Market risk gradually fading; midcap IT may be a bit of an outlier: Dipan Mehta

“One has to be very careful and selective in commodities and try and be as underweight as possible,” says Dipan Mehta, Director, Elixir Equities.

If June was a disaster and July is a comeback, what happens in August?
I think we will see a continuation of this trend and maybe markets could build on the foundation of the last few weeks. The most important thing is there is no further bad news. All the old bad news – inflation, war, commodity prices going up have been discounted and we are seeing marginal gains on those uncertainties and those problems as well. That is building some amount of positive sentiment within the bulls over here and critical technical levels were held, which is why the market is in a nice place to build on the current gains.

Hopefully, July-end, August should be good. But one should keep in mind that this is a very important earnings season and if earnings are more or less in line with what the Street is estimating, then that also should be a bit of a positive booster. Right now, things are looking good for the bulls and we can hope the markets will scale to higher levels. The important caveat is there should be no further bad news.

A new high before Diwali or before Christmas?
I am not going to get into that. I am bullish but as I said, the important thing here is that there should be no further negative news and we should see this continuation of commodity prices drifting lower. Let us see what the central banks have in mind for the markets as well. We have not heard from the RBI, we have not heard from the Fed in three, four weeks. I think what they have in store for us is the most important aspect at this point of time.

But yes, the same kind of fear which was there in May, June is not there at this point of time and that certainly is positive. And maybe it is time to get specifically focussed on stocks which should do well over the next few quarters or so. Overall market risk seems to be gradually falling.

IT has not come out with a promising set of numbers and you tend to get worried when TCS is feeling the heat of attrition, when HCL Tech is feeling the heat of problems in Europe, when Wipro is struggling with the basic demand scenario. Why are markets not throwing in the towel and why is there no nervousness in IT?
I think it has to do with the management commentary and Wipro despite disappointing results, is holding up pretty well because of the kind of order inflow which they have disclosed and the management was saying that the markets are looking good for them and demand remains pretty much in line and robust.

They have not seen any effects of the US recession or slowdown and that has been very well accepted. I think investors are also looking beyond the next six to 12 months. So even if there is a recession or a slowdown in the US markets and the US economy, that should even out over the next six to 12 months or so.

But if one takes a three-five-year view for IT companies, the prospects are extremely bright. The rupee has depreciated even further and that makes their value proposition even more compelling. On the whole, there is still a decent runway for growth as far as these companies are concerned. There is some amount of valuation comfort as well for the largecap IT companies.

Keeping all of that in mind, we are seeing that stock prices are not falling much further despite mild disappointments on the earnings front. We saw that in TCS, we saw that in Wipro as well and I think this trend will continue.

But most interestingly, looking forward to what numbers are to be reported by the midcap IT, I was pretty happy with what came out from MindTree as well as L&T Infotech. That was pretty much in line with what they have been reporting for so many quarters. I think midcap IT may be a bit of an outlier at this point of time.

I was looking at PE multiples of Trent, Avenue Supermart. These are fantastic companies but I think India is the only country where retail companies are enjoying PE multiples of almost 100 times. Globally, retail companies are shutting down and India brick and mortar retails are commanding PE multiples of consumer companies!
That is right; higher than consumer companies even! That is because investors feel that this is the new FMCG so to speak and if you want to play consumption and premiumisation in India and the shift from unorganised to organised sector, then retail is the best play. I think investors are factoring in the consistent 15-20% type of top line, bottom line growth rate for the large listed retail players.

When you project those numbers over the next three to five years or so or discounted cash flow, then even at these levels, a lot of these companies would be slightly fair valued and slightly undervalued as well. At the same time, there are very few good names and a certain amount of shortage of good quality stocks within the sector as well. That is the reason these stocks are trading at a premium but there are a few interesting nuggets within this space.

What will you not buy in this market or what will you sell in this trend?
Answer is very simple. One has to be very careful and selective in commodities and try and be as underweight as possible. We are seeing commodity prices sliding and if the US and rest of the world goes into a mild slowdown, recession and China also seems to be going in that direction, then the high commodity prices will not be supported. They will drift even lower from these levels.

So far crude is holding out but once demand falls, a lot of other commodity prices will also correct in line with that sentiment. So that is one sector that we want to be very careful about and avoid at this point of time. Other than that, almost everything is looking pretty decent now because a lot of listed companies, the real value creators, are all commodity consumers and lower commodity prices will certainly benefit them.

If interest rates do not go up as much as the Street is expecting, then we could see a very decent up move in the commodity consumers per se. So, it is just the commodity stocks which are to be avoided at this point of time.