The reality on the ground is that auto discounts have come back. The waiting periods which were running into years became months and now it is almost like you can get a car in a single day. But if I look at what the general brokerage opinion is and where the stock prices are, markets are not bothered about the ground reality. So, will markets get it right or the reality will haunt us?
Dipan Mehta: Reality will prevail. Markets are slaves of earnings and one should anticipate lower quarterly earnings, maybe not September, but December and March quarters can be very challenging for these companies. But commodity prices also are coming off, which gives them some leeway to increase discounts. At the same time, it is a cyclical business as well. So, there is a mild cyclicality. It can certainly pick up a few months down the line. Then, the interest rate possibility of a cut over there, easier liquidity could reduce the overall cost of ownership, and lower petrol prices if that comes to that will benefit the auto industry.
Auto is a multi-year secular growth industry and we could expect a few quarters of downbeat sales. But at the end of the day, given the demographic, given the low penetration levels, given the fact that a lot of new models do keep on coming from time to time, which do drive growth, also this entire premiumisation trend which takes place in the auto industry, there are many long-term growth drivers.
From an investor’s perspective, like we have shares of many companies right from Bajaj Auto, Eicher Motors, Maruti, M&M, just because a few months of softer sales does not mean that you want to exit these counters. These have been great long-term wealth creators and going forward also I think after this little bit of demand bump is over and done with, they can again go back to that high-single digit type of volume growth, double-digit type of revenue growth because of higher realisation, that particular assumption I think is still intact.
But it is better to manage your expectation that you could expect one or two soft quarters for the auto industry and there could be a correction over there. If you are too overweight, you could look at liquidating a little bit. But I would not exit the sector just because there are a few soft months of vehicle sales.
For Paytm, it is a full circle. The stock has almost retraced whatever it lost after the RBI restrictions. You were one among the few who you said that you will keep your faith. You need courage when the stock goes from Rs 700 to Rs 350 and not to sell.
Dipan Mehta: Paytm is the type of stock that we can love or hate, but cannot ignore. It is always in the news. Although they take a few knocks, underlying they keep on doing, continuing their good work in terms of increasing the subscriber base, providing more services, focusing on other revenue streams which can grow. They are following their path. One could say that whatever could go wrong has gone wrong with Paytm. Some say now it is an acquisition target also and that could be a completely different trajectory for the stock. And investors are looking for differentiated business models. They are looking for companies which can grow much faster than the industry, and have a clear edge over their competition and Paytm certainly is one of those companies. With every passing quarter, forget about the fact that they have been hit by regulation and those particular revenue streams may have got impacted, but the core business of payments, of financial, of distribution of financial products, of loan origination, that chugs along, and it grows quarter on quarter, year on year on a healthy growth rate.
At the same time, they are very much focused on their costs as well. At some point of time, this company can come solid into profit. We have seen that in Zomato as well, two-three years ago we were all scratching our heads and wondering when will Zomato food delivery business come into profitability and look they have already reached that particular level. Now, we are talking about when Blinkit will break even and start making a profit. There is certain visibility over there as well. Similarly, things will play out for Paytm as well.
For a lot of the new-generation companies, the market has taken a while to understand them. They also have taken a while to understand their investors and what their expectations are. But now we are seeing a meeting of expectations, strategies are being changed accordingly. Look at the way Policybazaar has done since listing, it also had a very, I would say, volatile period the last few months or so. But investors are recognising those business models and these new-age companies they clearly have a very strong edge and a moat which is very difficult to replicate.
Some investors prefer to have a long-term 5-year, 10-year view. Who knows where Paytm could be 10 years down the line? If they keep on going at the same pace, they could be a huge behemoth, something on the lines of Bajaj Finance. We are looking at those kind of scenarios as well. One needs to keep faith and you need to remain invested for a long period of time.
Lots of consolidation within the entire cement basket. What is your reading into how this could spell out in the long haul and what is it that you are picking out within the space?
Dipan Mehta: Generally, we are neutral to negative on cement and the June quarter numbers were not impressive at all. And even after that we are seeing lower prices and increased competitive intensity means that margins also will get impacted. If the government were to reduce fuels and some of the lower commodity prices, lower oil prices will definitely benefit cement companies one way or the other, but by and large it is not an industry which I think going forward is something you want to be overweight in. A lot of capacities are coming up. I am not sure demand is adequate for that. Capacity utilisation will remain pretty much low. And from that point of view, I just want to be a bit cautious in the sector.
This is something which I learnt yesterday, that private sector capex indeed has started, but it is in batteries, semiconductors, it is in manufacturing, it is largely in data centres. If one has to bet on the new India and the demand of new India, which are some stocks you would bet on assuming that this time private sector capex is moving to different areas?
Dipan Mehta: Oh, yes, that is a difficult one to answer. But one thought which crossed my mind is that you have not covered the kind of investment going into startups and that is also a huge growth engine for employment, for GDP growth rates, and also overall demand for a whole host of products and services. So, that is also one growth engine which is there in the economy. I would not say that private sector capex is lagging. I mean, company by company if you go, they are doing brownfield expansion, be it even old economy companies like textiles, steel, cement, power companies.
I think broadly across the board companies are incrementally adding capacity, maybe new plants are not coming up, but brownfield expansions are taking place. Productivity of existing capacities is definitely improving. It is not that sales are being curtailed because of lack of capacity and I think it is very sensible that companies manage their capital allocation far better. It is better for the shareholders as well.
I would not read too much into how much capex is happening in the private sector in order to find stocks or avoid stocks which are not expanding their capacity. I think right sizing is the key mantra over here. And broadly I think private sector is doing a great job. I have seen that capital allocation and return ratio certainly have moved up in the last few years or so and that certainly is great news and it could support even higher valuations.
