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Don't get carried away by the rally and buy duds now: Devang Mehta, Centrum

ET Now|
Last Updated: Sep 26, 2019, 04.53 PM IST
Devang Mehta-NEW-1200


  • It’s not the time to buy turnaround candidates.
  • We have not yet seen demand coming back.
  • The markets from here on would do well.
We are advising our clients to accumulate in tranches, rather than just getting carried away that the market would see rise from here on as well, says Devang Mehta, Head, Equity Advisory, Centrum India. Excerpts from an interview with ETNOW.

How should one approach markets now -- exercise some caution or stay fully invested? Go with the flow or go against the flow?
On 29th August, when I was last on your channel, we gave a call that markets would come back roaring from around 10,600-10,700 and we are happy that the call has worked. I do not see technicals but fundamentally also we thought that there would be some valuation support which market would take and nobody knew that such a desperate measure or reform measure would come in, but probably that has helped the market not only to turn the sentiment around but also on a fundamental standpoint, if somebody talks about macros and micros, we know that macros are not exactly as we would have wanted at 5% GDP growth rate.

But micros -- if it directly adds to the earnings of the companies or if it helps in reviving capex or price cuts which can probably spur demand -- would be a game changer at least on the supply side. We are advising our clients to stay with good stocks that we have been recommending and not to get carried away by the rally. Do not buy duds. It is not the time to buy only turnaround candidates. It is time to buy companies which are seeing earnings growth, which are having the robust business model or which are market leaders or high market share companies. We are advising our clients to accumulate in tranches, rather than just getting carried away that the market would see rise from here on as well.

Are you saying that you knew about the tax cut because nothing fundamentally has changed, the markets have gone up because of tax cut only.
That is what I said. Nobody knew there would be such a reform but we felt that at some level, market would have a floor where at least on a fundamental standpoint, valuations are somewhere around screaming buys or some largecaps, which had not corrected, they also started to correct and there was a bit of capitulation in the market.

That is why we said to start buying in tranches. Nobody knew there would be such a stellar rally following such tax cuts. But we felt that if somebody invests at that level, there is a good probability to make money in the next 12-18 months. God has been kind. Money was made in this last one week.

We have seen some long unwinding and major moves across that auto pocket post the tax cuts. There was also a move on the downside after some amount of profit booking. What is your take on the trend going forward now?
A lot of it was just due to the optimism of an earnings uptick and a lot of the sectors and I think it was more a rally of disbelief where there were a lot of shorts in the system and also there was a lot of pessimism in the prices. So on the day of the first leg of the rally, it would have been justified but the rally that continued on Monday was a little more overdone and that is what is getting corrected.

We have not yet seen the demand coming back. These are the two crucial months to give a call on this. Navratri starts this month and next month is the festive Dussehra as well as the Diwali season. If the festive demand does not come back even for two-wheelers or some passenger car vehicle companies, it is going to be a tough ride. But if it comes back after price cuts which Maruti announced yesterday, we can see a bit of rerating. Again I am not saying that we would be the greatest buyers, but the complexion has changed from a sell to a bit of a hold.

We have had mixed views this week on Reliance Industries. There was an upgrade news with regards to possible spending post debt reduction, but there is a huge overhang on the debt reduction front. Is there any scope of an upside in RIL in the near term?
Clearly debt reduction and an expected deal seems to be the trigger right now. The market has also started to give a huge thumbs up in terms of Jio. They have done a lot of capex which probably would start showing results after sometime. That is where the telecom business would come into picture where they are grabbing market share and subscriber additions which has started to happen in the Jio Fiber business is also something that the street is watching out for.

The markets from here on would do well. These are the leaders -- a couple of banks along with Reliance. In a very street-smart way, if the market is going to go up from here, I think Reliance needs to participate and whether it can carry out debt reduction in 18 months or 24 months is debatable but if the debt is reduced, the stock would get premium valuations. With a long term view of two-three years, it should be a candidate for accumulation on dips.

Are you telling your clients to buy ITC?
We look at a lot of companies and their 10-year, 5-year and 3-year performances. We look at revenue growth, PAT growth and EBITDA growth of these companies. Simultaneously, if these companies have grown 12-15-20%, we see whether the market cap of this company has also shown simultaneous jump or more than that. That is where we would be interested in wealth creation. We find that ITC does not tick a lot of these boxes except for dividend yield which could turn out to be 4-5%. India is not such a dividend yield market, it is more of a growth market.

We are more bullish on companies like Dabur; Marico, Britannia and Nestle, which would always be expensive if you compare it to ITC but they are not like to like businesses. ITC trades at half the valuation or in fact less than half of HUL. It deserves a bit of re-rating but to be very fair, we have not bought it in our portfolios as yet.

From an investment perspective, are OMCs an attractive bet or are they at best just a trading play?
That depends upon the news flow in the market and we ourselves have never got into this type of stocks which are PSUs and also cyclicals. The dependence is more or less on the crude part and that is also impacted by negative or positive news flows. If the divestment of BPCL is what the street believes in, there will be a bit of a rerating on the cards. But it would be a more speculative set of news. We would avoid the oil marketing space at this point.

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