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Dipan Mehta: I do not think it makes any difference to the company’s fundamentals or for that matter even the price movement per se because BAT never had a very active role to play. It was just an investment for them and all the difference it makes is that the weightage of ITC in the Nifty and other indices will go up because of higher free float, but that also marginally. So, by and large, it is business as usual for ITC and whatever challenges they are facing in terms of slow growth of the tobacco business and the other businesses not reaching their full potential, especially FMCG, are the concerns in my mind.
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Also the ITC Hotels demerger was not up to the Street expectations. Given all of these scenarios put together, ITC seems to be pretty much well priced at this point of time and I do not expect the tobacco business or the other businesses to grow significantly for the investors to pay a higher multiple for ITC for the stock to really outperform the Sensex and Nifty.
What is your thought on the private banking space because a lot of people are getting a little cautious with PSBs, the more mid and smallcap banks and sticking with the large private players. Also, they seem to be a bit of a bottom-up story right now because they did not quite participate in the rally that the market had until last month. Where are your biases and preferences within the largecap banks, right now?
Dipan Mehta: For us and a lot of investors, professional as well as amateur, HDFC Bank, ICICI and others of the peer group, large private sector banks are part of the core portfolio. Despite the underperformance, I do not think many investors have become extremely underweight in the large four-five bank because they are the segment where you feel valuations are reasonable. There is good earning visibility and these are the companies which really benefit from the India story because at the end of the day, it is all about higher credit growth and also lending to the infrastructure and corporate sector which is what these banks are able to do.
From that point of view, we remain very positive on these companies. Valuations are at historical lows for the likes of say Kotak Bank or HDFC or even ICICI for that matter. So, there is a lot of comfort over there. But at the same time, the base effect is coming into play. Their growth rates certainly have slowed down, especially HDFC Bank per se and even Kotak to an extent. But I think that has got priced in as well.
What also is happening is that the RBI generally is trying to increase regulation as far as the competition to the banking sector is concerned, especially the NBFCs and that may have a mildly positive effect on the entire banking sector. If you compare the growth rates, credit growth and other quantitative parameters not just financial between the private sector banks and the PSU banks, then the private sector banks are growing at a far higher pace and gaining market share. So, from a valuation point of view and a growth point of view, and from a valuation point of view, we are very positive on the top four-five private sector banks. PSU banks may still have a trading rally. But I am not sure you can hold them for an extended period of time and make them as part of your core holdings.
A very blanket kind of advice – if you own small and midcap stocks, just reduce them or just hold on to them as long as you are confident of the story?
Dipan Mehta: It all depends upon the quality of the stock. For example, we have a holding in Varun Beverages. It is trading at a very high valuation, almost 80 times trading 12 months. But it has been a great value creator and the company is growing at 25% and expanding capacity. Therein lies the dilemma: do you sell a stock which is overvalued, but still growing?
In my experience, remaining invested and anticipating that there could be a time-wise and price-wise correction is a better strategy. If you agree to give part of your gains but still remain invested, then over an extended period of time what you get is really a multibagger because stocks do not go up in a linear fashion. I would extend this argument across the board to midcap stocks, wherever there is quality like Trent to an extent or for that matter some of the other quality stocks like Praj Industries which has done well, within the banking and NBFC space, CreditAccess which has done well, Action Construction, Poly Med, these are great companies and they may be overvalued at this point of time because of the reasons that we all know, but then just selling them because they are overvalued is not a good strategy. These companies continue to grow but one should expect a steep correction, time-wise, price-wise in a lot of quality midcap stocks and if you are mentally prepared for that, then you can continue to hold on to them, but definitely not add to overvalued stocks to your portfolio.
TCS was actually sitting at an all-time high. What do you make of the prospects of IT?
Dipan Mehta: To an extent, we are seeing better trends in IT. They are not yet there where they can go back to double-digit growth rates or mid-teens type of growth rates, but they are getting over there and in the sense that the worst is over for the global economy especially US and Europe, we have an artificial intelligence wave and that could trigger a fresh increase in tech spending globally and that will benefit Indian IT companies.
I remain very positive on the IT sector, especially largecap IT. If you have the patience and the holding capacity for two-three years, then these companies can certainly outperform the broader indices. It is a bit of a contrarian play also because the earnings have been pretty much flat and you can expect an acceleration maybe a year or so down the line. We remain positive on IT per se and select midcap IT stocks also.
If they are available at reasonable valuations, then they could make an interesting investment opportunity like Tata Elxsi or Tata Technologies, KPIT Cummins, Coforge. These are companies which have the potential to grow at a significantly higher rate than the peer group and the industry as a whole but they are expensive and the key challenge is to invest in these companies at reasonable multiples which can happen if there is a correction. Nonetheless, largecap IT and HCL Tech in particular because of its slightly deficient business model may do well over the next two-three years or so. Having said that, a disclosure, we and our clients will be invested in many of the IT stocks which I named just now.
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