Time to sell IT has gone; now wait and watch: Dipan Mehta

"The time to sell IT has gone. They corrected by 20% to 40% or so. If you are invested in IT stocks, all you have to do is just wait out the stressful times for the global economy and hope that in six to 12 months, demand will start reviving. I would not like to add any further investment into IT. Just remain invested and wait and watch how this sector shapes up," says Dipan Mehta, Director, Elixir Equities

Let us talk about the market texture right now, the fact that FMCG is making a comeback, the fact that some of these textile retail plays are all sitting at all-time highs irrespective of the rich valuation that these stocks are quoting at clearly gives you a sense that the upcoming festival season is going to be a bumper one for the consumption space.
We are gearing up for a very good earning season and the last two-three earnings season were impacted by higher commodity prices but a lot of commodity consumers have passed on those price increases. We should have the two major variables being positive for most Indian corporates. That being higher, top line growth and improvement in operating profit margins as price increases are being passed on.

We are seeing a decent amount of interest coming through in almost every sector with the exception of perhaps commodities and software companies where the earnings may be slightly on the softer side. But by and large, we should see a very good earning season. That is driving a lot of interest into stocks. We have the issues of Ukraine and higher interest rates, but the underlying fundamentals of the Indian economy are sound and improving by the day.

We all know how Britannia, Unilever, ITC stocks have done but the interesting thing is happening within the textile/retail space. From bigger ones like Trent, Aditya Birla Fashions to Go Fashion to Arvind Limited, all are excited. Would you still recommend buying into it?
We are very positive on the retail space and after a torrid time during the Covid restrictions, we are seeing retail coming back very strongly, especially offline retail. A lot of clothes are coming into stores and that certainly is very good for the retail players. Top pick with usual disclosure that we and our clients are invested, would be something like Vedant Fashions.

I know it is expensive but it faces the least amount of threat from online players because when you go for an occasion like marriage, you need to try on those clothes and you cannot really buy them online. Second, a newly listed company is Go Fashions. Theri quarterly numbers have been quite impressive and there has been a very decent runway for growth as well.

Valuations are reasonable if you compare some of the other retail companies. These are the two top picks. Both are new listings but one of the dark horses could be V-Mart, only thing that last quarter numbers were a bit disappointing and it has a lot of exposure to rural markets which are a bit soft at this point of time but the underlying business model is excellent so I would say that go for the midcap stocks within the retail space and they should do pretty well. Other stocks also look interesting and if you are holding the likes of Aditya Birla Fashion, Trent, Avenue Supermart, all of them should do pretty well going forward.

How are you looking at the diagnostics and hospitals space and what would your top bets be?
Healthcare should do very well going forward but one needs to be a bit selective over there. I would avoid pharmaceutical companies. They had a great time during Covid and a lot of opportunities worked out very well for them.

But I think the time is not right for the sector as a whole because of what is happening in the US generics market and increased competitive intensity in the domestic market. We are seeing challenges in the laboratory space, the path lab segment, with new entrants and increased competition.

In my opinion, the best way to play healthcare would be through hospital companies like Apollo, Max Healthcare and Narayana Hrudayalaya.They all have come with a very decent set of numbers and valuations are reasonable. A lot of these companies are going in for expansion of existing capacities which they have set up and are now seeing very good utilisation levels as well. So it is very positive over there.

A company to watch could be even Krishna Medical which is quite an efficient, regional player. I think it is trading at a slight discount to its peer groups. So there is a lot of opportunities within the healthcare space but let us focus mainly on the hospitals I think they should do very well going forward.

What is the outlook on the defence space? In the last one to two years, nearly 200 items have been added to the defence import embargo list. The Russia-Ukraine war has aso put a lot of emphasis on indigenisation and a number of these stocks have been active of late. Is there merit in betting on the defence theme?
I think defence has hit a purple patch, especially PSU defence companies and they are sitting on very decent order book position; margins are stable and investors have a lot of confidence in these companies because of the earnings visibility on account of multi-year order book position.

Gradually valuations have also moved up but by and large, it is a well discovered, well researched sector and stock prices have moved up. Our view would be slightly neutral on it. May be if there is a market correction or sector specific correction, then these stocks could be interesting and provide a higher return then buying them at these levels but existing investors should remain completely invested. From an investment perspective, I would like to buy it at a decline rather than these levels.

What is your take on IT? The rupee has been weakening and is at a record low against the dollar. Today Accenture will come out with its earnings and that will be important because that will tell you how the FY23 outlook is with respect to their client budget etc. How should one be positioned in the IT sector?
Wait and watch. Let us see what these IT companies have to report, how the new order positions are shaping up and let us see what the management has to say in terms of the demand scenario. In the past whenever there has been a recession in US and Europe, IT companies have seen declining to stagnating revenues and a steep decline in their valuations as well.

As we speak, the time to sell IT has gone. They corrected by 20% to 40% or so. If you are invested in IT stocks, all you have to do is just wait out the stressful times for the global economy and hope that in six to 12 months, demand will start reviving. Now the entire industry has been telling us that IT spending is no longer as discretionary as before and maybe that will get tested in this quarter and the next. It is interesting time for the sector but I would not like to add any further investment into IT. Just remain invested and wait and watch how this sector shapes up.