Escorts best stock to play the rural and agri theme: Elixir Equities

I want to avoid expensive consumption-oriented stocks, says Dipan Mehta, Founder & Director.

What are you eyeing in the market right now?
The top pick in the rural sector has to be Escorts. I think they came with a very good set of volume numbers for the month of June and amongst all the auto companies, they have been displaying the best results. They are clearly benefiting from a higher rural spends, lower financing costs and Escorts has the advantage of growing its business in areas where it was not that strong. So now they have got the products in place, they have got the distribution in place for some of the regions where they were not the market leaders and they are really pushing sales over there, which is quite positive. Given the kind of commentary coming from the management, they will show good results for the next two or three quarters.

Tractors per se are an under-owned farm equipment and given the kind of dynamics playing out in the agricultural economy, where labour has become a shortage, at the same time farm gate prices have improved, volumes have looked up and there is abundant water available for irrigation. I think the confidence level is very high at the farmer level to go in for new tractors, larger tractors or even replace their existing tractors. So I think many positive trends are culminating for Escorts and it being largely a rather 100% farm equipment company certainly is an advantage unlike Mahindra & Mahindra, which has also got commercial vehicles and passenger cars, which are a drag on the consolidated numbers. So someone who wants a clear play on agriculture, is one company which certainly fits the bill.

We always talk about what to buy but where is it that you would be tempted to take profit given how strong and steady the recovery from the March lows has been? What is it that you would completely avoid at this juncture?
I want to avoid the expensive companies which are consumption-oriented stocks. Great companies like Titan or a D-Mart or a Jubilant Food Works are very expensive at this point of time. You could add a few FMCG names like a Nestle or an HUL where I think these valuations are just not sustainable and even if they are, once we have some sort of a recovery in place, you will see these businesses underperforming. Right now what we are positioning ourselves on is some of the safer sectors that could be in the pharmaceutical space and the new emerging sector which is looking quite interesting is midcap IT, which came with a very good set of numbers for the June quarter.

We are looking at buying some distressed banks and NBFCs which if they are still around over the next two or three years would certainly turnout to be multibaggers. So right now the strategy is to avoid those extremely high PE stocks where growth is flattening out because of the present situation but yet valuations have not come off and deploy those funds into safe sectors. We are also looking at companies which are available at very attractive and basement bargain valuations. So that is the kind of thinking which we are in at this point of time.

Clearly any company which is trading at a PE multiple of 55-60 times or so, the underlying growth is not expected to be more than 8-10%. So in effect, it is trading at a PE of 5 and should be avoided and these are the market darlings and it is a bit of a dilemma to sell such companies. But then if you want the outperformance and you want to get the returns in equity at a reasonable level, then these are the tough choices that one has to make.