Let us look at India specifically. We are the first big market which is out of this entire so-called Trump tariff sell-off. Yesterday’s close was quite impressive. So, while we will have to deal with the eventuality of 90 days, what should one do for the next 80 days?Dipan Mehta: I think that we are going to have an upcoming earnings season and all eyes should be focused over there. Normally, there is a lot of company specific volatility at that point of time and good investment ideas also can emerge. A lot of the companies would have had a look at Trump tariffs. In all certainty I think tariffs for India is going to be around the present range, that is what I understand. So, based on this scenario what the managers, what the management thinks going forward will be extremely important.
So, next 80 days we should focus only on the micros and look at companies on a bottom-up basis and then see if there are any good investment ideas or maybe do some rebalancing or reshuffling based on what comes out from the management and what the actual numbers are out for the Q4 FY25.
Let us talk about Jio Financial Services. More like a mystery stock. I mean, expectations were really high that this new kid from the Ambani group will do wonders. But operationally, they are yet to take off. It is almost 18 months now.Dipan Mehta: That is right. It has not lived up to its potential. It has got all the right people in place, the processes as well, and of course, the backing of the Reliance group, but somehow it has not scaled up to our expectation. And there are better stocks to buy in the financial services space, in the NBFC space which have gained ground where now the business appears to be quite decent because of lower NPAs and with interest rates going down and the risk weightage is also reduced for the NBFCs, there are many good ideas in the NBFC space, but I would give Jio a pass for the time being unless I see some material change in terms of growth rates.
Own this one, do you plan to own Jio Financial Services? I mean, would you say that I will take a leap of faith here?Dipan Mehta: No, I do not think so. As the measure disclosure, we do not have any Jio Finance because we were very-very positive on Bajaj Finance. And to that extent, our portfolios are overweight NBFC because of Bajaj Finance and Chola Investment and Finance and these two companies have had a stellar run and Bajaj Finance for one has reached new high, all-time high after being sideways for almost five years or so and both these companies seem to have entered a new growth phase as well. So, looking at these two companies to be overweight in the possible future and maybe not so much Jio Finance.
Do you think the next trigger for our markets is really going to be earnings and where do you think there is scope for an earnings revival coming by?Dipan Mehta: The focus will definitely shift to the earnings and specific triggers upward and downwards could be there depending upon what the actual numbers are and what management forecast is or what the assessment is for the current environment.
So, investors should get focused. Good numbers should come from two or three sectors. One, of course, being banks, NBFCs, they should report decent numbers with the NPA provisioning kind of flattening out on a year-on-year basis, that is one trend I would like to see and I expect.
Second is that we may see good numbers coming through from engineering, construction company, the likes of Larsen & Toubro, Afcons, NCC, so on. Execution picks up during these months, so that should be good.
Cement also will report good numbers purely on account of base effect and also general improvement in the industry cycle and some of the urban retail companies, the speciality retail companies also, last quarter itself we saw decent numbers coming through from there and we should have a follow-through quarter this year as well.
So, there are going to be great pockets of outperformance and good numbers as well in this earnings season. But look, valuations also need to be kept in mind.
So, if numbers are beyond our expectations and valuations are reasonable, then it is a good enough criteria to buy into the stock, but expect very dismal numbers coming through from tech companies so that is also going to be a bigger issue and so is the case with FMCG as well.
Do you think that most of the negative is in the price when it comes to IT? I mean, we all know it is going to be a dismal quarter. These stocks have already fallen 25 to 30 odd percent from their peaks. Is it time to nibble in at all or do you think it is going to be a while before news turns positive?Dipan Mehta: You could have a trading rally in IT at any point of time, but long-term secular growth rate for software services companies has declined materially. It is in that low single digit or thereabout, just like FMCG. And there are secular headwinds.
There is competition from GCCs. The entire AI opportunity is not as large as it is perceived to be, at least not for software services companies and when you have look at your portfolio and you want that growth of at least 14-15% in your portfolio returns and at least have a few multi-bagger stocks in your portfolio, so if you are looking at that kind of a strategy, then software services do not fit your criteria because these companies have been stagnating for the last several years or so.
You would be astonished to know that Wipro’s 10-year revenue growth has been 7.5%. TCS has been about 9-10% or so. Wipro’s earnings per share for last 10 years has grown by 5.76%.
So, these companies have the growth, has just completely fallen off the grid for these companies. So, I do not see myself buying into any software services company for the next several years or so.
What I expect next will happen is large-scale consolidation within the sector as growth really comes off, that could have some arbitrage opportunities or some positive sentiment, but end of the day where there is no growth, we do not want to be over there.
The other sector that is going to be in focus today is the city gas distribution and the companies from the likes of IGL, MGL, as well as Adani Total Gas will be the key to watch out for as they have announced that the APM gas allocation has been reduced in the range of 18% to 20% for these companies. These, of course, will actually impact the numbers. It was already announced a couple of months back and now it is getting implemented and the companies have now have to procure the gas at a higher price, that will definitely impact the financials. But the good part is that the lower crude prices are expected to provide some relief. But help us with your understanding and this news flow impact on the sector and any of the stocks between IGL, MGL you like at this point in time?Dipan Mehta: I am completely avoiding the gas distribution sector. There was a time when they were growing their territory and there was more and more usage of gas but that seems to have plateaued out. Last few years, the numbers coming through from these companies have been pretty much stagnant. It is not that the stocks have been on fire. At the same time, long-term trends now favour EVs and not just for passenger vehicles but for public transportation as well. And in the past, public transportation was a big growth driver for the gas distribution companies and that is not too happening at this point of time.
A lot of public transportation has shifted to EV and also going forward more and more penetration of electric vehicles will keep the demand for gas subdued.
So, I would like to avoid all gas distribution companies at this point of time. Maybe Gas Authority of India, if you want to look at but that is not really city gas distribution, it has got other businesses as well like petrochemicals and trading in gas and transportation of gas. So, although the numbers are erratic over there, the valuations are quite attractive.
Anything worth looking at within the EMS space? Of course, these stocks are already expensive and have run up a lot and most already own them but if you were to look to add a fresh or even look to add on to the existing positions.Dipan Mehta: See, a disclosure that although we have not invested, but there is one company on our radar and that is Syrma SGS. The quarters prior to the December quarter were a bit disappointing, but December quarter numbers were quite impressive.
Management commentary is positive. They have got won some good contracts and there is good earning visibility also and valuations are not completely out of whack. I mean, earlier it was trading at 100 times plus, now it is more reasonable in around the 50s or so.
So, we are just waiting for a right opportunity to look at this company in more positive light. And the entire EMS space has got good growth dynamics, but valuations are really a concern.
So, if we get a good business at reasonable valuation, that should be certainly interesting to investors. But the likes of Dixon and Amber, they are already quite expensive. Although we own them, I do not feel comfortable adding more to those positions.
Anything within speciality chemicals because these two have been showing you quite a few trading bounces already. But anything that you like particularly from speciality chemicals?Dipan Mehta: I think that right now our focus is on India-centric businesses and you could have a trading rally in speciality chemicals, no doubt about it. A lot of the speciality chemical companies are also expanding capacities significantly and those should be going on stream over the next few quarters, that certainly should give a boost to volumes.
Base effect also benefits speciality chemical companies as well. But look, from valuation perspective, as also the fact that these companies are also quite cyclical, we do not feel comfortable with the present valuations. But sure, there could be a trading rally.
Also, investors need to keep in mind that these are complex businesses and very difficult to understand and track. From that point of view, we are generally underweight speciality chemicals, but I am sure somebody who understands these companies better and the sector better could look at these companies depending upon which phase of the cycle they are trading at.
