Are IPOs meant for long-term investors?

I always prefer to have at least three, four quarters of good track record of a listed company before we can make a serious investment in them, says Dipan Mehta.

ETMarkets.com
There can be a huge dichotomy between how companies perform prior to IPO and post IPO, says Dipan Mehta, Founder & Director, Elixir Equities

There are two D-Street debuts -- Chemcon as well as CAMS. a) what do you make of those and b) are there any primary market offerings which you particularly like? There is UTI AMC and Mazagon Shipbuilding too?
As a general rule, we do not advocate participating in the primary market, the reason being that these companies are relatively unknown and their track record as a listed company is not really available to investors to judge. Also, there can be a huge dichotomy between how companies perform prior to IPO and post IPO.

However, I think CAMS India is definitely a portfolio stock given its strong position in the market and secular growth momentum as well as steady cash flows. It meets a lot of the parameters for a long-term investment idea but is fairly priced per se and on listing, you may get 15-20% type of upside and that could take away a lot of the expected outperformance going ahead.


Although positive on a fundamental basis on CAMS, one needs to see at what price the stock is available on listing. I always prefer to have at least three, four quarters of good track record of a listed company before we can make a serious investment in them. There is Mazagon Dock and UTI AMC. UTI is not the largest asset management company. It has been a bit of an underperformer within the sector and not that positive although valuations are attractive.

Finally, Mazagon Dock is in the same kind of category as a lot of other PSUs which are engaged in defence manufacturing. The likes of BEL, or Garden Reach or HAL where they have a significant multi-year executable order book but when you look at the actual track record over the past two, three years and what they can do over the next two, three years is just about single digit to high double digit. A good order book does not necessarily translate into explosive growth going ahead as we have seen for a lot of PSU engineering and capital goods manufacturing companies.

The valuations are attractive and you could keep it on the radar but I do not think that these companies can provide serious wealth creation going ahead. I would like to give even Mazagon Dock a pass at this point of time although on listing and few trading sessions after that it may show a spectacular rally, but those are all trading rallies and I would not like to hold it for long term in our portfolio.
ADVERTISEMENT

What would you suggest on BPCL given all the uncertainty around the privatisation?
This was inevitable given the kind of situation which the government is in and such delays were to be expected. As an investor, I do not want to touch BPCL at this point of time even though it is getting privatised and eventually the value will get realised. But long term, I am not that positive on oil marketing companies irrespective of who the owner of BPCL is, whether it is the Government of India or any private company. The reason being these are mature businesses and scope for growth is limited going forward.

We have the whole EV revolution taking place and petrol and diesel consumption is growing at a slower rate than GDP. Although these stocks are great value plays in terms of dividend yield, that is not new and specific only to India. In September, Exxonmobil which is the largest oil company now, gave a dividend yield of 10% in dollar terms. So that argument does not hold for BP, HP or other oil marketing companies which are also good dividend yield players.

At this point of time, the market prefers growth and value companies like BP, HP and other oil marketing companies should be avoided. I am not that positive on BPCL and as and when privatisation news does come in, you may see sharp trading rallies in BPCL and other oil marketing companies.

Torrent Pharma has been looking particularly strong on the charts. What do you think?
Dipan Mehta: We are very positive on the entire pharma industry and whether it is Torrent, Cadila, Aurobindo or Dr Reddy’s, all of them have got great prospects going ahead. A lot of these pharma companies including Torrent have done a lot of internal restructuring, right sizing their businesses and are focussed on specific geographies and molecules where they have a competitive edge and all those strategies are now playing out.
ADVERTISEMENT

In the case of Torrent pharma, one of the advantages is that it is more domestic focussed and exports to the US market is at least limited as compared to some of the other pharma companies and that has its upsides and downsides as well because from time to time, the US generic market gets very competitive and Torrent may not get impacted as much but the US generic market offers some fabulous opportunities in terms of first to file and molecules which may be in short supply and Torrent Pharma may not really benefit.

We are generally positive on Torrent Pharma but there are better bets within the pharma industry and with usual disclosure, we and our clients are interested in those stocks. Great companies like Aurobindo Pharma, Dr Reddy’s, Divi's Laboratories and Cipla are amongst the top bets as far as large cap pharma is concerned. There are a few interesting midcap pharma companies as well. The likes of Granules India or Suven Pharma and even Laurus Labs. There is a lot of choice as far as pharma is concerned and depending upon risk appetite, investors have a choice to go for high risk, high return or low risk, low return stocks.
ADVERTISEMENT

There has been a change of guard in Godrej Consumer. Professional management has given way to the promoters. It is a stock which in a sense is better positioned for rural recovery because their portfolio is in hair care and other categories which are perhaps middle and end of the pyramid. Could this be the odd one out from the FMCG space?
We have been thinking about this entire FMCG play going ahead especially in a post Covid world and what we can say with reasonable conviction is that the Indian FMCG companies will come into play and the likes of Godrej Consumer, Dabur India, Emami and for that matter, Zydus Wellness, Jyothy Laboratories all of these companies may outperform the likes of Nestle, HUL, Procter & Gamble and some of the other MNC FMCG companies which over the last two years have done exceedingly well.

The reason for that is that a lot of Indian FMCG companies and Godrej Consumer included are focussing on health and hygiene and that is the top priority as far as consumers are concerned in the post Covid world. In the case of Godrej Consumer, the insecticide business has been a big drag on the company but now that has revived exceeding well for that as well as Jyothy Laboratories and valuations are quite reasonable.The management has got a good bandwidth in terms of growing the domestic business.

The only negative when it comes to Godrej Consumer is that it is spread out all over the world with presence in Indonesia as well as Africa and to an extent in the UK and the US as well. And all these other geographies are not necessarily in sync with each other. So there is a situation where one geography does badly, it pulls the overall performance down. I have never seen Godrej Consumer fire on all the cylinders especially as far as its international subsidiaries are concerned. I think the earnings always appeared to be subdued because of some geography doing badly or so.

But nonetheless I think Godrej Consumer can be a market outperformer. Indian FMCG companies are coming into play but I would prefer Emami and Zydus Wellness which just completed a QIP. Both these companies are very strong in their respective categories, great dynamics in terms of headroom for growth and reasonable valuation. I would be positive on Indian FMCG companies but Godrej Consumer is not necessarily the top pick over there.

Where within the auto segment do you find comfort? Does one need to be in ancillaries, like the tyre stocks?
The auto industry may be in for better times going ahead and all the legacy related issues prior to Covid -- the shift to BS-VI, higher insurance charges, higher road tax, higher interest rates -- which were dragging auto sales down over the past two, three years have been completely negated now. It is a clear runway for auto companies and as and when demand recovers, as and when GDP improves and incomes come back, auto companies will start seeing earlier growth rates.

My preference would be for entry-level automobile vehicle manufacturers like Hero MotorCorp and Maruti. It will be a while before consumers start splurging on high-end models and the need for personal transportation is going to drive profitability, specifically in these two companies. The safest place in the auto industry is the tractor segment and there is only a standalone tractor company that one can buy and that is Escorts. We are quite positive on that and as long as the company keeps on coming up with good monthly sales figures, the stock will continue to rally. M&M also is a good choice but the utility vehicle is a bit of a drag and its competitive position in the passenger vehicle is not that strong. I would avoid M&M at this point of time.

We are positive on auto and the top picks would be Escorts, Hero MotorCorp and Maruti and maybe a few quarters later, depending on how the monthly sales performance picks up, even Eicher Motors should be tracked by investors. We are broadly positive on auto and these companies will start benefiting from the rural demand, festive demand and new models may also drive the sales growth at the industry level. New models have been missing because of the BS-VI shift as well as the current pandemic. There are many positive factors in favour of the auto sector and investors are best off being in the industry leaders over there.
ADVERTISEMENT
READ MORE

READ MORE:

LOGIN & CLAIM

50 TIMESPOINTS

Related Companies

More from our Partners

Loading next story
Text Size:AAA
Success
This article has been saved

*

+