Why Dipan Mehta continues to be neutral to underweight on IT

If the domestic economy is going to improve, then the best returns will come from domestic-focussed businesses, interest sensitives and consumption-oriented stories. Those would outperform IT, says Dipan Mehta, Founder & Director, Elixir Equities. Excerpts from an interview with ETNOW.

What do you make of the earnings season so far and how would you assess the earnings of IndusInd, TCS, Infosys and maybe a few more?
It is a bit early to judge how the earnings season will proceed based on what we have seen so far. It has largely been a mixed kind of a season so far. TCS had been a disappointment, IndusInd reported a good set of numbers but the Street did not like the increase in slippages, which the management did explain but these days, perception is more important than reality as far as banks and NBFCs are concerned.

We had some issues over there but by and large, there is not much great expectation about the Q2 numbers and investors are looking at management commentary and how the year would shape beyond the second quarter. Most importantly, how the festival season will play out post such a good monsoon.

What about auto companies? How would you look at their Q2 numbers?
The Q2 numbers for auto is going to be a complete washout. We all know the reasons for that. Volumes have been declining and extra-ordinary discounting also will affect realisations for these companies. One can expect the managements will see the way forward and whether they are seeing any green shoots or in terms of pickup in sales and revenues.

What is important in auto industry is that every month the sales figures come out and that gives an idea and builds the sentiment for the sector as a whole. Till we do not get positive sales numbers month on month, we would not be too inclined to get into the auto shares.

Specifically, passenger vehicles and commercial vehicles are facing some sort of structural issues as well -- passenger vehicle because of shared mobility and commercial vehicle because of improved efficiency post GST. These are separate challenges over and above the cyclical slowdown which the industry is being impacted by.

On the whole, the view on auto remains neutral to slightly negative and in some of the larger companies we would be looking at exit options. Let us just wait for the volumes to stabilise before taking a decision on the positive side.


What do you make of the Brexit news and some of these names that are flying in right now?
It is great news for the global economy and the country in particular, removes uncertainty as far as disorderly Brexit is concerned and let us get with the details as to what the deal is actually and which companies do benefit. But my sense is that it is more of a relief rally as far as companies which have a large presence the UK market are concerned.

I would not be too surprised if TCS and maybe even Mastek which have got a lot of UK business coming through, should benefit from this particular event which has taken place. After a long time, we are getting a flurry of positive news and that is just keeping the sentiment up. Some amount of short-selling squeeze also has taken place. The 9-10% rally is because the short sellers are trying to curtail their losses.

A lot of the IT companies have come out with numbers. How would you look at IT now?
Broadly, it is quite challenging for the IT industry and the commentary which came from Infosys, TCS and Wipro suggests that growth is not really picking up. It is flattening out and even getting to double digit growth rates is going to be a challenge. Given that kind of an environment, we would rather remain neutral to underweight on IT and there are too many headwinds as far as their costs are concerned.

I am not convinced that the currency would be favourable for them going forward. The main vertical for them is BFSI and that is under a lot of stress. Retail, which is an important vertical, is seeing more store closures than even last year. So keeping this in mind and keeping where the valuations have been and how these stocks have outperformed, I would say that if we are going to gradually get into a bullish phase in India and if the domestic economy is going to improve, then the best returns will come in domestic focussed businesses, interest sensitives and consumption oriented stories. Those would outperform IT.

IT is a good sector to be in when domestic trends are negative but not that positive.