Markets Jittery, But Fundamentals Offer Comfort: Insights from Dipan Mehta
Current Market Sentiment
– Indian equity markets are navigating a turbulent phase, leaving investors anxious, especially those who entered the year with high expectations from the earnings season.
– Concerns surrounding labor code adjustments, particularly highlighted by early signals from IT giant TCS, have heightened nervousness despite solid underlying fundamentals.
Dipan Mehta’s Perspective on Market Dynamics
– Dipan Mehta, Director of Elixir Equities, was surprised by the recent market correction. He shared, “Even I am perplexed. I entered the year optimistic, anticipating strong results from the earnings season. For now, it seems my predictions were off mark.”
– He cautions against overreacting to short-term market fluctuations, noting that volatility is an inherent aspect of equity investing. Mehta remains hopeful that the current earnings season will surpass expectations and potentially lay the groundwork for a rally that breaks through previous highs.
– Although the markets have not yet clearly surpassed these benchmarks, he anticipates that 2026 could emerge as a strong year for investor portfolios, despite any near-term turbulence.
Selective Investment in Asset Management Companies
– Mehta emphasizes selective exposure over a broad bet on asset management companies (AMCs). He acknowledges that while AMCs represent a solid long-term narrative, wealth management firms may offer greater flexibility and resilience.
– He points to the robust performance of companies like Anand Rathi Wealth, 360 One, and mutual fund distributor Prudent, suggesting these are better positioned for the financialization of savings.
– Mehta notes that AMCs face stiff competition and regulatory challenges concerning pricing and commissions, whereas wealth managers enjoy diverse business models. He also highlights stockbroking platforms as an emerging opportunity, with Groww rapidly scaling up its offerings.
Insights on the IT Services Sector
– After a prolonged period of underperformance, Mehta is increasingly optimistic about the IT services sector. He remarked, “I am gradually becoming supportive of IT,” identifying artificial intelligence as a critical growth driver.
– While he is uncertain whether AI will lead to immediate double-digit growth for large IT firms, he believes midcap companies have the potential to capitalize on this transition. For instance, Tata Elxsi’s recent success in the automotive sector demonstrates this potential.
– With valuations becoming attractive and investor positioning light, there’s a viable opportunity for IT stocks to outperform after a lengthy period of lagging behind the market. For more conservative investors, he suggests large-cap IT names as a safer bet, noting that AI already contributes around 6% to TCS’s revenues and continues to grow steadily.
Earnings Recovery Across Sectors
– Looking across various sectors, Mehta predicts a broad-based recovery in earnings. Excluding exporters heavily reliant on the U.S. market, he anticipates robust performance from most domestic-facing industries, bolstered by a strong festive and wedding season.
– Specific sectors like autos, cement, and metals are particularly promising. He expresses enthusiasm for the metals sector, citing higher prices and expected strong results from companies such as Vedanta, Hindustan Copper, NMDC, and Nalco.
– The banking and non-banking financial companies (NBFCs) sector appears solid, driven by encouraging pre-quarter updates and strong momentum demonstrated by Bajaj Finance.
Cautious Optimism on Reliance Industries
– When discussing Reliance Industries, Mehta takes a cautious stance. He believes the stock’s future is less about immediate earnings and more about its changing corporate structure.
– As Reliance increasingly resembles a holding company, potential separate listings for Jio and retail could lead to a holding company discount affecting valuations. While he recognizes that the oil-to-chemicals segment is a strong cash generator, he questions whether it justifies a higher valuation multiple.
– He argues that a formal demerger, allowing shareholders to directly own Jio and Reliance Retail, would unlock significant value. However, he acknowledges that management has shown little inclination to pursue this strategy.
Conclusion: The Importance of Corporate Profit Improvement
Dipan Mehta emphasizes that while markets may experience short-term fluctuations, the sustained growth in corporate profits is the essential driver of long-lasting market rallies. Investors should remain cautious, yet optimistic, as the earnings landscape evolves, keeping a close eye on the fundamentals that ultimately support market movements.