Investment Strategy: Waiting for technical correction in Indian stock and cash quotes, not chasing value: Dipan Mehta

Are you riding the market wave or is there anything you have made profits on or even added to?
Dipan Mehta: At the moment, the market is fairly quiet. Valuations are not comforting and at the moment we have a reasonable amount of cash waiting for a correction. Since the COVID pandemic, we have not seen a major correction and the markets have absorbed all the positive news flow. We believe that some technical correction could also occur.

When this happens, we are ready with our list of stocks and our cash to invest, but chasing stocks at these levels is pointless and I speak more from experience as I have seen so many bull markets that if you buy at the tops, two or three years later the returns tend to deteriorate. Right now, valuations are high for many good quality companies, and finding new stock ideas is also a challenge.

At a time when value is said to be hard to find and many stocks have risen, some bank stocks are available at a much cheaper price than they were at their peak. Some of these stocks have delivered virtually no returns at all over the past 12 months. So would you buy these stocks if they fall?
Not really, because there are already a lot of overvalued stocks and in many portfolios, including ours, there are a lot of banks. Visually, they are cheap, but the prices of these stocks have not changed because A) there are a lot of overvalued stocks and B) they are the preferred choices for foreign investors to sell when they try to liquidate their holdings in India. The third aspect is that growth rates have certainly slowed down and there has been a perceived sense of stagnation.

In the case of banks, the key parameter to measure growth is pre-provision profits, which have stagnated due to various reasons, and even the growth rates, credit growth and deposit growth have slowed down. Therefore, in a slowdown environment, one can expect the price-to-book multiple to compress. But I am still hopeful about the long-term prospects of the banking sector and we continue to invest in leading banks, be it public sector or private sector, and we hope that the cycle will turn for these banks, at which point, they will be able to regain leadership positions.

But for the time being, it is better to be cautious. But if you are underweighted in banks and have some cash, then this is a good contrarian strategy and you might also consider buying some bank stocks.As limited as the listed space may be when it comes to smart meters, clearly this is a space where small players like Power of gender Now companies are getting big and of course there are big mega corporations like Adanis in the same business. Shouldn’t we be looking at valuations and rising stocks?
Dipan Mehta: Genus Power has been a great wealth creator and has made multiple gains. Many investors bought into this particular stock and the key aspect of course is the multi-year order book position which provides a lot of earnings visibility and they have also been good at execution which is reflected in good appreciation or increase in turnover and profits as well. Maybe at an opportune time when it is available, reasonable valuation, when there is a general correction in the market, that can be a good entry point. But what Genus Power does, very few other companies are in the same line of business. You cannot compare it with Adani or any other utility company.

We are seeing a huge threat of energy theft and companies like Genus Power have a very important role to play in trying to improve the yields or performances that transmission companies can get from their network.

It has a long and strong growth potential and excellent prospects and I am amazed by the order book position and surprised that there are not more players in this business.

What do you think about the auto sector, as it was doing very well? We were all talking about the SUV craze, the push for electric vehicles and all that, but now there are weak spots. Inventory seems to be piling up and there are rumours of further discounts. What is your opinion on the auto sector at this point?
Dipan Mehta: Yes, and one might add that monthly volume figures have certainly improved. The benign commodity scenario cannot continue either, there could be pressure on the bottom line. Much of the premiumisation strategy has also ended. But this is a bull market and a lot of positive news is being received… rather than the negative news being ignored.

I am very cautious on auto stocks right now. There could be a cyclical downturn that could last two to four quarters. The long-term outlook is excellent due to low penetration, but we should expect lower or flat profits for almost all auto companies over the next year or so, and I don’t think that has been fully priced into the stock price.

So we might expect the automotive sector to underperform, but if you take a long-term view (3, 5, 10 years or so) then you’re fine. But keep in mind that there is a huge disruption taking place in the automotive sector in terms of EV competition. How this will evolve is a key aspect to monitor.