Investors should stay cautious on cement stocks: Dipan Mehta

"We are seeing brute force of money coming into play over here. And as of now, it seems that there are absolutely no risk factors, although there always are. And this market can go even higher from these levels purely on account of the liquidity coming into it," says Dipan Mehta, Director, Elixir Equities.

Seems like some healthy consolidation and much needed at that on the cards.
I do not know if it is a consolidation or what, but it is just a continuation of the rally which we saw post the election result announcement and the fact that investors are now convinced that NDA will be also a solid government and there will be a high degree of continuity as far as government policies are concerned.

In any case, all the key ministries are being headed by the same minister. So, I think it is just going to be business as usual and that seems to have been welcomed by the markets. Also, I think this recent number which has come in terms of mutual fund inflows, that has somehow enamoured a lot of traders and that kind of money coming into the market certainly is taking stock prices higher and higher, notwithstanding the high valuation.

So, we are seeing brute force of money coming into play over here. And as of now, it seems that there are absolutely no risk factors, although there always are. And this market can go even higher from these levels purely on account of the liquidity coming into it.


Would you buy the argument that the profitability for some of those oil marketing companies has peaked?
No, I do not think that the profitability has peaked as far as I am concerned about the valuation which these companies are trading at. And, clearly, they have got good earning visibility, railways is the focus area, capital expenditure and then maintenance revenues are going to flow through to these companies.

But look, they may be great businesses, they may be in a sweet spot also, but what valuations you buy them is very important if you want to really make a decent return on it and right now the valuations are pretty much well priced or overpriced zone. So, I would like to wait and watch. If thay have 25-30% correction, they can become attractive on a longer-term basis.


The last one week, I mean, from last Tuesday when you had the verdict, a lot has really happened in the market, a lot of chop and churn, that crash on Tuesday, previously of course was the Monday spike after the exit polls and then from there the markets have recovered all of their losses, in fact made fresh highs as well. What exactly have you done in the last one week or have you done nothing at all?
No, we have been trying to liquidate positions gradually and get more and more into cash. I think that at these levels buying into anything new does not seem to make sense especially if it is a good quality business which are all trading at very fancy valuations.

So, just waiting and watching, getting gradually into liquidity. Wherever we find the company’s numbers has not been up to expectations in the fourth quarter, we are kind of lightening our positions over there. And waiting for a correction, whenever that happens, it is not that we are going heavily into cash.

Anywhere from 10-20% type of a cash in the portfolio is strategically important at these levels and it could mean existing sales or fresh cash flow which is coming in or fresh savings which are coming in which one may want to invest in the market, but are just putting a pause for the time being.


An interesting development in the market and especially within the auto space. The fact that Ola Electric it seems is going to IPO very soon and they have got the go ahead. There is Hyundai in any case in the pipeline. And then, the entire auto space, be it two wheelers or PVs has all been charged up and I think CV plays as well. What is it that you make of this new emerging opportunity within the auto pack now?
No, let us see what valuations Hyundai and Ola Electric come at. And Ola Electric will be on our market watch completely, absolutely on our list of stocks to watch quite closely because that is the future of the entire EV space and it will start with the two wheelers and Ola Electric is the market leader over there.

So, I just want to see what valuations and maybe not on at the IPO time, but post listing few weeks, few months later, understanding the company better, may make sense to buy at that point of time. But it is an interesting investment theme to chase. And it is great that we are having such diversity and such new companies getting listed as well.
So, let us just wait and watch. Hyundai may be very interesting, but again, valuations are important. The only caveat is that if your recent retail sales, they have become negative for passenger vehicles and overall industry has gone to that low single digit.

Of course, a very bad summer is to be blamed for this particular low sales at the retail level, but I hope it does not become a trend. Because in a way what is happening is that the base effect of all these production and sales figures are also catching up and just as we are seeing a mild slowdown in demand at the consumer level for a lot of big ticket items, something similar could happen in auto and I would not even rule out real estate.

So, on the whole consumer facing industries which have had a great time last two-three years or so, they could have a minor demand bump for a few months or a quarter or two and that may kind of lead to negative sentiment, it could spook a few investors also. So, I just want to be a bit careful when it comes to maybe auto or even real estate for that matter.


But talking about the pharma space specifically, because that is where some of those ideas were emerging. Now, there is always the valuation conundrum when it comes to the healthcare side of the business. But within manufacturing, CDMO, API players, is there anything that stands out?
I think that pharma is a great defensive industry to be in and last couple of quarters the numbers across the board have been improving largely because of lower competitive intensity in US generic market and overall improvement in exports globally and better compliance or regulatory management as far as US FDA is concerned.

So, it is one emerging industry. It has been a laggard for many years until about a year-and-a-half ago or so.
And I think it is ripe to take leadership position and show our performance. So, very positive on pharma. And depending upon risk appetite, I think the large pharma companies, Dr Reddy’s, Sun, Cipla, they all could give good returns and the more riskier plays will be something like a Caplin Point or Ipca Laboratories or Ajanta Pharma, all of which have got very strong emerging markets or rest of the world business and have got some interesting products in the US generic space where their presence is still a little small and they can certainly grow that over there.

Specifically, Ipca, I think they have got that Unichem Laboratories acquisition, if that works out well for them, then it could be a growth driver for that company.

But on the whole, very positive on pharma, across the board I would say, even turnaround stocks like Gland Pharma, Piramal Healthcare also look quite interesting. So, lots of choices are there, but I think it is one sector one should get gradually overweight in.

What is the view on cement? Worth a bet?
No, I would be a bit neutral to underweight cement. There are reports that first of all because of very hot summer the sales and the prices have taken a bit of a hit and now we are entering the lean season as well as in monsoon hardly any construction activity takes place.

At the same time, I think rapid expansion of capacities across the board still continues and I know that the demand is great and real estate, infrastructure, road construction, all are doing well but end of the day these are physical businesses and with so much of capacity coming into play, I just want to be a bit cautious.

But I have been proved wrong on cement, at least I was very impressed with the numbers which came from UltraTech as well as Shree Cement.

So, I would just wait and watch as far as cement is concerned. And let us just see how the actual expansion plans play out. And also to an extent they may get hit by high raw material prices and some of the cost benefits may not be sustainable. So, I would be a bit underweight to neutral as far as cement is concerned.