Real Estate

Dipan Mehta’s top picks in real estate and cement sectors

Dipan Mehta-1200

The smallcaps were on the move today. Do you expect sustained buying there?
Last week and so far this week has been positive for midcap and smallcap stocks. Investors seem to be agreeable to buy at slightly higher levels as well. What we are seeing is definitely follow-through buying and stocks which have been beaten down completely in auto, banks, commodities seem to be outperforming at this point of time. All signals suggest that this kind of outperformance may last for a few more trading sessions.

But more importantly, it seems at this point of time all the bad news has got discounted and we certainly have a bottom in place. Now, whether it is the ultimate bottom from where the market does turn, only time will tell. But at least this phase of the bear market seems to be over and depending on how the next few trading sessions are, that will determine the course of this particular phase of the bear market whether it is turning around to be a bull market or we are going to find and trade at lower and lower bottoms. We are at a critical juncture is what I see the stock markets at this point of time and we will have an earnings season over the next six weeks or so. It will be a very important earning season especially from management commentary point of view.

How you are looking at the overall metals basket? Could you pick out some of the largecaps within metals?
Although traditionally we have not been very positive on commodities, these companies have seen a huge slide and right now, there is a lot of pressure because of domestic as well as global slowdown on account of trade war.

But these are cyclicals and deep cyclicals and at some point of time, commodity prices will stabilise and start to move up. It could be 12 months, 24 months down the line. Maybe stock prices will start moving up even before that. But as and when we will turn around in these commodity prices, you can expect a fabulous rally in whole lot of commodities stocks as well.

Over a three-year period, if they do have another upcycle from these levels, a lot of the commodity stocks can easily go up by 70% to 100% or so. These are not levels to sell off the commodity stocks like metals and maybe at corrections, if you are underweight in metals in a particular portfolio, you could look at selectively buying into some of the largecap metal companies and our preference would be for steel companies like Tata Steel or JSW and maybe Hindalco in aluminium, rather than a NALCO, where there is the possibility of M&A activity which may be earnings accretive over a longer period.

What about real estate? Do you see any reason to buy in at the bottom?
Yes absolutely and especially cement companies which are focussed on the economy segment. Companies like Kolte Patil, Prestige Estates and to an extent even Godrej Properties could certainly do well, going forward. These companies have reported good earnings. You could include DLF also which is not exactly into economy segment but then there are certain special situations over there. One can have an exposure to real estate sector through these three-four companies.

Right positioning in terms of price and area and focussing on sales rather than developing a land bank, clearly has paid off for these companies and their balance sheets are in great shape, which we think will outperform going forward.

What is your view on the IT space?
IT had served well for investors in the bear market and whatever little allocation investors had they had some at least capital protection as far as IT is concerned. Lot of the IT companies are more like utility companies. They will give any way from 8% to 10% type of top line, bottom line growth rate and that is fine in a bear market. But as and when the bull market starts to pick up, you will find IT companies start underperforming.

Then there is this entire fear within the IT space about overall global slowdown and that may certainly impact IT companies. It has not so far and whatever commentary has come through from the software companies, managements has been positive. But we have seen in the past that whenever the US economy goes for a soft landing, IT companies get affected and within that also, major sectors like manufacturing, retail as well as banking and financial services are under more stress than some of the other segments.

I would be a bit cautious in software at this point of time. If I am convinced that the markets in fact are turning and we are going to get into higher tops, higher bottoms and the worst is over, then I would certainly think in terms of getting underweight into IT and overweight into some of the cyclicals.

How you are looking at cement as a pocket? Is the overall dynamics improving?
Yes absolutely and there is a good deal of price discipline within the cement companies and although volume growth was certainly lacking in the last quarter, but that was more than made up by the kind of increase in operating profit margins that the sector as a whole witnessed and we are quite positive on cement. It is a cyclical industry, should benefit from higher government spending, increased infrastructure spending and there is adequate capacity within the sector to grow and take advantage of any increase demand which may take place.

I would prefer companies which are the largest in the space. Something like UltraTech CementNSE 0.73 % which will also benefit from merger of Century’s cement units as they start getting integrated. Alsom Shree CementNSE 1.16 % which has been one of the most successful cement companies in terms of low capital cost of setting up new cement plants and targeting the right market. Between these two companies, one should get decent returns as far as exposure to cement sector is concerned.