The market began the fiscal year on a very strong note as the Sensex closed nearly 300 points higher, while the Nifty clocked record highs and ended above 9200 for the first time. Experts hint at further upside to the indices going forward as earnings growth could see a come back this year.
Birla Sun Life AMC was not too aggressive at the current market levels. It saw a gradual recovery in economy as well as earnings. Companies with good earnings visibility will be key to the market, Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life AMC told CNBC-TV18 in an interview.
“Domestic-focussed companies will see a pick-up in earnings growth,” Patil told the channel.
The market’s rally was also boosted by better liquidity and inflows from domestic investors. Retail investments also surged due to increased flow into systematic investment plans (SIPs).
“Demonetisation helped in increasing the pace of inflows as well as get new people too. SIPs were growing much faster than what we expected,” he said. Investors were seen looking to generate better yields than bank fixed deposits (FDs).
On sectoral bets, he liked consumer discretionary, metals as well as non-banking financial companies (NBFCs). These are preferred from a long term perspective and any correction in these sectors will be a good opportunity to accumulate them.
Infrastructure and capital goods is a mixed bag and one could play individual themes to make money. We have seen pick up in government spending, but private sector capex is still some time away, he said.
While he refrained from speaking on Reliance, he was positive on refining and on the petrochemical space. He felt that refining margins will be good on the back of demand-supply mismatch.
Meanwhile, in the telecom space, he saw consolidation being good for the sector. Companies in the sector could see a rerating happening there. Furthermore, he saw consolidation in the consumer durables space as well with the implementation of goods and services tax (GST).
Below is the verbatim transcript of the interview.
Anuj: It has been a remarkable market for fund managers because there are so many stocks which have done well all through the last couple of years. Do you get a sense that this bottom-up stock pickers’ delight is going to continue, we will continue to see new highs for midcaps and smallcaps?
A: Right, the breadth of the market has increased considerably not now but even in the last two-three years and while the Nifty has done well, the broader indices have done much better in the last one year, two years, three years’ timeframe. That possibility continues in the broader market, we have individual smaller sectors probably which are benefitting and a lot of companies which are more domestic focused where the earnings growth outlook could be much better than some of the broader market indices. So this year it will largely be a bottom-up stock pickers market while the broader market will do well, the largercaps will do well but not to that extent. So identifying companies, which stronger growth visibility not only one year but for the next two-three years and getting their right pricing will be the key to outperform the markets even in this calendar year.
Latha: This is more by way of curiosity, because Idea has got a payment bank license and you are all part of the same group, as a fund entity, does that change things for you, does it make it easier to approach customers?
A: I am not too sure exactly how it will help us but clearly for us trying to reach out customers -- various touch points are important to reach out to larger audience because mutual fund penetration is still pretty low though we have seen an increase in that in the last couple of years, last one year specially the number of portfolios have increased but if there are various mediums, whether it is through online or anything else, a lot of the options if they open up, that will help us to penetrate and get this small retail investors on board. So one needs to explore all the opportunities.
Latha: You are not exploring options already with Idea?
A: We are doing that.
Latha: Every Idea account holder can become a bank account holder, so, that widens the scope for you?
A: Why bank account holder, even the Idea customer itself.
Latha: Let me just come to the sectors that your prefer, at this point in time are your going out and buying aggressively or are you becoming cautious?A: I think nothing to be too aggressive at this point in time because we are not seeing any kind of a run away in any sector. It is going to be a slow and gradual recovery in the economy as well as in terms of corporate earnings. However, we have seen a good
amount of sector rotation happening in the market at this point of time. So one needs to play that.
However, by and large we have identified a few sectors which we like from a longer term perspective, say next three year perspective and that is an area where whenever there is kind of a slight correction in those sectors, we look at an opportunity to build exposures in these sectors. These are sectors like for example a consumer discretionary I would say, the NBFC sector we think it is a long-term secular growth story.
Also sector like metals which has seen a decent price increase in the last one year, but I think there are a lot of domestic companies we see deleveraging happening and that is an opportunity for value increase in those sectors. So, clearly we have our sectors and stocks identified and any market volatility or corrections is an opportunity to add to those positions.
Sonia: The sector that nobody speaks about these days is capital goods but over there as well you have seen very good returns come in from names like Larsen and Toubro (L&T). In fact you have L&T as one of your top holdings in your funds, do you think the capex cycle has turned or at least bottomed out and what is your view on the infrastructure and capital goods?
A: The capital goods sector if you break it up into two parts, one is the public expenditure, public spending, that has definitely picked up. We have seen the government spending, both the central as well as state government spending has picked up and that is helpful. However, private sector capex I think is still sometime away. We think it is at least one year before we would see a pickup in the private sector capex because a lot of the large companies, large groups which are in that sector, they are still highly leveraged.
The deleveraging cycle, as I mentioned is started so that will take time before they start to again leverage and start to invest in a big way. So, until then, in the capital goods, the infrastructure sector there are only pockets which we are seeing good growth it is the road sector, railways, then irrigation, these are the areas where the growth is good and some revival say for example in the construction equipment side where we are seeing demand kind of pickup.
Apart from that the larger sectors like power generation for example, the demand remains -- the capacity creation there remains pretty weak. Again, on the T&D side, there is pretty decent expenditure which is happening. So, I think it is kind of mixed bag in the overall capital good infrastructure sector. One has to play individual themes, or individual sectors to really make money in that space.
Anuj: The other one that has really helped the market and is one of your top holdings, Reliance Industries. What have you made of the big surge that we have seen over the last three months after the multi-year underperformance?A: I would not want to talk specifically about Reliance but I think by and large we have been positive on the refining company and the petrochemical side. We think that the refining margins are likely to remain pretty good this calendar year. There is some
amount of demand supply mismatch coming in, in this calendar year primarily because the fact that demand continues to come in and supply is a bit restricted. So, refining margins should do well. So, that is a big positive for a lot of these refining stocks.
Even the petrochemical cycle also looks fairly good and companies where there is capacity increase coming in, as in case of Reliance, I think that will drive better earnings growth visibility. On the telecom sector specifically, we are currently going through a phase where we see consolidation happening. There is a pricing war which is there but it is kind of bottoming out at this point of time. The fact that the consolidation is going to happen, you will have a three or four player maximum in this sector is good for a longer term for the sector.
So, I think from that perspective, companies which are there in these two, we are seeing some kind of a re-rating happen over there. In case like Reliance for example, the people were undervaluing the telecom exposure, I think that is somewhere started to give some value to it and that is the reason for the recent up move in the stock.
Latha: How is the behaviour of the investors. Have you seen people up their SIPs and this entire demonetisation move which has brought more unaccounted money into accounted money, has that had a bearing, the last two to three months are more people putting money?
A: Demonetisation has clearly helped in terms of not only increasing the pace of inflows, large ticket inflows but also to expand the base and get a lot of new people. A lot of people have realised that where do they park their savings, and try to generate yields which are slightly better than what you can get in a bank fixed deposit. This is also correspondent with the fact that the banks FD rates have, one year FD rates have come down.
They have come down to as low as 6.5 percent and at that low rates, alternatives are always being explored by individuals and we have seen that. In fact the SIP book has been growing much faster than what we were expecting and at this rate if it continues, we should see almost like 65 percent of the inflows coming in through the SIP route and which will be good for long term stability of inflows into capital markets.
Sonia: You were telling us about the capital goods space, in your funds, in your infrastructure funds, you have recently increased stake in some of these plastic processor companies like Sintex, you have had big exposure in names like white goods companies like Blue Star, you see these themes offer more value despite the kind of run up we have seen?
A: As I mentioned earlier, these are themes essentially not exactly in the capital goods space but more to do with the discretionary spending which is there whether it is in the white goods, etc. So, that is a sector which we see that there is -- there are two things which are driving that sector. One is the consumption as it picks up at the rural as well as urban consumption picks up, but more so in a lot of these sectors there is a lot of unorganised players which are there.With demonetisation, we have seen that the organised sectors were able to gain market share. With GST coming in now, from July 1 or latest by September, we should see a further consolidation of the organised players in the sector which will drive better growth. The market growth itself is going to remain pretty good and with further consolidation of the organised players, I think they can see a stronger growth over the next few years.