Are FIIs getting into a big buy mode in India? Dipan Mehta answers

Dipan Mehta, Director, Elixir Equities, says FII buying, even FII selling, stops in some of the largecap index stocks, local money will ensure that the stock prices move up higher for those really mega cap stocks likes of banks, IT companies, Reliance. So, it is not just buying, even cessation of selling can have a positive effect.

The RBI governor last evening mentioned that we are at a structural shift in growth which means that we are at the cusp of that shift and are moving towards 8% growth on a sustained basis. I want to talk to you about what a decently high growth on a sustained basis and a moderate inflation environment can do to portfolios which are running with a focus of 5-10 years, kind of a horizon.
Dipan Mehta: Yes, sure, very positive statements coming in from the RBI governor and he is just reiterating what all of us have been experiencing and what all of us have the same view that this really is the decade of India and with a lot of fundamentals in place and a lot of stars completely aligned, demographics, political stability, overall up cycle in capex, good quality banks, banking sectors is in extremely good health. So, there are many positive factors which should result in sustained growth rates and a higher GDP growth rate eventually does translate into higher corporate profits. But the key question here is how much of it is discounted in the stock prices because at present the valuations are really, I would say, on the richer side and a lot of the future growth prospects seem to have got discounted but earnings can always surprise on the positive side. But nonetheless I think it is a great forecast coming in from the RBI governor and does inspire a lot of confidence amongst the investors as well as corporate India.

Yesterday, we saw the second big blowout in financials in a matter of 10 days. It appears that FIIs selling may have troughed out now and they are repositioning. Are you getting a sense too?
Dipan Mehta: No, FIIs selling is still quite volatile and their view has not changed. They do find the stocks are expensive at this point of time. They have the choice of investing in several other markets, so from that point of view it is difficult to predict how they will react to India at these valuations. But from time to time, we will have such days when they do have positive flows and those are the days you will find that the largecap stocks will do exceptionally well because those are the ones that they really are targeting and if FII buying, even FII selling, stops in some of the largecap index stocks, local money will ensure that the stock prices move up higher for those really mega cap stocks likes of banks, IT companies, Reliance. So, it is not just buying, even cessation of selling can have a positive effect.

Have you analysed CG Power or even Tubes, the parent company which holds CG Power and the stuff which is happening in these two?
Dipan Mehta: We have been covering CG Power and it is one of the greatest value creators and a superb turnaround story. Kudos to the Tube Investments Management for making such a fantastic acquisition and creating so much wealth for Tube Investments shareholders. And of course, this is one company which is in the right place at the right time. We are seeing a massive pickup in capex, private sector as well as public sector and the company's brand, the company's position in the industry is really strong. Demand for electrical products, electronic products have been looking up for CG Power and now I think they are going in for a lot of expansion in new-age technologies as well like EV.

But a lot of the positives have got captured in the stock price. Valuations are extremely rich for a typically cyclical business or an engineering company. So, at these levels, I think it is best to remain invested if you have been sitting on profit. But from a fresh investment perspective, I do not think that the risk return profile favours you.

With respect to the number of block deals as well as a lot of promoters selling out, has anything in particular caught your eye ? What should investors read into this?
Dipan Mehta: These are signals that so much of promoters selling, even selling by MNC promoters clearly shows that they find the valuation extremely stretched and liquidating part of the holdings, use that money elsewhere to repay debt or just personal consumption or just strategic cash clearly shows that we need to be a bit careful at these valuations and it is not a very positive sign from that point of view, the supply which keeps on coming. Mind you, the biggest supply is still to come from India's largest promoter, the Government of India and once they start selling PSU stocks, one needs to see where the stock prices settle down.

So much is happening with respect to some of these new-age tech companies like Swiggy and Zomato; there has been pretty robust growth momentum and there is a very divided view when it comes to investing or partaking in these growth stories. Where is it that you stand?
Dipan Mehta: Yes, there is a lot of dichotomy in these stocks. Some feel that they are new-age stocks and should give sustainable growth rates and create value and there are others who try to measure them on traditional metrics and feel that they are extremely expensive. So, only time will tell who is right. But I would go with the fact that selectively one should look at these new-age tech companies. They have got strong moats, a strong brand, and very aggressive management which can scale up the business. One should selectively look at these companies. We are positive on Zomato, although I am disappointed with the new acquisition which they are pursuing if it does happen, that is the ticketing business from Paytm. Nonetheless, the business is shaping up pretty well and then there is even PB Fintech, the parent company of Policybazaar, so that is one segment and the manner in which they sell insurance policy which is quite impressive and also, I think they are also getting solidly into the black sooner or later.

So, yes, there are a few interesting companies and more will get listed as well. But I would say that it is better to have kind of a basket of these companies, three or four stocks and remain invested for an extended period of time, like three years, five years, even ten years because these companies will take time to really fructify and create a lot of value but they are counter cyclical and if things turn out well, then they could be great value creators as well.