Why Dipan Mehta thinks this market rally can be sustained

If this is truly a revival of the bull market and bear market is over and done with, then you could see outperformance coming in from the small and midcap companies, says Dipan Mehta, Director, Elixir Equities. Excerpts from an interview with ETNOW.

It was a marvellous Monday on Dalal Street. With the bulls on a rampage, are you revising your targets for the index? Is this upmove here to stay?
Normally, we do not have targets for the index and not have targets for stocks also. We prefer that our companies continue to deliver higher earnings year after year and so long as they are delivering good earnings, remain invested in them. So no specific targets. But yes, this particular rally is sustainable because it makes a clear difference to the earnings of the company which is then directly linked to the stock price.

If the fundamentals have improved materially because of the tax cuts announced by the finance minister on Friday, then we definitely have a bottom in place. Unless there is fresh negative news flow which I do not expect, markets will certainly build on these gains. There will be corrections on the way tomorrow or day after because the markets have been up over the past two trading sessions. We are in a good territory now and gradually we should be able to build on whatever gains have taken place. A clear-cut turnaround is very much visible on the screen of our terminals.

Do you buy something afresh in this current rally or do you wait for at least this big pullback to settle down and then jump in?
It depends upon the cash levels and if broadly investors are fully invested and just have 5-10% cash levels in the portfolio, then they have the luxury to wait and buy at corrections. In fact, use this upswing in stock prices to make changes in their portfolio because some of the stocks which have underperformed, also have rallied. You may want to sell off those stocks where you are not convinced about the fundamentals and buy into other companies were the fundamentals are slightly better and have better scope for appreciation.

The reshuffling of the portfolio is something which every investor should consider at this point of time. Buying at these levels would be required only if a large portion is in cash like 30-40% of the portfolio is in cash. Even at these levels, it makes sense to start buying and trying an average if the stock prices by any chance as a correction and drift lower.

What is the outlook within the pharma sector? Would you be looking at some of the midcap names as well?
Once the market settles down and we have got the fair values for some of the real beneficiaries of these tax cuts, then one could look at pharma as well because per se pharma companies do not benefit from these tax cuts, not most of them. They take benefit of R&D expenses as well as some of the other exemptions. The deduction which they get are well below the tax rates which will now be applicable. But the pharmaceutical companies are on a stronger fundamental base at this point of time.

In the US generic markets, the price competitiveness has settled down. The price erosion also has significantly reduced and Indian pharma companies are now trying to focus on profitable products, profitable geographies and not expanding in a random manner. Earlier, they were going after new launches as and when they got the permission. There is a high degree of discipline coming into the pharma industry, manufacturing discipline, pricing discipline, discipline as far as R&D costs are also concerned. All that will be visible in earnings over the next few quarters .

Even June quarter numbers were pretty good for pharma. We are very positive on pharma companies, especially large Indian pharma companies like Sun, Aurobindo, Lupin, Dr Reddy’s. Theu can generate very good returns over the next 12 to 24 months. Valuations are also attractive and by and large, most of them have got very clean balance sheets as well. That is also a source of comfort.

Let us talk about some of the major areas where you see the impact of the move. Would you go in more for the consumption play? Would you look more at materials and the slightly deep cyclical plays? What do you think will have a better risk-reward ratio?
The banks and NBFCs are the biggest beneficiaries of this tax cut and good quality banks NBFCs can certainly be bought, if one does not have enough of them in the portfolio.

Apart from that, pure play FMCG companies MNCs as well as Indian, are also big beneficiaries. Companies like Britannia, Godrej Consumer even some of the alcohol companies like United Breweries, United Spirits would benefit from such cuts.

Of course, the building materials, appliances and a broad spectrum of financials and consumption stocks will be the major beneficiaries. The tax cuts do not benefit as much as the capital intensive businesses, which means global commodities like metals or for that matter even some of other cyclical businesses.

There is enough choice in the market considering what has taken place and more importantly, investors should look at midcap companies. If this is truly a revival of the bull market and bear market is over and done with, then you could see outperformance coming in from the small and midcap companies and there are several companies there which are in the higher tax bracket and immediately you will see their earnings move up as also their stock prices. There is a huge canvas of stocks that investors could look so long as the quality of the management and the position of the company within the sector is good.