Moneycontrol
Mar 07, 2017 04:52 PM IST | Source: CNBC-TV18

Don't chase mkt, wait for better price points: Birla Sun Life MF

The recent rally has led to a run-up in valuations, and Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life AMC told CNBC-TV18 he would prefer to not chase the market, but look to buy at better price points.


The recent rally has led to a run-up in valuations, and Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life AMC, said he would prefer to not chase the market, but look to buy at better price points.


While earnings could take couple of quarters more to pick up, India will likely be the fastest growing country over the next 3 years, he told CNBC-TV18 in an interview.


He said even as the outlook is improving on the global front and India’s net exports could improve, he is more inclined towards domestic-oriented companies.


Among sectors, he said one can take a constructive view on the telecom space for the long term as the pricing environment improves. However, in the near term price wars might keep a lid on earnings.


Oil and gas companies, he said, seemed fairly priced on a fundamental basis. While uncertainty on the structure of mega merger planned for PSU oil companies has weighed on stock sentiment recently, he does not see them as being ‘fundamentally overvalued’.  

In the banking space, the NPA issue has peaked out but a lot of large ticket resolution is still pending, he said, adding that this could continue to impact the profit and loss account.

Below is the verbatim transcript of Mahesh Patil’s interview to Latha Venkatesh, Sonia Shenoy, and Anuj Singhal on CNBC-TV18.

Anuj: We have seen a huge amount of domestic flows that have supported the market. Over the last three days of course there has been a bit of a domestic institutional investor (DII) selling, would you attribute that to valuations or would you say that it is a bit of an aberration right now?

A: It is a bit of an aberration I would say. Obviously the valuations, the market has run up recently on expectations. One is after the Budget and also the impact of demonetisation was not as bad as one was expecting, but I think again from our side I would say that, we are seeing the inflows coming in on a daily basis, so, that is continuing. We are taking our time really to buy stock, not really chasing at these levels, evaluating companies, looking at better price points if there are minor corrections in stocks to really enter because one doesn’t see any big upside in the near term really because a lot of the positives are factored in.

Earnings growth while we are positive, earnings growth over the next year, I think it will take another couple of quarters for the earnings growth momentum to pick in. So, given that, I think it is a scenario where one would wait. I think some of the stocks, we have seen a lot of sector rotation also happening again. So, we have seen oil and gas sector, petrochemicals again coming back. We saw IT doing well last month and then taken a pause, so, that is how the market would trade. So, nothing to rush about and buy as the inflow is coming in. Take our time is what we are looking at and that is probably reflected in the flows also. Probably few days domestic flows are not so positive, but that does not indicate that our view on the market that we are negative. We are looking at longer term, so, any minor correction, any disappointment, it is a level where the market will find support at various levels.

Latha: Globally people are talking about the return of inflation, return of higher inflation expectations, there is a lot of talk of more money coming into equity based ETFs, into global ETFs, are you seeing the global markets or export oriented sectors as a very big positive because of the numbers we are seeing in the global economy?

A: Yes, there is. I think the outlook on global growth has improved; compared to last year, if you look at last calendar year, overall this calendar year should be better again driven by US, to some extent even China, the growth is looking slightly better, even Japan I would say. So, clearly, the export oriented companies should see a better growth compared to last year.

However, if you look at India for example, we have large trade relations with US and because of Trump policies about trying to focus more on domestic manufacturing, border tax, there is some concern in terms of whether that will really materialise in terms of better numbers for Indian exporters, so, that is something which we still don’t have a clarity on because we need to see the policies in terms of what kind of protectionist measures US employs. So, I would say on the margin that nothing to get too excited, we have not seen that in the numbers. However, if the global growth continues, I think India’s net exports at the margin should look better.

However, depending on the policy, there could be pressure on margins. While topline looks better, but if there are taxes there, then it could have some impact on the margins.

Latha: I was just wondering if exports is one theme you will pursue?

A: Not necessarily. We don’t see any big delta change over there. At the margin, it is looking slightly better. I think the domestic growth itself would look better, it is a look apparent at this point in time in the next few quarters, but if you take a three year view, I think India’s growth will still be the largest, strongest I would say amongst the large economies and that is where the bigger money would be made.

Sonia: Reliance Industries is one stock that you have in your Birla Sun Life Frontline Equity Fund. You did speak about the positives in oil and gas, but I wanted to understand from you whether the growth that they have seen, the fast growth in telecom so far in Reliance Jio, do you think that is priced in to the stock and what would your outlook be in that segment?

A: While we have been positive on the petrochemical side and the refining side, we think the margins this year should be fairly decent. I think telecom is one sector, again a stock like Reliance -- the market was heavily giving a negative value for the telecom business and as we saw in the sector in the last couple of months, some amount of consolidation is likely. So, that is a longer term picture.

In the longer term I think one can now take a slightly constructive view on the sector because it is likely going to be a three player market, 3-4 player at best is what we are looking at. So, in that scenario, I think you should see a better pricing environment. However, I think in the near term, because of the drive to get market share by a new entrant, you will see a pricing pressure and which we have seen in the last three months; there have been sharp cuts in the tariffs and as the incumbent respond, because in this business, it is very easy to respond. You can just match it and want to protect market share.

So, unless we see the market share kind of settling down at a level and people are happy with those market share, I think you will see pressure on the sector in terms of revenue. So, while the market has got excited a bit because of longer term consolidation, I think near term you will see more pressure downgrades to the sector even next year. From that perspective, I think one would be a bit cautious on the sector.

However, in Reliance case, the market was giving negative value and now it has started giving some kind of a value for the telecom business. If you give say a one-time book value, then the stock looks to be fairly priced at these levels now.

Anuj: The other space where you have a lot of holdings in your value fund, are the oil PSUs, oil and gas, both of them. However, these stocks have had such a phenomenal run over the last two or three years whether it is HPCL and BPCL, or IGL; still value there?

A: If you look at purely from a price earnings multiple and price to book, and compared to where the market valuations are, they still look to be fairly priced. They are not – the multiples will be around in the lower teens or so. So, it is not really expensive, but I think there has been some concern about – the government talked about creating a mega oil PSU so how the merger will happen that is slightly unclear and that is probably weighing down on the stock. Otherwise fundamentally we think these companies again should report pretty decent growth next year.

The big rerating I think has happened in that sector, so, we have seen that over the last two years the stocks multiples have got rerated, but hereon it will be mainly driven to some extent by a marginal volume growth what we see and maintaining the margins and probably some kind of a -- as cash flows improve, some reduction in the debt. So, that will drive the stocks. It won’t be a big outperformer as what we saw last year, but it looks to be steady considering that the valuation support is there in the stocks.

Latha: From here on what will you incrementally buy in the finance space?

A: In the finance space, again the same stocks I would say, retail banks. Retail growth still looks to be continuing and it will continue to grow. Corporate banks we have been looking at it because we are expecting the credit cycle to improve. However, recently when we reviewed, we think that the whole NPAs issue which has been there while it has peaked out, the resolutions are taking some time. So, a lot of large ticket resolutions, what we were expecting is taking time.

So, given that, the impact on the P&L would probably continue even in the next financial year because the provisioning of the earlier loans which have been there, NPAs will continue. The corporate credit growth is still slow to pick up I would say. So, given that, I think the private sector banks, stronger banks, with stronger balance sheets will continue to gain market share even in a slightly moderate kind of a credit growth.

So, while credit growth should pick up from around 5-6 percent to around 11 percent next year, but I think there is still chance for larger stronger banks to really grow. So, that is a sector we are still more comfortable and think they will continue to deliver.

Sonia: I don’t see too much of an exposure in the power space in any of your funds. Is this a space that you have consciously avoided and would it look like a good opportunity now?

A: Power utilities -- we have private sector power players we have avoided. We have been more comfortable with the regulator entities in the power sector where you have certainty about your returns irrespective of the overall offtake. However, I would say in the power sector, a lot of companies, private guys who are coming up, the plants which are getting commissioned, they are looking to tie up for PPAs but signing up PPAs is a big challenge because there is excess capacity, there is a lot of plants getting commissioned now, we had started up around five years back in the market and the demand offtake is still pretty weak.

So, given that scenario, there is some amount of risk unless you are fully tied. There are a few companies where they have full visibility going forward, all the power plant is tied and those utilities it makes sense because you would have steady growth over there. The recent fall in interest rates also helps some of these utilities because the discounted value of the cash flows looks better. However, now on, if your outlook is that you don’t see any major rate cuts further down the line, so that rerating over their potential is also not diminished. It is going to be clearly in private sector companies which are able to tie for the NPAs for their PPAs, I think there you could see some kind of an upside over there.

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