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It is best to remain overweight on equities in 2018: Dipan Mehta

Talking to ET Now, Dipan Mehta , Member, BSE & NSE, says double digit returns are likely as growth is picking up as we saw in September quarter numbers were and the tone of the management commentaries.

Edited excerpts:

What caused R-Comm to move 35%? No, clue at all. There must have been some event as regards the resolution of their debt and which is why the stock may have spiked. Other than that, there can be no reason or there could be an M&A action which has taken place. Directionally, the company is trying to reduce its debt and it has put some of its assets on sale. So a deal over there also could result in such a spike but no real news flow from the company is there to justify why the stock prices have risen as much as they have today.

Are investors in for a solid double digit returns in 2018 or could returns be in the negative also? I would go with the former where at least double digit returns are likely and the reason for that is we are seeing growth pick up and the way the September quarter numbers were and the kind of management commentary that came through, I am quite convinced that the worst is over as far as the economy is concerned. All the major shocks, demonetisation, GST are now well behind the industry and December quarter will benefit from the base effect and then March and September quarters maybe quite decent for the entire stock market.

In terms of earnings, what may perhaps justify these high valuations are you still have this liquidity flow coming in from the investors. But there is no denying that we have not had a serious correction in a long time. Another 10% correction is something which every investor and trader should definitely brace themselves for.

It could come at any point of time and last for a few weeks or so. But we are in the middle of a nice long-term bull market and such a correction may be an opportunity to buy. Even if the correction does not come through, it is best to remain overweight on equities and you would have 2018 as another great year for stocks as well.

Coming on Eicher and Maruti, both have been massive wealth creators. But going forward, which one will make more money? But why do you want to choose among them? You can buy both these stocks as we have done for our clients as a measure of disclosure. They both are in separate segments and have fantastic market share in the segments in which they are present. They are bang in the middle of this rising consumption story which is a very powerful investment theme which we are playing on both benefit from rural demand, especially for Maruti especially and in Eicher more so now because they are expanding more and more into the tier two and three cities.

Many things are going in favour of both these companies and there is no reason to own either one of them and it is better to go for both these stocks. They could give decent returns in the region of 15% to 20% over the next two-three years or so considering that their profits also are likely to go around the same rates.

What do you make of the fundraising in HDFC Bank and HDFC Ltd? Will the book values change very dramatically? It is a step in the right direction, valuations are at a high level which justify perhaps equity dilution and whenever a finance company or a bank dilutes equity, it usually turns out to be earnings accretive when done at a high price to book or price to earning value.
The fact that HDFC wants to keep its stake in HDFC Bank, is definitely a sign of confidence and may be they are convinced that even at these high base levels, HDFC Bank may still turn out to be a great performer and a good return on equity for HDFC per se. So, it is a step in the right direction. It provides resources to both companies to expand their businesses. The businesses and the sectors they are present in are highly competitive and a lot of undercutting does take place over there. So, if cheap money is available in the form of equity, it certainly will go towards their net interest margins.

HDFC Bank could use some of it on their digital endeavours as well as making specific provisions required depending on circumstances. It is a step in the right direction and we have seen in the past that whenever these equity dilutions have come in either of these two companies, — two-three years from that point of time investors who have participated in the QIPs have got very good return on their investments. It is great from minority shareholder point of view.

Do you believe when it comes to autos that there is perhaps more beta headroom when it comes to some of the underperformers of the year gone by like a Tata Motors wherein even a slight bit of performance of marginal performance can lead to significant gains in stock price? Yes, certainly. All the other auto shares including the laggards like say Hero MotoCorp or for that matter Tata Motors you could have a trading bounce in them and we saw that kind of trading bounce in M&M recently when they announced their numbers as well as the monthly volume sales.

You could have a trading position in these stocks but from a core holding point of view, the best stocks to buy in the auto industry still remain Maruti and Eicher. At the same time, investors need to have the right weightage in the auto sector as well. When you can buy only two or three stocks, then it is better to stick with the winners but from a trading perspective, there is no denying that the entire auto industry is doing better than before and they benefit from rising in rural as well as urban consumption.

A lot of these companies are introducing new models in two-wheelers and four-wheelers because of which they do get traction from time to time. There are trading opportunities and long-term investment opportunities within the sector depending upon the risk appetite and the horizon for investment.

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