Dipan Mehta, Director, Elixir Equities, says “whenever we find that the performance is not up to our expectations, then we are trimming or exiting those positions and remaining in cash and that really has been my advice amongst the minority who feel that there should be a correction in 2024, all kinds of blue sky scenario notwithstanding. These markets cannot keep on going up like this.”
UP has now become the go-to place when it comes to religious tourism. No one would have thought that this kind of a number would be there in terms of footfalls for Banaras and now for Ayodhya. Is that a theme which you are betting on?
Dipan Mehta: We are very positive on travel and tourism and I have spoken about Indian Hotels and InterGlobal aviation also and then there is, of course, our favourite, with disclosures, Mahindra Holiday, which I think has performed below its potential. So, first of all, there are very few plays in this particular investment theme, but whatever is there,, has got great long-term prospects. These are great secular trends. You can see them compounding at 15% or thereabout for the next 5-10 years or so.
In India, we always have to be very positive on the consumption trend and this is one segment of the consumption strength that can only go from strength to strength over the next few years or so. So, positive on the investment theme. But as I said, there are very few ideas that one can actually invest in. At the same time, these are fairly valued at this point of time. So, better to buy them at a correction.
What is your approach this year in terms of the market? Would you be holding on to your stocks? Would you be looking at taking some chips off the table ahead of elections? Maybe raise some cash or would you just maintain the status quo?
Dipan Mehta: No, raise cash. At every given opportunity, at every rise, we want to raise more and more cash as we go along. It is not that we are going to be 100% in cash. But investors should be at least gradually reaching that 10%, 15%, 20% levels in cash with every rise in the stock market. Because I think in terms of valuations, it is pretty much fair and I am not completely happy with the momentum indicators which have come so far, be it GST collections, automobile sales, cement sales, even what the banks have disclosed in terms of advanced growth and it is not that they are doing badly.
It is just that the base effect is catching up very fast for Indian companies. And to that extent, we should expect at least year-on-year numbers for December, maybe March quarter to be slightly tepid. At the same time, we could always have a minor demand slowdown even in a very positive economic environment. From that point of view, I want to be a bit cautious. I do not think any geopolitical factor or liquidity issue will cause a correction, it will be caused more by, disappointment in earnings which may come through in December or March quarter.
What are your top midcap holdings just to understand how you are positioned?
Dipan Mehta: See, we remain invested in the top holdings which with disclosure are companies like Tata Elxsi, Varun Beverages, ITD Cementation, APL Apollo, then there is PolyMed. We have a nice bunch of excellent blue chip companies, but I am uncomfortable with their holdings and because they are multibagger gains, you are uncomfortable selling them as well. Whatever cash flows are coming through, I am just sitting on it. I am not investing afresh. Whenever a company is not living up to its potential, like something in speciality chemicals has largely underperformed, largecap tech has underperformed, but I still am positive on that sector.
So, whenever we find that the performance is not up to our expectations, then we are trimming or exiting those positions and remaining in cash and that really has been my advice amongst the minority who feel that there should be a correction in 2024, all kinds of blue sky scenario notwithstanding. These markets cannot keep on going up like this. Sometimes the law of averages does catch up and I have this theory about leap years. A lot of problems happen during leap years as we have seen in 1992, 2000, 2008, 2012 and 2020. Now we are in 2024.
What is your expectation when it comes to earnings within the IT space? Come tomorrow and it all begins with the heavyweights. Recent reports are talking about strong growth rate, strong order book, segmental revival, and that the downgrade cycle may end in Q3. Do you concur? Where do you stand?
Dipan Mehta: I am not looking at the actual performance of the IT companies, and I am going to be more focussed on management commentary because this will be the first IT earning season after the Fed has clearly stated that the interest rate cycle is turning over there and a lot of the uncertainty in the US economy led by high inflation and high interest rate had put a restraint on IT spends although these companies are sitting on very large multi-year multi-million dollar order book position. It is just that execution was slow, discretionary products were slow.
I want to see how that has changed in this particular earnings season and if they were seeing positive commentary from their customers? Since IT spends are secular. every two-three years there is some new wave, today it is generative AI and some of the other related technologies tomorrow to be something else. As a business owner, you are constantly investing in software and I have seen that in our own business and you may also have noticed that you are constantly investing in hardware and software just to keep the systems going and improve efficiency and productivity.
So, if you have the confidence that the business will do well, then you will undertake those expenses and the key question to ask the IT managers this time is if they are seeing revival of confidence in spending for the future? The numbers are largely discounted. There will be disappointment as we have seen in the September quarter. So, do not read too much into that, stocks will somehow discount the future, not what we are seeing for the December quarter.
Typically, when markets fall or correct, even in intact bull markets, it is a sharper decline for the mid and the smallcaps. This time around, it could be different because there are many largecaps out there, which are underperforming. Largecap outperformance as well is in very specific pockets. It is the midcaps and the small caps, which everyone has been chasing. And that is the one pocket where you are seeing companies deliver those kind of growth.
Dipan Mehta: Another theory that I have and I am sharing with you, I reserve the right to be wrong, is that even if you do not have a steep correction in the Sensex and Nifty, we will see the markets narrowing. You will just see 10-15 Sensex Nifty stocks maintaining or delivering returns. And you may see a correction in large swaths of small mid cap companies.
Actually, investors’ portfolios may underperform. In the last two years, investors’ portfolios have done really well. If you benchmark it versus the Sensex and Nifty, that trend is most likely to change as well because midcaps are priced to perfection. Even a slight miss in their earnings and investors could get disillusioned because at the end of the day, there are a lot of trading positions also over there. There is not that much liquidity and once the result comes bad or something goes negative, for a stock to decline by 15, 20, 30% is nothing, it takes maybe a few trading sessions or so.
From that point of view, also, I am a bit cautious on small and midcap companies. Great quality businesses can trade at high PE multiples but they could have a quarter or two, where the earnings are soft. That certainly can cause a correction, whereas the likes of Reliance, HDFC Bank, ICICI Bank, the large ones, Larsen and Toubro continue to deliver and then we have these FII flows also coming in and that is holding those stocks up. It is possible that we may not see a correction in small and midcap stock, if you look at the headline indices.
From the start of the year till now, have you eased off positions from anywhere, trimmed anything?
Dipan Mehta: Yes, absolutely. I am being candid enough to say that we are sitting on some amount of cash. And with every rise, we are looking at adding more to our cash positions. Thankfully, we are in the broking business and broking capital market activities are doing exceedingly well. You see the numbers from Angel Broking, or Motilal Oswal, some of the listed stock broking companies. So these are great times from a stock broker perspective.
We are having strong cash flows with the grace of God. We are just not investing those cash flows into fresh equity as was the strategy which we always followed, it is just that we are staying back for some time. And as I said, wherever the results are not looking that great, we are looking at exiting those positions like Quess Corp is something which I sold after holding for many years because it just did not live up to our expectations.
Even a travel company like Thomas Cook, we sold because the numbers never came through, despite so much potential. So yes, we are looking at exiting positions where companies which we thought were great buys two, three years ago, where we invested and patiently waited, those numbers just did not come through.
