Should you make Reliance a portfolio stock for the next three years? Dipan Mehta explains (2024)

"If you are expecting returns in line with the Nifty and Sensex then you need to have a sizable portion, maybe more than 10% of your holdings in a company like Reliance," says Dipan Mehta, Director, Elixir Equities.

Mehta says that on a three- to five-year basis, one may see Reliance outperforming the benchmarks. However, his personal preference is for small mid-sized companies with given opportunity to create wealth and hopefully, multibaggers.

Just when everybody gets excited, it never works. Ten days ago, everyone thought Reliance’s time in the sun had come and then the stock came tumbling down!
There are no real reasons why Reliance should go up or down by 1% or 2% or so. There are no developments that I am aware of and these are just technical considerations, fund- based buying and selling which comes into play and we should not be too much into it. By and large, the company is following through excellently on its strategies and plans.

The only real question in my mind and that of the investors is the value unlocking process which may emerge now that there are three solid businesses within one entity. Not all investors want to buy into all the three businesses. So how are they going to split the company or will Reliance become a holding company by doing IPOs in retail and Reliance Jio? That remains the biggest question at this point of time.

But other than that, it is business as usual over there. There are some investor concerns about debt again going back in the company but we have seen how Reliance management handles debt through equity dilutions in the emerging businesses. That particular path is well trodden and they can certainly follow it up for some of the other nascent businesses which they are developing within the group entities.

Would you make Reliance a portfolio stock for next three years? The weightage is 10% in the Nifty. Would you like to allocate a similar kind of weightage and make it as an anchor portfolio stock for next three years?
As a general rule, in our portfolio, our preference is for midcap stocks, where we can get a growth of at least 20-25% on the earnings per share and hope that the stock price also goes up by 20-25% or so. So that is how you try and target to double your portfolio. But for a safe investor, looking at trying to just match the benchmark, one cannot really avoid Reliance Industries.

If you are expecting returns in line with the Nifty and Sensex then you need to have a sizable portion, maybe more than 10% of your holdings in a company like Reliance. I feel that on a three- to five-year basis, you may see Reliance outperforming the benchmarks given that we are quite negative on commodities and some of the other companies within the Nifty and the Sensex. So the simple answer is yes but my personal preference is for small mid-sized companies with given opportunity to create wealth, hopefully, if they become multibaggers.

Just curious about your take on the entire auto space. It is being weighed under pressure but what could be the next catalyst or trigger for the auto sector as a whole?
I think already a catalyst and a trigger is in play, which is why we have seen auto outperforming for the past few months or so. We saw good pent-up demand came into play. Then we saw the trend of rising average realization prices for the sector as a whole because of premiumisation. We have seen volumes come back very strong because of increased transportation needs as well as overall, the new models have excited a whole host of new generation consumers and customers.

The auto industry volumes really have gone nowhere for the past 10 years compared to the GDP growth rates. The actual volumes on a 10-year basis compound have been much lower. I do not have the number exactly, but I remember this fact. It is but natural that we are seeing an up cycle in the auto industry. More or less, the margins are maintained or going to improve because input costs have come under control and operating leverage has come into play.

This is a good sector to be invested in if you are particularly positive on pricing consumer spends. So keeping all of that in mind, we want to be overweight in autos but preference is for four-wheelers, be it commercial vehicles or even passenger vehicles, I want to be a little bit underweight as far as traditional two-wheeler companies are concerned. But then again, we are quite optimistic on Eicher Motor’s prospects.

As we unwind this financial year, soon the template will change from FY23 to FY24, which is, come the earnings season, we will start talking about FY24 and FY25 guidance. What do you think is the market positioning ahead of earnings season because that will determine at least the next 5-7% move on benchmark indices.
It is a bit premature. Let this particular financial year and month get over and then we will hopefully have some advanced estimates from companies from time to time as to how the month has gone by, especially momentum indicators from the auto industry, GST collections, and some other retail players will also give out what their performance has been for the past quarter. That will set the tone for the earnings.

By 10th or thereafter middle of April, we will start to get to the software company numbers as well. My expectation is that it will be a decent quarter, especially banks should do exceptionally well and we need to see further confirmation that the IT players are dealing with the expected cuts in IT spend because of global headwinds.

I am very positive on certain consumption-oriented sectors like auto, real estate, hospitality, health care. These should give a decent set of numbers and keep up the momentum which we saw in Q3. By and large, I do not think that the earnings season will be a damper and we could see maybe a few more ideas emerging from the earnings season and perhaps if things go well, trigger a breakout from this very narrow trading range we have seen for the past several months.