The IPO market has been quite interesting. There have been Lodha Developers, Nazara Tech, Kalyan Jewellers etc. Has there been anything that merits mention in terms of long term potential?
We have seen a slew of new IPOs but the most interesting one where we are invested is Nazara Technologies. Considering that gaming is a larger market than even OTT and all other forms of entertainment, a company like Nazara has a great future. In three-four years, this will be a solid value creator. Overall, there is a great jump as far as the use of its products and services are concerned. Eventually that will get factored into the valuation of the company.
Typically businesses which are one of a kind and become a concept business would tend to get market share and we expect this company and business to create rich multiples going forward. A correction like this is a good opportunity to get into something like Nazara Technologies which offers quite a different type of investment which otherwise will be available only in the private space.
Nazara reminds me of what InfoEdge is trying to do. InfoEdge had a steady business in Naukri.com and then they had a lot of other investments in Zomato, policybazaar which gives them a strong cash flow. Nazara I think is also trying to do the same.
I think that is a sound strategy. We have seen the way value got created in InfoEdge and as of now, Zomato is the largest component of the valuation as far as InfoEdge is concerned. Something similar could play out for Nazara. From that point of view, investors have that comfort and have that outlook that eventually it will be quite a large company with Tech Mahindra as well as several other smaller gaming companies and in a way this business also provides good visibility as far as earnings are concerned.
Whatever strategy these companies follow, eventually because of the size of the market and opportunity, we will see growth coming in a very strong manner over the next few quarters and years. That will be reflected in the stocks well.
Are you still confident that despite Covid concerns, the BPCL transaction could go through?
That is a big if and the big disappointment as far as BPCL was concerned is that none of the oil majors have put in their hat for acquiring the company. Maybe, the business is not as attractive as we thought earlier and if private equity players are going to acquire BPCL, then they will try to unlock the value. The long-term prospects of the oil refining and oil marketing business needs a relook at this point of time.
At the end of the day, any appreciation in BPCL is linked to how privatisation takes place, at what price it takes place, what is the open offer and how that gets accepted. There are just too many ifs and buts and while a lot of it may work in a bull market, when stock prices are moving up, in the midst of a severe correction, it is better to focus on quality businesses which we have missed earlier and which may have corrected 15-20% from their highs.
These are nice growth businesses with good corporate governance and it is better to get into those quality businesses rather than something which is dependent on an event. If that event were not to take place then the overall business is not that exciting or attractive. This is the time to improve the quality of the portfolio and not try and dabble in speculative trades.
ET Now: What is the prospect of the insurance industry because of the Covid crisis?
Dipan Mehta: While the opportunities are better for the insurance companies, the valuation discomfort prevents us from taking huge stakes or going overweight in the insurance sector. While there is opportunity in both general insurance as well as life insurance front, a lot of the positives have got discounted and the insurance businesses are complex businesses to understand and value.
Intuitively we do feel that using traditional valuation methodology, we are on the expensive side and corrections like this are great times to get into solid businesses where PE multiples are too high. I would like to go for such businesses rather than insurance which are truly very long term businesses. They will grow steadily but a lot of the future growth has been captured in the stock price.
What is the right way of looking at Mahindra & Mahindra — as an auto company which is beneficiary of rural demand or a group which is trying to reboot capital allocation with new professional management?
I think both. There has been a change of leadership at the highest level with fresh strategy coming into play and one of the issues which investors have with M&M in terms of capital allocation. Focus on it now. There are many ways to try and improve that particular ratio, apart from whatever earnings may come through. If M&M is able to improve its capital allocation and return ratios, the investors will pay off premium in terms of higher PE multiples.
It is quite an interesting investment opportunity at this point of time and this monsoon certainly augurs very well for rural focussed companies like Mahindra & Mahindra. Overall, the automobile sector is picking up. They have an exciting new product range coming into play. We are very optimistic on M&M for the next two-three years or so.
