Mkts may move 10% on either side: Birla Sunlife MF

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Mahesh Patil, Fund Manager, Birla Sunlife Mutual Fund said that the markets at current levels, look to be in a fair zone. He is of the view that the markets are fairly valued at this point in time and that they are merely following global market movements. So in the shorter-term he expects markets to remain volatile and rangebound.

Excerpts from CNBC-TV18's exclusive interview with Mahesh Patil:

Q: Give us a view on the market as it stands after the kind of volatility and the kind of surprises we have seen over the week gone by? How would you assess the movement from hereon? What kind of drivers would fuel the market on the earnings front?

A: If you look at the market at the current levels, it looks to be in a fair zone. Historically, the market has been in a P/E band of around 12-20. Currently, if you look at the consensus earnings for the EPS for the Sensex companies, it is around Rs 850, that means a P/E level of around 17 for the market. I think the market is fairly valued at current time. We have seen the market with the fair valuation; it is mainly following global market movements. So in the shorter-term, we expect market to remain volatile, rangebound and over a longer-term, one can expect earnings growth to be in the region of around 15-20%. This is what one can expect from the market over a one-year time horizon.

Q: Give us an idea of what range you have in mind for the medium-term?

A: Considering the current volatility, one can expect the market to move around 10% plus or minus.

Q: We are waiting to hear from the Fed, not expecting any changes over there. Even on the domestic turf have we hit the higher end of the band, will we not see a further hike from here?

A: It looks like, if you look at the statements made by the Finance Minister and RBI Governor, who have asked banks to actually cut down our interest rates. Even some of the housing finance companies have pared the rates by around 25 bps. Considering the current liquidity, we think that interest rates have peaked out, probably they will stabilise at these levels before they start moving down, so I think that is broadly the view on the interest rate side.   

Q: Would that convince you as a fund manager to start relooking at interest rate sensitive sectors like autos and real estate and banking?

A: If you look at the interest rate sensitive sectors like autos, or real estate or banking, it has underperformed over the last three-six months. It will take some more time before confidence comes back in this sector. I think, from a valuation perspective, some of these sectors, especially the auto sector looks attractive. But I think one has to wait for some signs in terms of interest rates actually easing off, but as a contrarion view, one can look at the sector positively and going forward, one can take a positive view on some of these interest rate sensitive sectors.

Q: You have also mentioned engineering and capital goods, those sectors have been outperformers for the better part of the last year. How would you rate their chances and how much upside in percentage terms would you ascribe?

A: The engineering capital goods sector has had a good run and they have been outperforming even in the last three months and over a one year period. The clear excitement in this sector is that it has been led by huge investments, we have seen an upturn in the capex cycle. Even in infrastructure space, there are huge investments, which are likely to flow in over the next five-ten years.

That is driving the orderbook of some of the engineering and capital goods sector and with clear visibility in terms of earnings, because of the large orderbook and the margin expansion that we have seen in some of these companies that brings up a clear case in terms of earnings growth over the next two-three years.

Most of these companies are asset light, they do not require huge capital investment and the ROCs are pretty high, so they can grow at 25-30% without equity dilution, which enhances shareholder's value. Considering that the increase in interest rates have not really affected the capex plan for the corporates. Given that, while some of these stocks in the sector are fairly valued, but the higher earnings growth would actually mean that over a longer-term, this stock in the sector should outperform the broader market.

Q: How much cash are you sitting on? Over the last two weeks when we were seeing the mayhem in the markets, what was the strategy that you deployed? Did you book profits or were you largely invested or are largely invested even now?

A: On an average, we have got around 10% cash across most of our large funds and this is a level of cash we are comfortable with, because in a volatile market that gives you opportunity when there is a sharp correction in the market to get into stocks. In the last couple of weeks, broadly we have not done much, because we do not believe in trying to time the market.

Q: Are there any redemption pressures for your funds?

A: Not really, I think the Indian markets have matured now and there is still confidence in the broader market, so we have not seen any redemptions. 

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