Market starting to look attractive; like consumer staples: Birla

Patil, however, refrains from betting on a longer bull run for global markets as he believes there are still few headwinds there.Below is the verbatim transcript of Mahesh Patil’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: The market is starting to make a bit of a recovery, foreign institutional investors (FIIs) have now bought today’s in a row do you think the demonetisation fears have been completely priced in?A: The negative news flow on the demonetisation is definitely easing. After the initial impact what we saw of demonetisation -- lot of impact was there on few sectors -- we are seeing things easing off over there. December month again probably would see a slightly larger impact because lot of the sectors, specially autos, there was some push from the wholesaler down to the retailer. So, December numbers could probably be slightly weaker over there.As you get in the actual numbers for the corporates the full impact of demonetisation would be analysed. However, from the ground level the news flow what we gather things are easing of, the liquidity is slowly coming in and sales which have dropped down to around 50-60 percent have now normalised and probably are down only around 15-20 percent, lot of the retail sectors.Latha: What would be the stock that you will first pick up as probably basement prices?A: Again, it would be in context to what has been the fall because we have seen certain stock fall by around 15-10 even 30 percent. Then looking at what is the realistic price for those stocks and while we think that clearly the consumer staples should recover very fast, small ticket consumer discretionary, there the recovery again should be within a couple of months or so. Again in the financials services sector where we have seen decent kind of a crack over there, there again one needs to differentiate in some of those where the impact could be on the growth and on asset quality.I think where the impact is only on growth -- that should recover in a quarter or two and post the recent correction, there are good long-term stories over there, which can be bought in this correction. If it is a long-term good secular growth stock, if the stock has corrected by 15-20 percent, obviously it becomes a good opportunity to look at.Anuj: What are the chances that this market will make a new high in 2017?A: There is a fairly good chance; there is a strong chance of it because a) despite the short-term impact what we would see probably might affect our next two quarters December and the March quarter. As we move forward as the benefits of demonetisation, you would see some benefit of that also come through as the government gets more taxes, there will be distribution of that gains down to drive consumption. Again we have Budget coming next year, which will try to again re-stimulate the economy in various ways. One has to wait and see and the fact that the interest rates have cut, next year after this -- we should see recovery back into the economy.Also, after a long time we have seen that the difference between the bond yields and earnings yields which is one of the kind of good indicators to see how the relative valuations are in the market has come down or has compressed dramatically. So, it is well below the long-term average.So that is a good sign that the markets starting to relatively looking more attractive and as some of the short-term pain is behind us, the market should start to do well. Obviously, the liquidity itself has been, domestic inflows have been very strong so that should be supportive. The global fund, we have seen after the initial scare, we had been a bit cautious on the global fund but Donald Trump people were expecting that correction in the market, but since he has come to power the Dow is up 1,200 points. So, the global risk-on continues, looks like at least for the time being. Though emerging markets haven’t done that well.Latha: Will you bet on it, will you bet that this rally could get even more full blown and the global cues, I mean we have seen two days of FII buying but does it get into a big broad rally?A: I wouldn’t bet on that at least from a near-term perspective. I think there are still some headwinds on the global front. One has to wait and watch. We have seen the Italian referendum play out, there are other events which are there in the earlier part of next calendar year. Global events will still remain something which could lead to these bouts of risk-off kind of a scenario.Sonia: I was going through your fund the Birla Sun Life Frontline Equity and over there you have recently increased your weightage in some of the IT stocks like Infosys. Do you think the worst is over for the tech sector or do you foresee some more volatility?A: In the tech sector, we have seen the downgrades happen in the last few quarters. So, the expectations in this sector are pretty low at this point in time even in terms of the topline growth. What we are seeing is that before the US Presidential election, there was some deferment because decisions were not been taken. I think post that we should see some activity picking up on discretionary spend.The good news is that the banking sector, which was kind of weak last year -- we have seen some pain over there -- that sector has bounced back pretty well. In US, the financial stocks have moved up pretty sharply. So, that should do well for spending from that sector coming through, so I think the worst is clearly behind us. One has to wait and see how that translates in terms of where the growth will claw back to around 14-15 percent or remain at around 10-11 percent.Anuj: What about stocks like UltraTech Cement, Ambuja Cements, are you topping up some of these stocks in your portfolio?A: The cement sector has, if you look at last couple of years, done pretty well so a lot of these largecap stocks, the valuations over there are slightly on the higher side. However, one was still okay with that because the demand was picking up, the demand supply scenario was narrowing down and that should have done well for the sector to hold on to these valuations.What has happened is because of demonetisation clearly, the sector will probably get impacted slightly more than some of the other consumer and the impact could slightly be more longer-term. When I say longer-term I mean more than six months or so.On the cost side, we have seen now the costs have started to increase a bit. Last year we have seen the companies benefiting because of the lower cost, but we have seen the coking coal cost has gone up. So, in an environment where the demand is going to be weak because of the demonetisation and your cost push, you could see probably pressure on margins over there in the cement stocks in the next couple of quarters. I think probably we will wait and watch, look for a better entry point in the largecap cement stocks at this point in time.Latha: If we were to give you a Rs 100 how would you split it incrementally in stocks?A: There are two ways to look at, one is at the marketcap level where the largecap or midcap I would say 80 percent in largecaps and 20 percent in midcap that would be the first broader allocation. Within that -- in terms of sector allocation if one has to put in -- I would say that the banking and financials probably a neutralish or slightly overweight. We will see while near-term there could be an impact in terms of credit growth, but you would see that picking up.Positive on autos, recent correction in the auto space, we should see the quicker recovery over there. Oil and gas sector again neutralish over there, pharmaceutical and consumer staples and discretionary in this correction is a sector where we will be overweight. I would look to add over here. These are again long-term or short-term, one or two quarter should not impair the long-term growth and the under penetration, which is there in some of the categories.Sonia: You also have a large exposure to the NBFCs space Cholamandalam, LIC Housing Finance, Shriram City Union Finance all in your equity fund, we have seen a fair amount of correction here. Have you topped up?A: Again here, we like to differentiate a bit over there. There are companies in the NBFC, which have got a more diversified portfolio where we would be more comfortable. If there is a slowdown in a particular sector they can compensate that. We are trying to kind of reallocate between the various NBFCs.However, clearly, the lower interest rates, and I think the retail growth, while it has got impacted the most over here, as the benefits of as remonetisation happens and as the income moves down towards the bottom of the pyramid and also financial inclusion as more bank accounts and more economy moves from the informal to the formal sector you will see that driving retail credit growth much stronger and that should benefit the NBFCs space from a medium-term perspective.