Apr 16, 2015 07:30 AM IST | Source: CNBC-TV18

See pharma, IT as good defensive bets: UTI Mutual Fund

From a tactical perspective the pecking order would be private banks, NBFCs and public sector banks, says Swati Kulkarni, Executive Vice President and Fund Manager at UTI Mutual Fund.

Swati Kulkarni, Executive Vice President and Fund Manager at UTI Mutual Fund is of the belief that volatility in the market is likely to continue for some more time and with the fourth quarter earnings also expected to be subdued, retail investors should look at investing for the  long-term, with a 2-3 year time frame.

The house has been underweight on banks because investments have been lackluster but would look at adding positions over the next six months. From a tactical perspective the pecking order would be private banks, NBFCs and public sector banks.

However, on the other hand pharma, IT and the consumer space would continue to grow to the tune of 15 percent and so could be a good defensive plays, believes Kulkarni. Autos and industrials are good cyclicals plays, she adds.

However, the house is not so upbeat on the metal space yet, says Kulkarni.

Below is the transcript of Swati Kulkarni’s interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18.

Anuj: What is the advice for retail investors now we have seen the market show a big decline and a very sharp recovery now? At this point do you think the odds for the markets going to all time highs are rising and which sectors would you be bullish on from hereon?

A: For retail investors I would advise that it is better to look at a larger timeframe because Indian markets are going to be volatile. The earnings support is also not going to be that strong. The euphoria that we have seen in the first half of this year is some what coming down to the reality as far as the earnings downgrades are concerned. So don’t expect any sharp up movements in the near-term. Howevrer, since the government and the overall economic recovery is on the side of boosting investments in the economy, from a 2-3 years perspective they should look at it positively.

Certainly these are not the levels which are toppish from that time horizon as such. As the earnings grow we will definitely expect a much better numbers on the leading indices and hence on the equity side

Latha: We did see the Bank Nifty underperform but we have seen relative outperformance coming in today probably after the Consumer Price Index (CPI) numbers. How will you incrementally look at this set of stocks? Will they form a larger portion of your incremental investments?

A: Basically, we have stayed underweight on the sector because this is supposed to be a late cyclical given that the investment side of the economy had remained lackluster as such. From the perspective that as the credit growth picks up and it is not going to pick up next quarter,  but as we get into a busy season. we can surely expect that the asset quality related stress that we are seeing perhaps could heighten in next couple of quarters.

We look at it adding positions in this sector over next six months or so. Because the valuations and also if you are positive as a proxy on the economy banks looks attractive and that is the thought process.

Anuj: What about metals we have seen big decline but off late started to see a bit of buying is this the short covering, value buying and what is your current view on some of these metal companies?

A: As far as metals are concerned the global cyclical, the kind of price carnage that we have seen like oil has dropped 50 percent on year-on-year (YoY) basis. Many of the ferrous stocks or the iron ore prices and the hot rolled coil prices (HRC) and cold rolled coil prices (CRC) prices are down by upwards of 20 percent or so. We look at it that China is a major factor and also Europe is also struggling for growth.

So with these two hangovers it is very difficult to expect a strong recovery in this sector as such. As you rightly pointed out that from the valuation perspectives perhaps these are at bottom and they are at bottom in a worst kind of scenario so some kind of interest could develop. However, structurally I would like to look at other sectors than metals at this point of time.

Latha: Which others?

A: If you dissect the earnings growth versus where the sectors which are struggling, pharma and IT and probably consumers still look to be growing at about 15 percent versus the rest of the market or the rest of the pack a. From a very short-term perspective, from a tactical allocation these sectors might still do well and you have seen the kind of performances that we have seen on pharma so these could be a defensive play for sometime.

From a cyclical point of view some of the auto plays, some of the cement and some of the industrial plays where you have a benefit of operating leverage and not so much of dependence on the capex cycle to come up in a full swing. These are the plays which you would play for a delta apart from the banks which we just discussed.

Latha: Tactically not from a longer term perspective because I guess the private companies will always be very good long-term placed. But from a tactically perspective what well be the pecking order, private banks, non-bank financial companies (NBFCs) and public sector banks?

A: Very much that could be the pecking order because even from a bottom picking perspective I don’t think that the stress in the public sector is totally away. Some of the banks are struggling with the capital adequacy as we know and they could have issues on the growth if it comes back. So we will have to look at despite the valuations reflecting some part of that private bank having growth story as such.

However, we will have to look at that plus some of the large PSU banks are looking attractive at these valuations so we would be positive on that also. In the NBFC space I would say that small allocation to NBFC can also be taken from a perspective that as the interest rates come down.

That is the thesis that we are on the downward trend as far as the interest rates are concerned. The cost of funds goes down and because of the low penetration otherwise on the coverage that we have across India for many of the banking stocks as such. NBFC could be a good niche play and that is how one should approach the overall banking exposure.

Anuj: You did say pharma as one of your top pick but wouldn’t valuation be a concern there especially for the largecap where we have seen peak valuations at this point in time?

A: My point was in a scenario when you are struggling for earnings growth in other sectors, probably pharma becomes a good defensive bet and to that extent yes earnings have moved up. However, earnings are still not that alarming given that some of the leading companies have niche product presence and they have good pricing power as such. Some of them have a very strong ANDA pipeline. So you would still bet on these from a long-term perspective as a defensive bet rather than looking at for example global cyclicals where the demand patterns is not entirely driven by India.

Pharma for example if you look at All Indian Origin Chemists & Distributors Ltd (AIOCD) data it shows a very good domestic market growth. We have also seen the National List of Essential Medicines (NELM) in products have taken about 6 percent price increase. Also, we have seen 10 percent increase on non-NELM portfolio. So you have a dual advantage of volume growth plus the pricing growth in the near term. You can be choose stocks that have a much better US generics opportunity also. The exchange rate is also some what stable and that should not be a problem.

This is one sector compared to IT is not so much affected by the cross currency headwinds. Although it is relative and there could be some impact but not so much and one can pick and choose where the impact is minimal.

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