Moneycontrol
Nov 25, 2017 03:34 PM IST | Source: CNBC-TV18

Valuations are not cheap, but not expensive either: Manulife Asset Management

We expect that trend to strengthen going forward, Rana Gupta, Managing Director, Indian Equities of Manulife Asset Management said.

CNBC TV18 @moneycontrolcom

Moody's upgraded their rating on India last week and all eyes are now on the Standard & Poor’s (S&P) report that is expected soon. How will this change the global eye on India? CNBC-TV18's Udayan Mukherjee caught up with Rana Gupta, Managing Director-Indian Equities of Manulife Asset Management and asked him about the Indian market and his thoughts on fresh buying over taking profits.

Valuations are not cheap but it is not expensive either considering that earnings growth has come back this quarter, he said.

We expect that trend to strengthen going forward, he added.

In terms of taking profits, we would rather avoid stocks where the valuation is expensive and the earnings recovery is not there, said Gupta.

We remain bullish on life insurance sector, he further mentioned.

Below is the verbatim transcript of the interview.

Q: Since we last spoke last year, what kind of significant changes in your portfolio have you done because a lot of things have happened? We have had a big bank recapitalisation, a lot of people are talking about the fact that maybe the worst of the asset quality pain for banks is over. Do you agree with that assessment and is that theme finding representation in your portfolio now?

A: I think that is one of the major changes that has happened since we last spoke. Our view is that it depends on what kind of time horizon do you have. If you have a shorter term view, three-six months we don’t thing asset quality pain is over yet. Because we do hear that Reserve Bank of India (RBI) is preparing a second list and there will be some more divergence coming out for some more banks because all is not done. So, December quarter March quarter we do expect some more recognition of non-performing loans (NPLs).

But if you have one year view then we are quite constructive on the corporate banks. Because by that time the recognition will be behind us, hopefully some resolution will happen and hopefully given the global commodity prices are quite strong some possibility of recovery also cannot be ruled out. Once this bad assets pipeline is cleared now the banks have got capital not just state owned banks but the private banks are getting capital, so growth can come back.

Q: When you say three to six months might still be tricky, do you think there will be more opportunities given the news flow to buy them or do you think the market knows what is coming for the next three-six months and it is already in the price and we may not see meaningful corrections in these names?

A: That is a possibility, so what our view is that in terms of whether banks come out and report those numbers may still not be good for the next two quarters. Now of course, we don’t know whether the stocks responds to it or not corrects or not, but our sense is that if they do those will be opportunity to buy with a 12 month view.

Q: You would say the same of private sector corporate banks and PSU banks or will you make distinction between the two –like the ICICI Bank and Axis Bank on one side and the PSU’s on the other side?

A: We are more comfortable with the private sector banks, having said that the top ranked PSU banks. Also something that one should look towards, the only thing towards this is that even in the top ranked PSU’s there is a possibility that the government may do some sort of merger and acquisition (M&A), consolidation so that part we are still not sure about.

Q: That worries you?

A: Look I mean we don’t know what is going to come out. This is something which is unknown. Rather than that we would stick to something that we know much better. Our sense is that we would back top private banks and absolutely top sector PSU banks.

Q: Does this also mean as you include some of these corporate banks name that you are going to whittle down your exposure to either private sector NBFCs or to some of the private retail banks which I am sure would have had representation in your portfolio?

A: If you look back at this year the private sector retail banks, NBFCs have done phenomenally well. Their business outlook continues to look quite good. Although rates will remain lower in the longer term context but are going to incrementally rise from here, so makes sense to take some profit on the non-banking financial sector.

Q: And private retail banks?

A: Private retail banks we do think that the longer term outlook is quite right and although they may not perform as well as they have done in the past but we would stick to the private sector retail banks still.

Q: So last time we spoke I remember you said that telecom was the sector you were quite underweight on? Subsequently, there have been some positive developments, enough in your eyes to warrant a buy or are you still looking and waiting the time has not come to press the trigger?

A: Last time when we met there was one consolidation already happened, but no capacity was going out of the system. Over last three months we have actually seen capacity going out of the system in the sense M&A gathering much more pace. That makes us positive on the sector. Also, if you look at the financials of the let say from the third player onwards they are in pretty bad shape. Now we discussed last time also that telecom to us is a commodity. In a commodity market when the third or the fourth best player start losing money is it is time to buy the sector. So, this is the same analogy I do think this is the time to look at the telecom sector positively.

Q: The other sector which you were not very bullish on last time was pharmaceuticals. There too there are some murmurs that may be the prices are discounting the worst. We have seen one or two come backs like the Divis Laboratories of the world but you are still not convinced are you?

A: No, we are not convinced on the pharmaceuticals sector because the pharma stocks they still derive a lot of earnings in the value from US generics and US generics price have still fallen. In fact if anything the space of approval by US authorities have gone up even more. So, prices are falling at the faster pace than ever. So, I think that prevents us from taking a constructive view. Having said that some companies the valuations have corrected meaningfully, so had we been value based investor we would look at it, but we are growth based investors so that is why just value alone with no catalyst or trigger in next 12 months view would not excite us.

Q: Where do you see growth now because as you said I mean it is not the time to look at value, when you look at over the next one or two years assuming that this earnings recovery story plays out finally where would you get the maximum delta?

A: Actually, there are three pockets and to explain that how that happened in next 12 months let us look at the last 12 months also. So, the first bucket in fact if you look at what has driven not just earning growth but even the market returns among the larger sectors of course the first bucket is global cyclicals energy and materials. They have done well and we would expect them to continue to do well. Because global growth is strong, China is still cutting capacity which means higher energy and material prices, so rising utilisation and earnings. So, that sector will do well.

Q: Metals largely or across the board?

A: I think metals and energy too. Then moving on to a second bucket which was financials and consumer – discretion that has done well in the last 12 months. Although the sector has done well when you drill down it is only handful of stocks that has done well this year. Primarily, the stocks which could take advantage of the formalisation reforms going on. So formalisation did three things – financial savings went up, retail credit went up and in the consumer sector lots of value transfer from unorganised to organised. So, we now expect that opportunity to broaden out so I think we will get earnings growth coming from there also.

The third bucket which will join in our view – with the 12 month view of course would be the corporate banking sector the industrial which we started the discussion about. Also let us just join all the dots that we said if energy material prices are higher, companies will produce more which means there are more materials to go around, utilisation rise which means more job for the industrial companies.

Last but not the least we would also like to highlight that if you look at the India’s largest steel companies, aluminium companies they are running nearly 100 percent utilisation. In one year definitely they will be there. So, then they need to think about Capex, again opportunity for industrial sector and thus earnings to come back.

Q: What kind of industrials do you think would benefit the most?

A: You have to break it down in time period because from here to next 6-12 months we are looking at rising utilisation. As utilisation rise the consumables will do well, so consumables or commercial vehicles which moves goods around they do well. After that period of time when they hit 90-100 percent utilisation and think about Capex there is a capital goods and the construction companies also start doing well because they need to put up those capacities on the ground.

The other theme of course about industrials is government’s plan of roads and railways that should also help the construction companies.

Q: The other thing that you said is about this whole formalisation of the economy theme spreading out, spreading out to include which kind of sectors which have not been touched already?

A: For example, let us think about within consumer, we are very bullish on let us say electricals. Now electricals they have done aright but our channel check show that they have not really gained materially from the unorganised sector so far. Now rates have been cut, we do think it is a very positive step because it is good to give formal sector opportunity than to go for the last tax evader. On the other hand you look at government’s initiative on electrification so on so forth. So, it has good demand, these companies are ready with their supply, taxation mess getting sorted out, so overall now those sectors we expect then to fire also going forward.

Another example could be organised retail – so with the onset of GST coming in these companies can optimise their logistics, they can get input as credit so all these will now start playing in the numbers, so these are just two examples. They are many more that is out there.

Q: What is your view on oil and gas as a sector –upstream, downstream oil and even gas where some of the gas utility kind of names have done remarkably well over the last few months?

A: If the view is that oil price will remain somewhat on the higher side you do not have adequate proper levered names in India to play that. Maybe there is odd one or two stock here and there but proper leverage is not there. In fact most of the stocks classify as energy in India actually contra crude play to some extent. One has to be careful about that.

With respect to gas play we are also quite bullish on the gas plays because we do think that the use of gas is set to rise, so we would play some of those gas names. Not so much in the B2C names because those names are really expensive, but B2Bnames we think there are enough opportunity for the gas players to make money even from here.

Q: You are talking about the LNG kind of plays?

A: Also the national gas distribution kind even them. We have to look at B2B plays we are not that optimistic on let say the City Gas plays – make no mistake City Gas will do very well, but too much in the price.

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