Expect sideways, range-bound market in coming months: Dipan Mehta

"Considering these factors, I expect the market to move more sideways over the coming months. More importantly, it will become extremely selective—both across sectors and within sectors. Even within popular investment themes, only a few players are likely to perform well. So, I anticipate the next few weeks and months to be selective and range-bound," says Dipan Mehta, Director, Elixir Equities.

Help us understand what you make of the markets. It’s one day up, one day down, with very volatile moves in the benchmark indices. Yet, macros are looking strong, earnings so far have been decent, and we are just a couple of days away from ending this earnings season. We haven’t seen any major disappointments so far. How do you believe the markets will move from these levels, and what will be the key drivers?
Dipan Mehta: I beg to differ slightly. By and large, this earnings season has been a disappointment. If you aggregate all the numbers, profit growth is just 5.4%—the lowest in eight quarters. That is certainly a cause for concern, and the expected improvement in earnings is not materializing. The markets are in a very tight range because liquidity is preventing them from falling, while fundamentals do not justify a rally in stock prices given current valuations. Many large companies, as well as parts of the midcap universe, are experiencing a secular slowdown in earnings growth.

Considering these factors, I expect the market to move more sideways over the coming months. More importantly, it will become extremely selective—both across sectors and within sectors. Even within popular investment themes, only a few players are likely to perform well. So, I anticipate the next few weeks and months to be selective and range-bound.

Yesterday, we saw earnings from Honasa Consumer and Nykaa, both in the BPC (beauty and personal care) and discretionary spending segment. I don’t know if you’ve had a chance to review the numbers, but both seem decent—Honasa even beat estimates, and Nykaa was in line. What do you make of this trend of continuous good quarters for these companies?
Dipan Mehta: I would classify both as new-age FMCG companies. Traditional FMCG companies like HUL, ITC, and Nestle operate in mature categories where growth has largely plateaued. For investors still interested in FMCG, the BPC segment represents the real growth opportunity, as reflected in Nykaa’s earnings.

Honasa delivered numbers better than street expectations, but looking at year-on-year growth, I wouldn’t view the company as particularly strong. Nykaa, however, posted a very impressive set of numbers. If they can execute their apparel and fashion business well and reduce losses there, investors are likely to reward the company, potentially driving stock prices higher. Nykaa’s achievements are especially noteworthy given the competitive landscape. If they continue on this path, they could resume a strong wealth-creation trajectory.

Another concern is valuation. What’s your take on that?
Dipan Mehta: That is indeed the challenge. Wherever there is growth, companies are being valued at extremely rich multiples. This makes it difficult because even if the company meets profit and growth projections, the high PE multiples are prone to compression over time.

Finding good-quality stocks is challenging even after this mild correction. Broadly, in this earnings season, companies with consistent secular growth of 15–17% over three to five years are trading at 50–70x, sometimes even 100x price-to-earnings multiples, which is unsustainable for long-term returns.

There are essentially two sets of companies: those growing above nominal GDP and those that are not. The number of companies failing to grow beyond nominal GDP is steadily increasing, which is a growing cause for concern.