Multiple bull and bear markets in commodities & stocks within a year the new normal: Dipan Mehta

"We are seeing a decent up move in the capex cycle and one could add Thermax and Siemens also to the list of stocks. With usual disclosures that we and our clients are invested, the top pick remains Praj Industries and the real advantage here is the ethanol play which is real and is there for companies like Praj and sugar companies to take advantage of," says Dipan Mehta, Director, Elixir Equities.

When any market goes down 20%, it is termed a bear market. Now experts are talking about an epic bull market as well as a bear market in crude oil for the same period. JP Morgan is talking about oil at $380 and Goldman Sachs is talking about $60 in the same year!
All I can say is that cycle times are narrowing and we can have multiple bull and bear markets within one year in many of the products – commodities as well as stocks. Our markets can correct by 20% and then go up by 20% and the reason for that is the high momentum trading, the algo-based trading, quant-based trading.

All of that has impacted the sharpness with which prices move up and down across the board on all publicly traded products. That is the reality of the game. This is the new normal and we need to factor it in when we are making our investment decisions.

Crude, commodity prices are down. What are the changes in your portfolio?
Nothing. We were never that highly weighted towards commodity stocks and although from time to time, I may have recommended it, but deep down, there has never been any great conviction in buying commodity stocks and whenever we see such high inflationary phase, we just sit tight on the commodity consumers and that strategy has played off.

So, nothing really changes in that light and what happens is that these commodity stocks also will come back again after couple of years or so. The whole rotation which takes place is just that our comfort level is with the commodity consumers, the brands, the technology companies, and companies which are high on distribution have a decent marketing kind of network.

Those companies have done exceptionally well, created a lot of value over the years and we stick to them. Now that commodity prices have come under control, the prospects for those companies have improved even more. The likes of automobiles, appliances, construction materials – all these companies should do exceedingly well now that this bogie of inflation is gradually coming to an end.

But let’s just keep our fingers crossed and hopefully there will not be any more geopolitical events or economic shocks and this trend that we are seeing in commodity prices – that it flattens out over the next few months or quarters and then one can conclude that the worst is over and maybe a bottom has been found.

Do you think Titan merits a buy at these levels?
Yes. On a long-term basis of three to five years, Titan can still deliver very good returns but from a timing point of view, I just want to wait and watch. Let us see how the June quarter numbers are reported for Titan.

More importantly, in this high inflationary era, how are they managing consumer sentiment and the sales and how do they look at it. Those are critical questions because jewellery and watches are typically discretionary expenses and when prices of basic commodities and basic items of usage tend to go up, there could be some demand squeeze over there.

I just want to wait and watch and see what the management commentary is before making an investment decision but existing investors like us will continue to remain invested. One is sitting on decent profits if it was bought a few years ago. It is a great secular long-term story and in that sense, one can keep it as part of the portfolio. But when it comes to adding or making fresh investment or taking a plunge – one should wait and watch for June quarter numbers.

The capex cycle has started and soft capex companies will have a good two or three years. How are you betting on this? What is your best idea to participate in the capex cycle?
We are seeing a decent up move in the capex cycle and one could add Thermax and Siemens also to the list of stocks. With usual disclosures that we and our clients are invested, the top pick remains Praj Industries and the real advantage here is the ethanol play which is real and is there for companies like Praj and sugar companies to take advantage of.

If blending is going to increase from 10% to 20% – and there is a great deal of urgency behind that and the way sugar industry and other non-sugar players are expanding the ethanol capacity, I think that Praj Industries should not have any dearth of orders and they have not even scratched the surface when it comes to overseas order book position.

I am very positive that the stock is trading at a premium valuation compared to its other peer group companies in the engineering space. It is completely justified, given the opportunity and the space they are in.

Also, one very important name, the king of capex, the engineering construction company Larsen & Toubro has been a flattish mild underperformer for several years. They are now picking and choosing orders and as and when orders which they have got over the last two years get into execution phase, I am pretty confident that despite rising inflation, they may be able to manage or improve their operating profit margins as well.

Their balance sheet is in great shape and they are also well diversified when it comes to their order book position from India as well as overseas markets. On the whole, these are the two stocks we are quite positive on and of course all of these stocks which we mentioned have got great prospects over the next two-three years or so and these companies have very good operating leverage as well.

When the top line goes up, we will see a disproportionate increase in their net profits as well and I think by and large they are at reasonable valuations as well. One can exclude ABB and Siemens and may be a few other MNC companies which have always traded at premium valuations. But by and large, Indian engineering companies are available at reasonable earnings price to book multiples.

What about the two-wheeler segment in auto?
I do not agree with your theory that TVS Motors can make a dent on Eicher Motors. Eicher Motors, that is Royal Enfield, has been facing competition time and again many players have come and gone but you just cannot take the Bullet away from the equation over here. It is a solid brand, it is an aspirational brand and any of the two-wheeler commodities can try and launch premium bikes, but I do not think they will have the traction of what Bullet brings to the table.

This has been built over decades if not more than a century or so. So I think that in this space, Eicher is very well protected. They have a very strong moat and this is one company to watch. After three, four years of sideways price stock movement and many challenges on many fronts, it has emerged stronger and it is sitting on good order booking position.

If you compare what orders they have and what volumes they are projecting over the next two, three years as compared to any other two-wheeler company, you will realise that Eicher is offering a superior proposition over there.

Even the commercial vehicle side has picked up so the subsidiary also is doing pretty well over there. Valuations are reasonable and when we talk about high growth, high consumption stocks and Eicher certainly comes to mind. So I am very positive on that company amongst all the two-wheeler companies and I think that from these levels also, this stock can be a good compounding story with reasonably good returns. A disclosure here, we and our clients are invested in Eicher.

We had seen Bajaj Finance stocks under pressure. Sanjiv Bajaj recently told ET Now he is not worried about the stock price because it is just the FII selling, the things on ground are working well and the prices will catch up. Is that what is happening?
That is true. I think many had written off Bajaj Finance but I think the giant juggernaut keeps on rolling and they have been focussing on the bread butter business and that is scaling up pretty well. At this particular investor release which comes along with the June quarter results, what we will be watching keenly is their super app which has been in the works and we have seen a few versions of it as well and how that particular business is scaling up.

The real story and if it is successful is whether Bajaj Finance can truly become a fintech giant or not just another NBFC and if they are able to do that transformation, then stock price can even double from these levels also. Again, a disclosure, that we and our clients are invested in it.

Even if it does not double, I think valuations have become fair and the lending business can easily grow at a high of 17-20% thereabouts and they have good lending practices. They have been able to manage all the crisis in the NBFC space pretty well. So this is one company you can like.

Like HDFC, HDFC Bank, you can just keep it as part of your core portfolio and expect that over a longer period of time it will always outperform the benchmark indices. So very positive on the company and maybe this correction is a good opportunity for investors who have not bought into Bajaj Finance to look at that stock in a positive light.