Best to be with the bluest of blue-chip banks: Dipan Mehta

"From a long term investment point of view, Avenue Supermarts is still a good stock to hold if you are sitting on profit but would not like to make a fresh investment in this company at these levels," said Dipan Mehta, Director, Elixir Equities. Edited excerpts:

While the rest of the markets are moving in one trajectory, DMart is moving in another. Today also it is down by about 5%.
Investors are getting a bit concerned about the price-to-earnings multiple for DMart. They are also seeing a lot of disruption coming into the segment per se retail. A lot of online players are funded by private equity and the big business houses -- Reliance and Tatas are also entering into that particular sector. So competition is intensifying and because of the base effect and their conservative expansion policies, the growth rates are around about mid-20s kind of range. At the same time, valuations are on the higher side. What we are seeing is a slight disappointment and leading to some correction in the stock. This may continue till we find the valuations at a reasonable level. From a long term investment point of view, it is still a good stock to hold if you are sitting on profit but would not like to make a fresh investment in this company at these levels.

What happens to banks because 2021 saw stark leadership by ICICI Bank and SBI? Now across the board, banks finally participate in the rally in the run-up to 18K but again within that do you feel the stronger is going to get the strongest and the weaker hands are just going to be able to just try and catch up?
I have been a very avid investor in banks for the last five years. I have invested in large caps, small-cap, PSU banks across the board, I have dipped my fingers into all categories of banks, and it is my understanding and final learning that you are best off in the top two or three banks – HDFC, Kotak, maybe ICICI and SBI.

These banks continue to display growth rates equal to or higher than most of the smaller peer group midcap or small-cap banks. So it is not that the small and midcap banks are growing faster, so you should invest over there at the same time these larger banks with their large balance sheet can withstand any of the disruptions or the prices which come in the banking sector, which they do come from time to time, they can handle it better and they can manage their NPAs better unlike some of the midcap banks likes of YES Bank, RBL Bank, IndusInd.

We have seen all sorts of bad experiences from these banks per se. So it is best to be with the bluest of blue-chip banks. You may notice that they may underperform from time to time, but when looking at the three, five, ten year period the likes of the banks, the larger ones they have outperformed the Bank Nifty, they have outperformed their peers midcap banks, they have outperformed the PSU banks. I have concluded that safety pays off in banks in the long run and it is best to be in these top three-four banks and you may ignore the smaller banks for the time being. They may display higher growth rates, but that eventually usually ends in a bad way, in terms of higher NPAs a couple of years down the line.

Would you be a buyer in any auto stocks outside of Tata Motors and M&M?
After many quarters of underperformance, auto ancillaries may finally start to be market performers and eventually outperformers. A lot of the OEMs should be starting to show better monthly sales figures as the semiconductor-related issues get resolved. And some of the auto ancillary companies are benefitting from exports as well. Varroc Engineering has got a decent export market as well for its products. Our preference is to go for auto ancillaries that are neutral to emerging technologies and the old internal combustion engine technology as far as OEMs are concerned.

Whether the world goes for more IC engines or more electric vehicles, auto ancillary companies, which are focussed on non-engine parts, will continue to do well. They will see their markets and their content per car grow.

Keeping that investment strategy in mind, the companies which come to reckoning are -- Motherson Sumi, Minda Industries, Minda Corp, Endurance, and maybe even Varroc Engineering.

But of all these companies, our clear preference is Motherson Sumi. It is a company in which we and our clients have invested. Second is Minda companies -- Minda Corp and Minda Industries. These three companies are extremely well managed. They have grown faster than the industry growth rates for the past several quarters, well-diversified revenue from many products and many OEMs and focussed on enhancing their share of sales to EVs and the OEM market.

So we are quite comfortable with these companies, valuations are reasonable, and the balance sheets are strong, low capital intensive businesses and in a way, they are not impacted by the success or failures of new models given that it is the risk the OEMs take. So, we are getting positive on auto, auto ancillaries and prefer auto ancillary to some of the OEMs where the risk factors are less.

Enough has been said about the HDFC Group underperforming the market. Will the expectations be far more from it for the quarter gone by?
Looking for exceptional numbers from HDFC Bank given the December quarter data, which came out in terms of their advance growth, deposit growth. The provisioning cost will come under control overall, and they would be able to expand their net profit margins. That will be the turning point in terms of out and underperformance of HDFC Bank. Finally, we may see the bank starting to outperform its peers and the market as a whole. We are very positive on HDFC Bank and it can grow at a pace much faster than a lot of banks and even some of the so-called nimble private sector banks.

They have done a phenomenal job as far as their NPAs are concerned. In terms of technology, a lot of the issues which were there in the past have now been dealt with, and they are looking at expanding their credit card portfolio as well. HDFC Bank seems to be firing in all cylinders at this point.

The economy is looking up, a lot of opportunities to expand their credit book. On the NPA side also there would be fewer threats at this point. Valuations also are at a reasonably level HDFC Bank has traded at far higher premium valuations than what it is trading at this point in time. Although a lot of investors have HDFC Bank as part of their core holdings, my advice would be that investors who do not have HDFC Bank among their top three or four holdings, this is the right time to take their weightage in their portfolio for this bank on the higher side.