compress as far as cement industry is concerned as ROIs also drift lower and the kind of price discipline which was there for the past several years that may get vitiated with the entry of new players in this sector as a whole.

I see better opportunities within the cement consumers. Look at the way the real estate companies have been reporting pre-sales and new projects and the way engineering and construction companies have been reporting excellent numbers and bulging order book position at decent margins. From that perspective, I feel more comfortable with cement consumers than cement producers.