In terms of overall opportunity, consumption, automobile, domestic cyclical sectors like construction, cement, banks for that matter looks attractive for the fund house.
The Indian economy is on a growth path and should be able to double from USD 2 trillion to USD 4 trillion in less than eight years, Swati Kulkarni, Fund Manager, UTI AMC, said in an exclusive interview with Kshitij Anand of Moneycontrol.
“In terms of overall opportunity, consumption, automobile, domestic cyclical sectors like construction, cement, banks for that matter looks attractive,” she said.
Q) What is your call on the markets? The M-cap/GDP is above long-term averages at 80. Sensex and Nifty too are above their respective long-term averages.
A: If you look at the price to earnings, the denominator, which is earnings, has been growing at a sluggish rate in the last 4-5 years. That is why the ratio seems to be elevated at the current levels. So, may be from a trailing 12-months perspective, markets are at about 22-23 times.
The market is expecting a growth of about 25 percent in FY18. So, from that perspective, if you go by what we have seen in the past, the growth has been not up to the expectations. Hence, in the near-term, you might think that in PE multiple, the valuation seems to be at the higher end.
No matter where the markets are, you have to choose companies which are likely to grow better and which have a sustainable business or scalable business model. With such a portfolio, you may not have to be that cautious if you have a 4-5 year horizon.
However, if you are choosing companies in which things start looking nice when the wind blows, a caution definitely needs to be there into verifying what kind of businesses one is buying and whether these businesses are sustainable.
You might give a higher valuation for sustainable businesses. Ten years down the line if the business is still going to have that kind of leadership in terms of the cash flows that they generate, or the return on capital employed that they generate, then surely these valuations should not be a worrisome point.
Q) Some analysts are of the view that India is on track to become $4 trillion economy (double) in next 8 years. If that is the case then where does the opportunity lie?
A: First of all, if you just go by the nominal growth because when you are saying USD 4 trillion economy, we are talking about a nominal economic size. So, even if you assume the growth at 6-7 percent and inflation of 4-5 percent, it should give you a nominal growth rate of 11-12 percent.
By applying the rule of 72, these numbers may be achievable even earlier than eight years.
In terms of opportunity, and the overall boost that the government is making towards 'Make in India', the formalisation of the economy which we expect post the demonetisation and the implementation of GST. These will ensure that the size of the parallel economy could shrink and that itself will give you this expansion. Plus, being a service economy, there are still many services which are not necessarily fully reflected.
Q: Any sectors that you have in mind for this?
A: In terms of overall opportunity, consumption, automobile, domestic cyclical sectors like construction, cement, banks for that matter. I am talking more about retail banks now. Given the current asset quality and resolution related issues, and capital infusion could be an issue for some banks. So, I am saying these sectors should support.
Plus, when you are looking at 6-7 years period, IT and pharmaceuticals should also come out of current issues and headwinds. So, these two sectors should also contribute.
Q) On the event of the third anniversary of BJP Govt on May 16: Is the chant of NaMo here to stay or is there is a lurking bear ambush?
A: This is a very tricky question which one should avoid as world over, we have seen how political predictions have gone for a toss.
So, rather than predicting that, I would like to say that look at what are the structural changes that are being brought in.
Irrespective of the party in power, the reform process should continue. The state devolvement will ensure that it has funds in order to focus on the growth areas. Also, we had power and coal-related reforms where we have seen coal production going up.
The decision-making has energised and these are some of the positives irrespective of whoever comes in next.
We have seen fiscal discipline in terms of maintaining fiscal deficit target and incrementally government spending going into areas of roads, railways and developmental areas, affordable housing. These are some of the things which can continue as the roads have been laid down for such reforms.
Q) Where do you see Sensex, Nifty header in the next 2 years of Modi govt and do you see Modi 2.0 in 2019 elections?
A: I don’t want to comment on what happens to the government. Irrespective of the government, the investment push that the government has to really take a lead as private sector is not likely to start capex soon given the underutilisation of capacity.
I think government capex should lead in the next two years. I don’t want to relate it to the election outcome. From an equity investor point of view what matters is are the drivers for economic growth and whether those drivers are in place?
Q: Any specific level that you have?
A: It is very difficult. The underlying profitability was missing for the last 4-5 years. There are select pockets which are showing that growth but we will definitely see the earnings growth which has been volatile in the past.
In the last 25-year period of Sensex, in earnings behaviour, there are periods of 4-5 percent of double-digit earnings growth and there are 3-4 years of a lull. This time, we have seen this lull to be about 5-6 years.
I do not want to believe that that is going to continue the way it is, but there will be a pickup. Now whether this happens in the next one year or it takes two years is something which we will have to factor in what stocks we buy rather than looking at this index.
So the easy answer which your readers might be looking for is not. You cannot give any logic for that.
Q: US Fed is expected to raise interest rates in the month of June. Do you see a knee-jerk reaction or the adjustment has already started happening given the fact that markets are not able to move higher and witness selling pressure at higher levels?
A: The US Fed related path is fairly discussed and there has been a fair amount of sharing in terms of what actually happens; in terms of the FOMC discussion. The market is probably aware that there will be in this year, about 2-3 hikes. So, if anything happens outside that, it could surprise the market. But otherwise, whatever is discussed, that is there in the numbers.
Q: Are there any themes which investors should stay away from?
A: Currently, the diversions between a midcap and largecap valuation is pretty high and that is also reflected in the way midcaps have performed in the last five years.
In last three years as well, the differential in returns is pretty much high and that has led to this kind of valuation differential with midcaps being at an all-time high premium to largecaps.
Investors should avoid just blindly following the momentum in midcaps. The valuations have an implied growth rate which are much higher than what growth rates these companies are able to deliver.Investors need to be very stock-specific and avoid any kind of concept stocks at this point in time.