FII flows steady amid global volatility, but Trump tariff risk looms in July: Dipan Mehta
"It is a difficult sector, but a lot of companies did very well in speciality chemicals in this particular quarter. It is a cyclical business to some extent and I see an upcycle in the speciality chemicals business," says
Dipan Mehta
, Director, Elixir Equities.
The setup I think depend one needs to be cognisant of the fact that even though the global yields have gone higher, US yields have gone higher, the dollar index is well under control, currency is well under control. So, can one say that as long as the dollar index remains weak and currency remains strong which is Indian currency, we should not worry about
FII
activity?
Dipan Mehta:
FII generally are realising the superior fundamentals of the Indian economy and they are seeing that in US the fundamentals and the corporate profitability are seem to be a bit challenged and there is just too much concentration in the Magnificent Seven.
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So, from that point of view, all emerging markets are doing well and India is getting benefits of that as well. So, I am not that much looking at the global factors at this point of time but really the real important event over here is what is going to happen in July when the 90-day period gets over and what is going to be the Trump tariffs that is the most important question and frankly, the real risk factor in this nascent uptick which we have seen in stock prices. But nonetheless, the long-term flows of the FII seem to certainly have improved.
If you have to pick up spots based on earnings, where are you finding a sense that a 15-18% growth looks conceivable for next two-three quarters, where are you getting that confidence, in which name, in which sector, and which theme now?
Dipan Mehta:
It is a difficult sector, but a lot of companies did very well in speciality chemicals in this particular quarter. It is a cyclical business to some extent and I see an upcycle in the speciality chemicals business.
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These companies invested heavily just around 2020, around the covid times they came into the limelight because of China plus one strategy and generally cyclical up cycle and they were all expanded capacity significantly and expanded their footprint in the global market.
A lot of them have got long-term supply contracts as well and now, since input prices have stabilised and even the final prices have improved a little bit, these companies are doing well on the volume front and the price front.
So, within the entire space now we are looking at speciality chemicals very closely to see if there are any good winners over there. Right now, on optical basis these stocks look expensive because last few quarters the earnings have been a bit disappointing and they have been negative for many of the speciality chemical companies but these are great operating leverages and at some point of time the earnings can surprise us on the upside and from that point of view these stocks seem to be bit undervalued.
But this is a very complex sector, difficult to understand, and there could be a great degree of diversity in the terms of the earnings which come through, so we need to be very careful which stocks we buy into. But if you ask me one sector which is looking promising after this earning season, I have to say it is speciality chemicals.
Is it a contra call by any chance?
Dipan Mehta:
No, it has now gone off the radar completely and we have gone over this thing many times. The real reason here is that clearly, they have lost their moat. What is happening is with the kind of surge in GCCs, global capability centres, really the comparative edge of the IT software services companies has got eroded.
Their clients themselves are going ahead and setting up captive software development centres themselves. So, what is really the value add of a software services company that is being questioned.
Secondly, whatever happens, it is very clear that US economy is going to be stressed for the next few quarters. Recession, depression, crash, one does not know but definitely there is a great deal of uncertainty amongst US corporations.
And in that kind of a scenario, they are not going to go ahead and increase their expenditure on software, so that is going to be a bit of a challenge for software service companies. And then there is this entire this AI thing. I thought this AI was going to be a great opportunity for Indian software service companies, but it does not seem to be so and a lot of those projects are very small and really it is not percolating down to the software services companies.
So, for me, the entire sector is avoid except for two or three outliers you could say like a Persistent Systems which has an exceptionally well, maybe an Oracle which is more of a product company, Newgen but disappointed with Newgen is numbers which is kind of a platform company. So, there are just one or two picks here or there but by and large the traditional software services companies are a complete avoid.
Help us with your take on Jio Financials because just yesterday, the stock was also up around 3%, but well, of course, it did had a news flow. But other than that what did well were some of the laggards within the banking space? Case in point being Bandhan Bank,
RBL Bank
, they did pretty well in trade just yesterday. At this point in time where in the banking space you are finding value?
Dipan Mehta:
See, I think that Bandhan, RBL came with decent set of numbers and maybe a lot of their issues are behind them. But one pocket within the bank space which did really well are the PSU banks.
Across the board right from State Bank of India to Punjab & Sind Bank, the smaller bank, the larger banks, Canara Bank, Bank of India, Bank of Baroda. And if you look at their numbers, their NPAs, their credit growth, their CASA ratios, they are all matching up to what we are seeing in the private sector but valuations are still on the lower side.
So, I see that the valuation gap, the performance gap between the PSU banks and the private sector banks is narrowing very fast. So, if you wanted to increase your exposure to the banks, the best way to play would be through the PSU banks.
But if you still want to do, it is better to do it with the NBFCs.
And in a situation like this where interest rates are lower and NBFCs per se have got lot more lending opportunities, they are far more flexible, and to an extent they manage the regulatory framework far better, so if I were to increase my exposure to the lenders, I would like to do it through the NBFCs and there are a lot of choices over there and our preference would be for companies which are offering multi-products like say a Bajaj Finance or L&T Finance or a Chola which is not just into gold financing not just into microfinance or vehicle finance, but across the board they offer all the lending products. I think those could give decent returns over the next few quarters or so.
LIC
is one of those non-starters. At 871 thereabouts, what is the call on the stock now?
Dipan Mehta:
See, I was very positive on LIC. As a measure of disclosure, we are invested in the
IPO
as well and are still holding that stock.
But the entire insurance space now is not really inspiring or it is not really appealing to us. These insurance companies have been around for more than 10 years.
LIC much less than that. But they have not really set the stock markets on fire. Their performance has been very volatile, it has been tepid.
Their growth rates although optically they look good, but when you see the stock price appreciation over a 10-year period is nothing impressive. These are complex businesses to understand and to value.
You cannot just take the price earning multiple and value them. There are many other nuances over there. But end of the day they have not really created a great amount of wealth for the minority shareholders and as a business it is heavily regulated.
There is hardly any scope for innovation or one company doing exceptionally well over the other. So, from my point of view, I now want to get completely underweight or nil weight the insurance sector be it life insurance or general insurance.
It is just that the track record for the past 5-10 years has not been that inspiring and from an investor's perspective you want that alpha, you want to beat the Sensex and Nifty get higher returns, I am not sure that insurance companies are your long-term bet.
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