PSU stocks have no future; rallies cannot be justified by fundamentals: Elixir Equities

There is a high degree of uncertainty in retail stocks and there is no comfort when it comes to valuation, says Dipan Mehta, Founder & Director.

How are you looking at some of these stocks within the retail space? What is the outlook when it comes to the retail basket?
I would like to be underweight retail. I am sure that prior to this Covid pandemic, we were quite positive on retail and it was emerging as a new consumption-oriented stock. We were seeing strong trends about a lot of consumer spending going into retail; be it for fashion products, food products, grocery. But now with every passing day, online ordering is getting ingrained into the minds of the average Indian consumer and the way new online companies have risen to the occasion in this particular lockdown, then spending habits will move more and more online and still there are many risk factors as far as retail is concerned.

You do not want to enter into a shop unless you necessarily want to buy a particular product. I would be a bit sceptical on all these companies and one also needs to keep in mind that with the exception of Future Retail, which is available at a fraction of its book value and comes with associated risks, most of the other known retail companies like Shoppers Stop or Trent or for that matter any of the other retail companies are trading at very rich valuations. And with such rich valuations, if you do not have decent 17-20% type of growth rates in the bottom line and if they do not come through, then the price earnings to growth is extremely stretched; which is why I feel that one should remain a bit cautious on the retail space.

I think there are many stories and many industries which have opened up post this pandemic and one could look at diversifying into those sectors and stocks rather than retail where there is a high degree of uncertainty and there is no comfort when it comes to valuation.

Is it the right time to revisit some of the PSU names or would you just ethically stay away because you do not know how often the policy would change?
There is no future in PSU if they are PSUs. You want to buy a PSU when it is sure that it is going to be privatised and the new management will have full control over how to dispose of the assets and the employees and restructure the business the way it deems fit. Unless you do not see that scenario, all rallies in PSUs are trading rallies and they cannot be justified on a fundamental basis. There are many cases of PSUs having completely gone under and become sick. When they were good, the government did not privatise them and just let them astray; which is why they are sick at this point of time.

So I have not been a great fan of PSUs. At this time, the valuations are cheap and they have good dividend yields but at the end of the day, we would like to chase growth and there is hardly any growth in most of the PSUs; be it on the financial sector like banks or engineering companies or mining companies or oil marketing companies. But if they are privatised and they get a good valuation, then that changes the dynamics completely. Till now I do not think India has done a successful privatisation in the last several decades. The last one was Tata Communication which was erstwhile VSNL and at that point of time even Hindustan Zinc was privatised and investors made great returns on the companies after they were privatised. So a similar situation may play out but having seen so many failed attempts at privatisation, it is better to be cautious and look at PSU stocks only once we are certain they have already been privatised and a new management has complete control.

What is your take on the pharma space? Do you think that there is a lot of potential for this sector to emerge as a big winner in the long run?
I think so. Pharma would have done well irrespective of whether we had this pandemic or not. And the reason for that is a lot of pharmaceutical companies have done a great deal of restructuring internally and are far more focussed geographically and product-wise than they have ever been. There was a time when the pharma industry was just going for turnover, applying for many new ANDAs and trying to launch as many products in the US generic markets and in the Indian domestic market. I think those trends have now completely reversed and every pharma company is considering products which have a cost strength or which has a brand strength.

But this particular realisation is bearing a lot of fruit. So we are very positive on pharma companies and I think across the board one could look at buying pharma shares. But our favourites of course, and with a usual disclosure, the larger companies like Aurobindo Pharma or Cipla or for that matter Divis Laboratories which have better potential than the rest of the industry. But by and large it is a great sector. Investors have been underweight in pharma and with every correction in that sector, they must take the opportunity to build positions in pharmaceutical companies. I think this bull run will last for two to three more years and they are coming off a low base; so to that extent, we have a lot more upward trajectory for these companies to grow.