There is a structural issue in the IT space and the pain may take the time to go away.
The anti-profiteering clause can play a dampener in Sept quarter while inventory de-stocking could hurt June, Lalit Nambiar, EVP & Fund Manager (Equities), Head – Research at UTI Mutual Fund in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) The biggest fear for markets could be June quarter numbers as most experts feel that it could carry some burden of GST impact? What are your views? And, if that is the case, do you see markets to hovering in a tight range for the next two months?
A) The anti-profiteering clause can play a dampener in Sept qtr while inventory de-stocking could hurt June. Chances are market will look through this period of transition and focus on the full year.
Q) What would be your advice to investors, like 5-point check directly investing into equity markets?
Applicable especially for midcaps
A) A) What is the company's track record on return ratios and cash flow? Is there any similarity to competitor performance? Is it paying full tax? Am I pricing in a never-before-scenario (then exposure should be limited or diversified across such names)
B) Is the company free-float shareholding very closely owned? or is it that the same investors are buying, then the downside impact of any negative event could be very damaging ( a recent example of Hyderabad-based CRAMs -Pharma company)
C) Is there price movement without volumes, then it may point to price manipulation
D) How is the total financial leverage (total debt =short-term + long term)
E) What is the reputation of governance (past actions of promoters, current auditors)
Q) Some of the global investment banks raised their target for Nifty50 for December 2017 but it is not that much which leaves limited room for upside. What is your call on the markets for year end and do you also have a specific target for Nifty or Sensex?
A) As active fund managers, we buy stocks bottom up and sectors top down so the benchmarks are largely a post-facto reference indicator.
That said, it is difficult to project further rerating from currently steep valuation levels and earnings is yet to pick up. Understandably, from here it is tough to come up with defendable arguments for higher index targets.
Q) We saw fund managers reviewing IT sector, as they reduced the weight in the month of May. Well, the trend has been declining from May 2016. MFs weight in IT sector in May 2016 was 9.7% to 6.8% in May 2017?
A) There is a structural issue in the IT space and the pain may take the time to go away. That said valuations are looking quite inexpensive so perhaps we may not see further price correction although the same cannot be said about time-correction
Q) What are the themes which are likely to dominating D-Street in the next 5 years?
A) The cyclical upturn story is slowly gathering pace and it should bring huge benefits to the bottom line through operating leverage aided by the typically attendant valuation expansion. I think that will be the big story of the next 5 years as it was in the early '90s and '00s.
Q) What is your call on OMCs'?
A) The structural rerating which came with the removal of uncertainty in subsidy burden is done and dusted. They are also pushing up on capital expenditure. From here on can't see much more than a volume-driven story.
Q) What is your call on banking sector which ones are hogging the limelight? Do you think it is a matter to rejoice or something to worry about? The proceeding could be long drawn process and the some of the PSU banks are functioning they might be eating into their own deposits?
A) I think the worst is over for corporate banks, but the recovery could test the patience of the market. It looks like there may be much more moments of hits and misses in terms of sentimental upturns and performance delays, more like a tortuous zigzag but the broad trajectory is up.
Q) AUM for MFs dipped a little bit in the month of May but equity funds were in news. Do you think the trend is here to stay even though risk-to-reward ratio might not be favourable especially for investors investing directly into markets?
A) MF flow may be driven by the attractiveness of equity segment versus other asset classes versus equities and a realisation that speculation isn't for all.
As long as these perceptions hold, which I think they should for the medium term, the MF flows should continue. For those investing directly, the experience may be very uneven and disparate.For these direct investors, returns may be a function of luck and timing, perhaps even of information. But these are not qualities which can be expected to occur consistently unlike the process and research-driven investments made by MFs. Risk-reward for the average direct investor may not be great at any point in time.