Largecaps are no longer dictating trends in the IT sector. Dipan Mehta explains why

Dipan Mehta, Director, Elixir Equities, says in the last 2-3 years, we have seen midcaps grow at a much faster pace than the largecaps, more so within the largecaps. Also there is divergence in their kind of growth rate. But, that is really a sign of the maturity of the industry and from a midcap software company perspective, they have finally come and recognises their strength. They are focusing on specific niches. They are focusing on specific talent and what kind of jobs and projects they can do.

There used to be a time when one large company indicated a trend that would apply for the entire sector, large cap, midcap or small cap. That is not true. There is a big divergence in TCS, HCL Tech and Infosys and there is a big divergence in Mastek, KPIT and what we are hearing from other companies?
Absolutely. I have never seen this kind of selectivity performance in IT and I have been tracking it right from 1998. There was a period when largecaps used to do exceptionally well compared to midcaps and you always wondered that the gap between Infosys and the midcap companies is only increasing and not decreasing.

But in the last 2-3 years, we have seen midcaps grow at a much faster pace than the largecaps, more so within the largecaps. Also there is divergence in their kind of growth rate. But, that is really a sign of the maturity of the industry and from a midcap software company perspective, they have finally come and recognises their strength. They are focusing on specific niches. They are focusing on specific talent and what kind of jobs and projects they can do.

The clientele are also understanding the importance of working with that niche players and extract maximum value out of them. It is a maturity of the entire industry. It's the maturity of the investors who are investing in these companies. They are discerning the smaller differences which exist where the management are aggressive in terms of getting good quality projects, which vertical management is focusing on, where there is the least chance of cut in tech spending.

Where is it that disruption is taking place like the auto industry where there is no way the client can cut any tech spending impact. They are too dependent on the vendors to take them to the next level. So a very few important trends and sub-trends are taking place because of which we are seeing this divergence in performance and in the stock price. And that means that the job of the software analyst has only increased manifold because now he really has to find the gems and avoid the companies where you see that within two, three years, growth will slow down. It is more hard work for us and more selective strategy on part of the investor as well.

Let us talk about some of the beleaguered names like Ipca laboratories as well as Crompton Consumer, which have been getting the drubbing from the last couple of trading sessions. Then today, MCX is down about 6% on account of that CTO change. Any name that you track from this pack or anything that you would want to recommend?
Well, I track all of them. Exchanges like MCX are more like technology companies and loss of a key personnel certainly does tend to impact. But now a reformed organisation, it has got solid backers and they will definitely attract talent. And MCX certainly is in a very sweet spot again because they are the largest exchange on which gold is traded and gold prices have been consistently going up and also in MCX they are seeing very good growth in their options trading as well, which earlier was eating up into the transaction fees in the futures but now that potential to scale up those volumes is phenomenal.

In our broken community, we are seeing that many of the prop traders, the large broking houses, are trying to focus on using the capital to trade in options once the equity markets are closed. So I am very positive on MCX, no doubt about that and this may be a minor setback but they will certainly regain the position.

There was also a bit of overreaction on Crompton Greaves. One cannot make so much difference and the fact that their performance may be under a bit of a stress because of the acquisition of Butterfly Gandhimathi. But that is a good acquisition in the long term for them. I would think that the company should report decent numbers this quarter and next as well because of the kind of seasonal impact and it has been a really warm summer and they are market leaders as far as fans are concerned and this acquisition gives them more diversity in terms of the product profile.I am very positive on that company as well.

Ipca is a bit of a mystery why they want to go in for a pure generic exporter, when in fact, the entire generic market is under so much of stress and there is such competitive intensity. The way most pharma companies are going, they are focusing on the domestic market and Ipca is doing the opposite. Maybe, they know something which we do not know or maybe they just want to get into the US generics market anyhow and they are buying this capacity so that they can get that line of business going. But it is not a great strategy from my understanding because the real value is in the brands and the kind of growth which we are seeing in the domestic market where healthcare spending is on a secular upturn.

If I were to hand pick just HUL, we are expecting a 5% volume growth. What is your sense on how we are likely to see the margins shape up for the company? Will it continue to remain flat, largely due to the hike in the royalty charges? What is the outlook on HUL?
It is a complex company but if Nestle results are anything to go by then I would think that HUL could have a positive upside. If you look at Nestle’s results because they are in a somewhat similar line of business, they saw a decent volume growth and the fact is whatever price increases they have taken, have started to flow to the bottom line and the average realisations have also gone up.

On the whole, the company delivered a very good set of numbers and something similar can be expected in HUL. We have seen the revival of the rural market in the last couple of months or so. That also would benefit HUL and maybe you may have operating profit margins looking up and some amount of volume growth higher than what the street is expecting also is what we are factoring in just now. So it is a very positive quarter for HUL’s numbers looking at what has come in Nestle. But we know what the valuations are and many of the categories that HUL operates in are at maturity level, like soap, detergent, toothpaste, there is only so much growth that they can squeeze out of it. So from that point of view, I am not such a great fan of HUL on a longer term like a three to five year basis whether it can deliver good returns. But there may be a trading opportunity for the next few days or weeks in HUL on the expectation of a good number.

We are up 1,000 points on the Nifty. Mathematically that is not much but a 1,000 point rally in April and late March is a meaningful one. Do you think we have seen the worst of the market level in terms of evaluation for this year?
The more important thing is that we were saved the blushes, the lows which we saw when the market traded below the 200-day moving average and technical analyst always tell me that it is the Golden Cross the opposite of that when that takes place in the 50-day moving average crosses the 200-day moving average on the lower side and that is really a dangerous sign. We really avoided a lot of the huge downside by rallying the way we have over the past one month or so.

If this kind of a trend continues, then this entire pattern of lower tops, lower bottoms gets converted to high tops, high bottoms and that is something that is great if we can build upon it. We can then definitely say that we have a very tangible and solid bottom in place and that will bring a lot of confidence also back into the investors because there is no denying the fact that it is great to say that it is s best to buy when the markets are down and there is blood on the street but how many investors, even professional ones are really able to follow that advice.

We typically like to buy when the markets are rallying and rising and such markets are followed by such good corporate news coming in the form of better than expected numbers for most of the companies and large industry groups, banking as well as automobiles also doing as well as they do. We have the entire infrastructure space which is also going to deliver good results.

At least the negative numbers coming in from the software sector are restricted to a few companies. All of this gives me the kind of impression that maybe the market can certainly scale to higher levels. There could be corrections on the way, but I am getting more optimistic on the longer term trend than I was maybe a few weeks ago.