In an interview with CNBC-TV18 Gautam Sinha Roy said the impact of demonetisation will be felt more in rural facing, consumption inclined towards rural demand and real estate-linked sectors including building materials.
"We are more or less sticking with our allocation because for the portfolio, we are seeing around 20 percent earnings growth," says Gautam Sinha Roy, Motilal Oswal MF.
In an interview with CNBC-TV18 Sinha said the impact of demonetisation will be felt more in rural facing, consumption inclined towards rural demand and real estate-linked sectors including building materials.
These sectors are likely to be more impacted from an earnings perspective.
Sonia: The start of the new year has thrown up a lot of questions about asset allocation, sectoral allocation and going through your funds, you have been invested in some sectors that have done extremely well up until now case in point, sectors like oil marketing companies (OMC). What is the sense you are getting about how the sectoral allocation should be made in the first half of 2017?
A: We are more or less sticking with our allocation because for the portfolio, we are seeing around 20 percent earnings growth. Of course, valuations are under pressure because of foreign institutional investor (FII) selling, but that is something which is very external, we cannot do much about. As long as our core portfolio earnings growth is good, we are happy sticking with the choices that we have made.
Some of them of course, have lower growth like OMCs you mentioned, but there the price-earnings ratio (P/E) reratings potential is still there. So, a mix of P/E rerating and earnings growth is what we are looking at for the entire portfolio. But, not too many changes from the demonetisation perspective or other such near-term perspective because we believe that these are transient events and it is very difficult to build a portfolio around such transient events.
Anuj: You have a lot of auto stocks in your portfolio, names like Eicher, Maruti. In particular here, because we have seen divergent trends. Eicher, for example and Maruti also has been strong, but we have seen weakness in TVS and Hero Motocorp. Your thoughts on that?
A: Actually coincidence or we are just thankful that the names that we had suffered the least. And this was the hypothesis we had even when the demonetisation event happened that our stocks relatively safer and we could buy them cheaper too because these stocks corrected 20-30 percent post demonetisation and have bounced back a little since then. But yes, generally, the auto sector has been impacted, but things are improving now. As we speak, things are improving and again, as I said, most of the impact is transient and next quarter, things could be better for the auto sector in general.
Sonia: In about less than 10 days from now, we will be talking about earnings season, but this time around, how are you positioned as far as Q3 earnings are concerned? And where do you see the maximum amount of damage because of demonetisation?
A: Surely in more rural facing sectors, consumption sectors which are more rural facing and more real estate facing sectors including building materials is where you will see demonetisation related impact being the most from an earnings perspective. The delta in earnings however will come more from PSU banks and metals. So net-net earnings growth on a year-on-year basis could still be a decent number.
It might now be in teens like in our earlier thinking, but it could still be single digit somewhere, still a growth number, because of the PSU bank base being very low and metals also recovering fine from last year’s lows. So, earnings will not be overall very bad and the impact from demonetisation would be transient again.
Anuj: Housing finance companies and non-banking finance companies (NBFC). Any stock that you would want to take a punt right now?
A: Generally, as a space from a near-term perspective, one has to be a little bit cautious there because a lot of the financing which happened, these are very different businesses though, but a bulk of the space that we are talking about where growth was high, was either related to small and medium enterprises, loan against property (LAP) book, all real estate related and also related to what we call liquid income profiling which is basically non-taxed income that they used to profile and then on basis of that. Now, because of twin impacts of demonetisation and GST, this segment will not be as attractive. On the other side, banks are also becoming increasingly competitive on the rates side. So, twin impact there and valuations have been crazily expensive before demonetisation. Now they have corrected a bit. So we will give it a breather and revisit it, probably that space later on.
Sonia: One space that has been roaring is this entire gas space, all these companies like Mahanagar Gas, Indraprastha Gas, etc. We were speaking with Mahanagar Gas the other day and they did indicate that things are looking pretty good especially as far as CNG volume growth is concerned. And that is one stock that you have been holding in your portfolio for long. I just wanted your view on the outlook for the sector as a whole, as we head into 2017?
A: The longevity of growth would be really high for these gas utilities because gas was clearly the energy of the future. But the rate of growth in volumes might not be spectacular. So, it would be 8-10 percent or in early teens. In the near-term, we are benefitting from a surge in earnings before interest, taxes, depreciation and amortisation (EBITDA) margins, simply because input prices, cost of cash for them is coming down. So, that is already getting reflected in earnings growth this year.
Earnings growth this year would be spectacular. Next year onwards, we should not expect very high earnings growth from this sector, but definitely longevity of growth will be pretty high. Valuations, where they are undiscovered, I would say till six months back and whatever we have seen in the last six months has been basically a P/E rerating or a valuation discovery given the very good cash flow profiles of these companies.