Dipan Mehta on why one should bet on L&T and 4 other capital goods & infra stocks now

“L&T should be part of the core holding and that is one sector and one stock which will do very well. Also ITD Cementation looks very interesting. NCC also reported good order wins recently and are sitting on a very decent order book position. Another interesting company is PSP Projects, which is more into contracting and they are focussed more on civil buildings. One could look at IRB Infra as well,” says says Dipan Mehta, Director, Elixir Equities

Other markets have started going up. How would you look at India reacting to the US going up every day now?
2023 is going to be a great year for the Indian stock market. We cannot say the same about all the other markets which will be grappling with recession and higher interest rates. But in India we are seeing many large sectors of the economy do very well – right from real estate, automobiles, capital goods and some of the other larger sectors, especially those related to consumption.

With the exception of externally focussed sectors, we are seeing very positive trends across the board and that will start to reflect in the economic trends and the stocks as well. While the last two trading sessions may have been a bit challenging, this year looks to be good and I hope to build on the foundation created in the last financial year, rather the last year when we had massive outperformance in terms of our markets being stable as compared to sharp declines in some of the other global markets. So, I am very positive on Indian stocks and I know valuations are on the higher side, but growth prospects and profit numbers may surprise us.

Where do you think those positive surprises are going to come from?
Apart from commodities, by and large, a lot of sectors are having a very good time and some of the sectors are having the best ever time. But to name a few, the kind of trends we are seeing in the banking sector on the income front, the total volume of business and the quality of their balance sheet, I have never seen this excellent quality and such positive trends in decades.

The same is true for automobiles also, especially the passenger vehicles and the commercial vehicles. After many years of stagnation and declines, we are seeing very robust volumes come through over there. Also, look at real estate which is a catalyst for many of the other feeder and other subsidiary related sectors. After a multi-year decline, stagnation, lower prices are coming back into life.

We are seeing good volumes across the board in India, stable to higher prices and a lot of real estate players are also expanding their land bank and looking very positively at the future.

After many years of decline, the capex cycle has turned. We are seeing more and more private sector capex being taken at this point of time. Companies are expanding their capacities and they are looking at the future in a more positive light and with the election coming in 2024, one can only expect government spending on infra to pick up in a significant way going forward.

So these are the large industries within the economy and if consumption – rural as well as urban – holds up pretty well, then we could be in a very sweet spot and India could be in a very strong trajectory for the next two-three years or so.

You were talking about where to place your bets. Within defence, railways, the entire capex theme, capital goods, etc, where would you be willing to take concentrated bets because most of these sectors have already had a decent move so far?
A concentrated bet has to be taken on Larsen & Toubro. A disclosure, we and our clients are invested and to that extent, our views are positively biased towards it. We have seen great returns in the past but going forward as well, we feel the best years are ahead of Larsen & Toubro. The management has taken excellent steps in terms of improving their return ratios. They have completely cleaned up the balance sheet and are focussing on large projects which are margin accretive.

They are also focussing on trying to diversify their order book and are not dependent on any particular segment or type of client be it PSU, private sector, India or Middle East for that matter and on the whole lot of value being built in the subsidiary companies as well.

L&T is a stock that should be part of the core holding, the top three-four-five holdings that we have in our portfolios and we do feel that that is one sector and one stock which will do very well. There are other companies also which come to mind.

Again a disclosure, we and our clients are invested. ITD Cementation looks very interesting. NCC also reported good order wins recently and are sitting on a very decent order book position. Another interesting company is PSP Projects, which is more into contracting and they are focussed more on civil buildings. So that is something which we are tracking quite closely but there are many companies within the sector and one could look at IRB Infra as well.

So many other companies are there. All of them are sitting on very good order book positions and have very good earnings visibility. The operating leverages will play out pretty well for them and the only real threat is rising cost of inputs and maybe a slowdown in capex or government spending, but that seems unlikely with elections approaching in 2024.

It is turning out to be a bit of a problem for Bajaj Finance. Looking at the recent quarterly updates, one questions the over ownership and whether the valuations justify the kind of growth they are going to post continuously?
I have been a Bajaj Finance shareholder for a very long time and it has been a great wealth creator for us and our clients. I am not that disappointed with a 27% AUM growth, given the context. Given the competition levels and some of the way the NBFCs function, I think it is a great number and that too on a large base. Maybe the Street had overvalued the stock on various parameters but gradually if the company delivers these kind of 25-30% type of bottom line growth rates, one could have a sideways movement for maybe one and a half years or so, but thereafter, the price to book, price to earnings multiple will correct and normalise.

It has happened in the past with all the large financials, HDFC Bank included and then one could expect Bajaj Finance to continue to deliver returns in line with the growth and the earnings per share which even after 3-5 years from now will be in the high teens given their structure and given the aggression with which the management is pursuing the business, given its competitive edges.

So I am pretty confident in the long-term prospects of Bajaj Finance. I am sure it can correct another 5-10% easily. Selling can get overdone. It is a bit of an over-owned stock as well and people have too high expectations which are difficult to meet. It is not like a technology business or some platform business where suddenly it can go up by 40-50% or so. There are physical challenges as well and we need to keep that in mind. But on the whole, I am not selling Bajaj Finance at these levels. I am in it for the long haul and even in the next four, five years, prospects for Bajaj Finance look exceptionally good.