Rate cuts could get you a nice alpha as far as quarterly results are concerned sometime around September or December and markets will start rallying well before that, said Dipan Mehta, Director, Elixir Equities, in an interview with ETNOW.Edited excerpts:
What did you make of Lupin’s earnings?
We need to go a bit deeper into Lupin numbers but broadly we are getting positive on the pharmaceuticals sector. Overall, the pressure in US pricing seems to have abated and now it is more of a volume growth story. As and when more and more new products, niche products, specialty products are launched, those companies will start getting benefits of those new products.
At the same time, pharma companies also have base effect benefits. A lot of pharma companies have been in the process of derisking as far as regulatory issues with USFDA are concerned. A certain change is taking place within the industry and may be in a quarter or two and within 2019, the pharmaceutical industry can clearly make a turnaround. There is comfort as far as valuations are concerned and the broad trend is that globally spending on pharma products is certain going to increase going forward.
Having said that there is no denying that the recent lawsuit on Indian generic manufacturers does bring an element of uncertainty and one would like to see the progress of that particular event before building even greater conviction in the pharma story.
What are you making of this mega consolidation in Tata’s FMCG business? They are saying that it is going to unlock value, align revenues and cost synergies. But is it really that beneficial for current shareholders of Tata Chemicals?
Yes, absolutely. It is value accretive for shareholders of Tata Chemicals in the short term and in the long term for Tata Beverages as well. It provides the Tata Group a very strong platform in terms of marketing, distribution, brand building from which they can launch many new product line extensions. I am certain that they will get a lot of synergies into it as well.
The Tata brand is extremely strong. Such a move on the part of the management will be extremely positive in the long run. The Tata Consumer company will become one of the large FMCG companies and a force to reckon with. So I am extremely positive on the move made by the Tatas and I think both companies will benefit but given that there is a mild slowdown in consumption, one should have a slightly longer term view post consolidation.
There seems to be a consensus building that assuming we get past the elections with everything intact. that there will be an immediate fillip to some of the consumption names. Is that really feasible given the kind of earnings that we have seen come through?
Absolutely. As I mentioned earlier, interest rates play a very important role in consumption and if interest rates were to come off, then you would immediately see an uptick as far as automobiles are concerned.
Once autos start doing better, a whole host of ancillary industries also start to perk up. So, it is one sector which can really galvanise the markets and the overall sentiment, that is one part. Second, real estate also will benefit from lower interest rates and that sector has been undergoing stress for many years and now finally, first signs of revival can be seen from the results of Godrej Properties and some of the other stronger real estate companies.
Once real estate starts doing well, then ancillary industries like cement, building material will again start to do better. One should just wait and watch and let the elections get over and done with and then look for what the RBI has to say in terms of cutting interest rates.
We have had a benign inflation scenario, growth is definitely slowing down. At this point of time, there is a fabulous case for cutting interest rates sharply and improving liquidity in the system. At the same time, a whole host of NBFCs where a lot of investors are stuck, will suddenly start doing better because of liquidity. Even the stronger NBFCs have been holding back on lending because of liquidity concerns and if those issues are addressed by the central bank, then you will have many sectors getting into revival mode and the base effect will benefit these companies.
So, you would get a nice alpha as far as quarterly results are concerned sometime around September or December and markets will start rallying well before that. Let us just get this election over and done with and hope for steeper cuts in interest rates. If the global scenario is stable, then definitely we could see a turnaround in our markets, sometime post monsoon or so, assuming that the monsoon is more or less in line.
Since you are extremely positive, would you be tempted to buy Tata Global now?
No, we are not buying anything till May 23.rd That is extremely clear and there are fears that there could be a hung parliament and we could see extended political uncertainty. In such a scenario, we would rather keep the cash spare available to buy solid blue chip companies with good earnings visibility whenever there is selloff post election results.
Right now, just wait and watch. The major event is just too close and let us see how it unfolds.
Your take on the rift between IndiGo promoters. Should this make investors a little nervous?
Absolutely. Any bad news has an exaggerated effect on the stock price and this came out of the blue. You may see a sharp reaction in Indigo unless the management comes out and gives a clarification as to what the exact situation is. But rumours tend to be getting priced in by the market and you could expect some pressure on Indigo stock as soon as it opens today.