FMCG stocks best avided till there is a major revival: Dipan Mehta, BSE & NSE

In a chat with ET Now, Dipan Mehta, Member, BSE & NSE, says any bad news on an underperforming stock like Jubilant Foodworks tends to gather all sorts of traders and short sellers. Edited excerpts

ET Now: I wanted to actually start with Colgate but since I was on Jubilant, let me start off with that. A 10% slam dunk on a report from CSE which speaks about presence of two chemicals which FSSAI says are not on the banned list. Was this recovery in Jubilant a no-brainer?

Dipan Mehta: Yes one could say that. I think the market tends to overreact to such news and especially having seen what happened with Nestle and the way the market has positioned in terms of its overall trend, any bad news is negatively impacting even more than what its actual due is. We are seeing a sharp correction and now a recovery is taking place in Jubilant Foodworks. But other than that, the stock anyway has been underperforming and same-store sales have been stagnating as the performance over the past few quarters have been pretty much flattish. So any bad news in a stock like this tends to gather all sorts of traders and short sellers into it which is what has happened at this point of time.

ET Now: About the two chemicals, one that was spoken about is not on the banned list and therefore it can be replaced but need not be replaced immediately. Two, the results are slated to come out from Jubilant Foodworks in about four-five days and the assumption is that they might clock in maybe 5-6-7 same store sales growth as well. If that were to happen, do you think there is merit in looking at this QSR space or you would leave it alone for the time being?

Dipan Mehta: I think when you look at the entire consumer discretionary and the rising consumer spend as an investment theme, then there are many other stocks which fall within that theme rather than QSR segment where we have been seeing flat growth for the past several quarters. If you look at where the consumers are spending, we are seeing the appliance companies, especially air conditioners, air coolers, fan manufacturers come out with stellar set of numbers.

This is where a lot of the consumer spending is going into. Then there are building product companies, the likes of plywood as well as ceramic tiles, sanitaryware, they have done exceedingly well because of rising consumer spends over there. And then there is the entire FMCG sector where select pockets, select categories are doing exceedingly well.So when one investor looks at investing in rising consumer spends, these are better options rather than the QSR segment and the likes of Jubilant Foodworks where growth is still stagnating. Maybe it is to do with the trends which are there in terms of eating out or ordering at home. May be these trends are impacting the performance but by and large I think growth has been disappointing and till we see a major revival, I think it is best avoided.

ET Now: Talking about Aurobindo Pharma and largely the pharmaceutical space. Has the mood changed there post these earnings? Of course, news flow continues which does not augur well and litigation risk is always there in the sector but you are off for a bit.

Dipan Mehta: I think pharma is suffering from over exposure that investors have taken into the sector as a whole and negativity has crept in on account of competition and lower pricing in the US generics market because of vendor consolidation. At the same time, I think the threat of US FDA is also hanging like a Damocles' sword on most pharma companies. The pharma companies which have been hit by US FDA action, have taken a very long time to recover. So that also is playing on the minds of the investors.

So what I see is that pharma companies over the next two-three quarters are going to experience very rough weather. But you need to have a slightly longer term outlook within the sector as a whole. It remains a good defensive sector. The US generics opportunity as also the opportunity to export to the rest of the world -- both developing and developed market -- remain huge and it is a sector in which India definitely has a price advantage and technical advantage as well. So I would say that long-term investors could look at the sector favourably and these corrections could be good opportunities for increasing exposure but for short-term investors and traders, I do not see much of scope for pharma stocks to appreciate at least in the near term.

ET Now: I know you have a keen eye for media. I do not know whether you look at Dish TV individually or not, but it has had a bit of a correction after those numbers yesterday and the guidance has not been spectacular. What would your thoughts be there?

Dipan Mehta: We follow media stocks quite closely but I have consistently avoided Dish TV since its listing because basically the company never rose to its promise and if you see the track record, it has not been that great at all. There is a high degree of volatility in earnings and despite the huge opportunity, the secular growth rate never came through in Dish TV. Although their revenues went up, it never really was able to show sustainable profits and I do not think that anything has changed for us to change our negative view on Dish TV. Within media I think the best companies to play of course is Zee which is into content itself and that came out with a very good set of numbers.

There are also exhibition companies likes of INOX and PVR which are also coming out with a very good set of numbers over there because of rising box office collections and increased trend of consumers going out for movie experience. So that broadly I think and of course our favourite company remains Entertainment Network which is part of your group and they also have been coming out with very good set of numbers. There is a secular growth story over there and opportunity coming up in terms of new radio stations as well. So these are the companies sort of which we and our clients are invested in.

ET Now: I want you to come in what is arguably the stock of the morning and that is VRL Logistics. I am asking you to comment from a perspective of somebody who is holding on to these shares because they may subscribe in the IPO and thought that it is a great company and probably it did make a lot of money for people but somehow this aviation foray by the promoter in his personal capacity has not worked out well. My question is when the management spoke to us, the only thing that did not quite sit right was his inability to commit to the quantum of stake sale that he will have to do to raise funds. He could not commit whether it will be 5 or 10 per cent.But what did you think of this whole episode?

Dipan Mehta: I do not think aviation is such a bad industry after all. The fact that they are doing it in their private capacity should not be bothering shareholders of VRL Logistics and as far as the stake sale is concerned, I think these are first generation entrepreneurs and they are being transparent about the fact that they will need to sell their stake to fund their private venture which is perfectly fine and from time to time, promoters will sell their stake and that does not mean it is a negative on the company. I think if that was the case, then Infosys would never have appreciated the way they have considering how much promoters have sold as a stake in Infosys over the past 10-15 years or so.

I think if GST is going to get eventually get passed, a logistics company like VRL will certainly benefit. At the same time, they are in transportation business also and that also should look up given the kind of increased travelling which the average Indian is doing at this point of time. So I am not completely sure about the exact valuation, whether it has reached attractive levels but just based on the fact that promoters want to offload part of the stake to fund a private venture, need not lead to such a drastic reaction as a 20 per cent fall. But one must also factor in that the company’s performance has been a bit disappointing and that also can have a play on the fact that this stock has corrected this much. Maybe at further corrections, it could turn out to be a decent buy for the long term for the investors.

ET Now: Any merit in a Federal, in a KTK, J&K, or DCB, some of these small and midsized private sector banks/some which have a slight public flavour too?

Dipan Mehta: We are very optimistic and positive on DCB and as matter of disclosure we and our clients are invested in DCB. DCB is a class apart in comparison with some of the other private sector banks, the smaller mid-cap private sector banks, the likes of say J&K or Federal Bank or Citi Union Bank. DCB has been performing exceedingly well consistently. They have had some challenges in terms of setting up new branches and what the cost increase would entail in terms of bottom line impact, but by and large I think they have kept their books extremely clean and the net interest income growth and the fee based incomes growth is best in the class as far a DCB is concerned. The valuation also is quite reasonable according to us. So we are very positive on DCB per se.

As for the other private sector banks, from time to time, the likes of Federal Bank and some of the other banks do come out with good set of numbers. Even Karur Vyasya came out with good set of numbers but they are not consistent and provisioning tends to creep up. I am not completely satisfied with the net interest income or the business growth of these so-called old private sector banks. So within the banking sector, it is better to deal large private sector banks like IndusInd Bank or HDFC or Yes Bank or Kotak Bank. And with some more higher risk return profile, even likes of DCB would be quite interesting.

ET Now: Any view on Just Dial? In many ways this is a company that is in a state of flux right now with investors not quite knowing what the future of the company could be. A lot of people are hopeful that things could turn around but are not quite confident that they will...

Dipan Mehta: You said it, it is a company in a flux and their new initiatives JD Plus or JD Omni really have not kicked off. So they have not been able to gather any of the transaction-based businesses going and as for its traditional business, the search business is also seeing growth rates slowing down significantly. The kind of momentum which was there in the past several years seems to be missing and stock still remains valued pretty richly which is why investors seem to be having a negative view on the stock and selling at this point of time. My sense is that this kind of negative trend in Just Dial may continue for a few more quarters unless we see the transaction based businesses start to pick up for the company or the search traditional business has to again get back its mojo. Till that point of time I think it will remain under stress and we will see a compression of the price earning multiple.