Is there a frenzy in some of these railways and defence stocks? Dipan Mehta answers

Dipan Mehta, Director, Elixir Equities, says the leverage in the system is extremely low. There is no frenzy. The cats and dogs have not started to move up as yet, We are a long way from there. It is just that after many months of sideways to declining trend, we are seeing sparks in the market. Let us not overthink too much over here that we are going too much on the bullish or on the other side.

“The focus and the strategy has to be defined in the next RVNL or the next Gujarat-based PSU or where the action is going to be in future,” says Mehta

In the cash market today, RVNL has traded more than ICICI Bank, HDFC, Axis Bank, SBI and Reliance. Isn't that fascinating data?
Yes, but what is surprising about it is if there is going to be a speculative activity, then all the traders are going to zoom in and whatever trading volumes you are seeing is not by investors who want to buy RVNL just purely based on fundamentals; they are chasing momentum and that is taking the stock price up. For the fact there are so many algorithms in play over here, intraday algorithms with servers at NSE data centre and the minute they see this kind of upswing, all the traders and all the strategists start to focus on such stocks and then we have the kind of excellent move which we saw on Wednesday.

And why this RVNL? You will see in the Gujarat PSUs also something similar. when you start to analyse their volumes. It is not surprising, but on the whole, the entire railway story is good. RVNL is available at attractive valuations. The kind of resistance and scepticism which investors had over PSUs is gradually decreasing. In fact, there was a time when having a state or central PSU stock in your portfolio was a bit embarrassing. But now, more and more investors want to get more of these PSUs in their portfolio. They are cheap. They give high dividend yield and on the whole I think the government policies are certainly beneficial to them and they are clearly able to get the maximum out of their monopolistic or near monopolistic position in the sectors they are operating in.

The PSU tag is definitely a benefit now in gaining more and more revenues and profits for these companies. So, I am not surprised with the kind of move which we are seeing in RVNL just now. It is just about playing catch up after many years of underperformance.

My question is that you see a speculative frenzy. Frenzy is the word. I am not getting into the right-wrong, big picture, the railway, capex cycle. But when you see such a frenzy, is it not the time investors should say that it is time for them to take it easy?
No, we are far away from frenzy. This is a frenzy in one or two stocks here or there.

I am talking about railway stocks, capex stocks. Is there a frenzy in some of these railways, defence, capex, industrials and,cyclicals?
No, a categorical no. There is no frenzy. This is the market. We will have days or weeks when certain stocks will be in the limelight and you get 25-30% type appreciation and then for months, you will see sideways to a declining trend. There is no frenzy. The delivery volumes are on the higher side. It is not that the valuations are out of whack over here. It is also the fact that we are seeing institutional volume playing out on the stock market just now.

The leverage in the system is extremely low. There is no frenzy. The cats and dogs have not started to move up as yet, We are a long way from there. It is just that after many months of sideways to declining trend, we are seeing sparks in the market. Let us not overthink too much over here that we are going too much on the bullish or on the other side.

It is just that the focus and the strategy has to be defined in the next RVNL or the next Gujarat-based PSU or where the action is going to be in future. We are in the earning season. It is the time when there is the highest degree of stock specific volatility and there are good trading opportunities as well.

Some numbers come up which are exceptionally good and we may see a rally in those stocks. We will see what happens to the banking stocks. I think they all have delivered numbers better than what the street was expecting and we have seen a decent rally over here.

According to me, the real sector to watch and where we will see maximum positive surprises would be the capital goods sector, companies ranging from Larsen & Toubro to NCC, the ITD Cementation and then we have the engineering companies, ABB, Siemens, Thermax. These numbers are going to be quite eye openers, according to me and you could perhaps see strong rallies over there, maybe some expectations have got built in, but these are all companies coming up from a low base effect with multi-year kind of depressing trends within the industry.

Now these companies are coming through with a surge in order book positions. Margins also will be expanding because of operating leverages, stable raw material prices and also the fact that a lot of the orders are at high margins.

So, a lot of positive things are happening for two large industry groups. One is the capital goods, second is the banks and, auto is also going great. Bajaj Auto numbers are pretty decent, considering the kind of stress they are facing in the export market. So, I would say that at this point of time, there are many investment teams working out for investors rather than not working out. Be a bit careful what you are investing in. But by and large, most sectors, most industries, the larger organised players are doing pretty well and they should be beating the numbers.