Time to move out of IT, go for pharma, specialty chemicals: Dipan Mehta

A whole host of largecaps -- Tech Mahindra, Kotak Bank, UPL, M&M -- saw deep gashes in trade yesterday. What could one do with them?
It is best to stay put at this point of time. It is an evolving situation and we do not really know how it will play out. The sectors which are globally focussed and externally oriented, may get impacted more as it appears that India might come out of the Covid-19 crisis earlier than some of the European nations and the USA.

One needs to be a bit cautious at this point of time. It is something new, we are in an unchartered territory and we do not really know how it will play out. I would like to say that even after the lockdown is over, consumer behaviour may be completely different.

What we are seeing in China is that despite the lockdown being lifted over there, the average consumer is very scared at this point of time and does not want to go out and spend or wants to go out and even go for the normal life over there. That would also follow in India and other countries which are impacted.

I would be very cautious at this point of time. I know that values have come off and stocks are at attractive prices but there is a great deal of uncertainty and the kind of uncertainty which an investor just cannot grapple with.

If you are a trader, you can trade based on prices, volume and technical parameters but from a medium to long term view, it is best to stay away from the market at this point of time and let it settle down. Let us have some positive news flow on the health front and then reassess and reinvest.

How do you read into the auto sales numbers that have trickled in? It really is a bleak road ahead and it is no surprise that auto sales have driven off the cliff, given the lockdown. Is it the right time to buy into some of the auto names?
Auto numbers are a washout and that was expected. If you cannot go out of your house, there is no question of buying into discretionary products like auto or even commercial vehicles. The way the economy is and the way the outlook is, there is no point making fresh investments.

The recovery in auto was expected sometime after the implementation of BS-VI. That will get delayed by a few more months. Assuming that we are out of the Covid-19 situation by summer, the best possible scenario for the auto sector is when the next festive season comes through. Maybe by then, the industry would get back to normal. But it is all subject to there being a solution to the present pandemic and the economy getting its rhythm back and overall business activity picking up.

At the same time, whenever the problem is resolved, the auto industry especially will benefit from the underlying demand which has been waiting for the opportune moment to come in and buy. You could see a nice uptick once the business confidence is on the higher side and the pent up demand comes into play.

They would benefit from operating leverages as well as better capacity utilisation. Who knows, they may be even able to increase their operating profit margins because raw material costs have been coming off significantly over the past few months.

Whenever autos stages a comeback, would it be passenger vehicles first or would it be tractors or CVs?
It would be more passenger vehicles because CVs are still dealing with the aftermath of GST where the productivity of vehicles has improved. If I had to buy auto stocks, I would go for passenger vehicles and maybe even two-wheelers, maybe a premium two-wheeler like Eicher Motors with usual disclosure that we and our clients are invested. These may be taking off sooner than some of the other companies.

But as I said, I do not want to get extremely bullish on the sector as of now and once life gets back to normal, it is more to do with staples which will do better, pharmaceutical companies will do better. Products which are not discretionary in nature, may be first off the block. Those companies may start outperforming immediately and then once we have a handle on the banks and what their NPAs are sometime in the second quarter, those would see a rerating upwards.

The last would be the discretionary products because I do not think consumption spending will start spiking immediately. It would just be basically spending on essentials which also have done badly because of disruptions in the supply chain and inability of the consumer to access the products.

But once the essentials are available, you will see those doing particularly well. In my opinion, the last to get back to normalcy would be entertainment and especially exhibition companies, theatre companies and maybe all travel related industries especially hotels and airlines.

That is how we are seeing the trajectory. Once we have the lockdown over and life starts to get back to normal, the best stocks to invest in would be the FMCG companies, the bare essentials, thereafter the discretionary products and then the last would be entertainment and travel and some of the other luxury products.

When it comes to the IT sector, there will be a serious concern on what sort of client spends will there be now and whether deal wins will be as smooth as they were previously?
The software sector is very closely linked to the global economy and with the way the European and American economies are going to be impacted because of coronavirus, these companies will have a very long winter and it will be very difficult to get their volumes going. They always have some amount of maintenance revenues but the uptick in revenues and the profit margins come from discretionary spends which gives the fortune 500 clients. A lot of companies will get into cost saving and a survival mode because of what they are undergoing at present.

Considering that the economies are going to be in a bad shape, an economically sensitive sector like software is bound to get impacted. That is getting reflected at this point of time and despite the rupee weakening the way it has, we have seen a lot of damage to software companies purely on account of the fact that there could be slower and even negative growth rates going forward.

Even before the Covid-19 crisis, software had been slowing down over the last two-three years. The growth rates had come off from 15-20% to more mid to high single digits because of technology disruptions, base effects and because of a lot of platforms and other systems taking over. Now with the coronavirus crisis, there is going to be more heavy lifting for the industry to do.

From that point of view, I would like to remain underweight in the sector. Investors who are considering a reshuffling of the portfolio must remember that reshuffling can happen at any point of time because you are remaining at the same asset class. It is just that you are positioning yourself better so as to outperform the broader market indices.

If you were to undertake a reshuffling exercise, then software is something you could perhaps sell off and buy into some of the staples or the pharmaceutical or healthcare companies or companies benefiting from global supply-chain disruptions, especially specialty chemical companies.

Once the world gets back to normal, most of the Fortune 500 companies are going to have a close look at what they are procuring and from where and from that point of view, India will become a solid second source of almost every manufactured product. So a new investment theme will definitely emerge and investors should position themselves for that. There will be companies and sectors which will take very long to emerge out of the crisis and those are the sectors which investors should try and get underweight on like say software, airlines, travel related businesses, even entertainment and especially exhibition companies, maybe restaurant companies.

I would say that even at this point of time, it makes sense to reshuffle the portfolio, position itself for the post coronavirus era where you may see a change in the leadership position. Selective outperformance will continue in all markets.

What about real estate as a sector because pre-Covid, you had seen most of the stocks bouncing back -- be it DLF, Oberoi or Godrej Properties. Now, because of this pandemic, things got pushed back a little. In this decline, would you venture out to buy any of the realty names?
Real estate has corrected significantly, especially good quality companies like Godrej Properties which we and our clients are invested in as a measure of disclosure. So, a massive correction has taken place in the real estate sector. Stronger companies like Godrej or Prestige Estates, maybe even Sobha Developers or Kolte-patil will benefit because again the process of consolidation which was there before this particular crisis, that process of consolidation will gather momentum because although liquidity is available to the AAA borrowers, it will become scarce for builders who have stretched balance sheets. With sales coming to a pause and consumers pushing their purchases, there will be more stress in the sector.

The stronger players will be there to cannibalize. They will take over stressed or stuck projects and to that extent, over a medium to longer term, the large players in the real estate industry be it a DLF or even Godrej Properties or some of the other names will do far better going forward and whatever damage has been done to the industry, 60-70% would have already got priced in by now,

The overarching theme going forward has to be the survival of the fittest and those who can survive this crisis will certainly thrive and that is absolutely true and that is the overarching sentiment as far as the real estate sector is concerned.