Brexit may shave 10-20 bps off India FY17 GDP growth: Motilal

Brexit has been a black swan event and ramification of the same can be seen on currency market, said Manish Sonthalia, Senior Vice President at Motilal Oswal Asset Management. Not just this, India's Gross Domestic Product (GDP) may be impacted by 10-20 basis points compared to earlier estimates in case of a global economic slowdown due to the UK's exit from the European Union, he told CNBC-TV18.Given the scenario, the biggest threat to Indian markets going ahead would be if Britain's 'separation contagion' spreads to other member countries of the EU going forward, said Sonthalia.However, the Indian equity markets have performed well even at a time of global turmoil, Sonthalia said, adding, now is a good time to buy both discretionary and staple consumer companies' stocks. Growth will only accelerate from here. Hence, though valuations will not come down, earnings are likely to surge, he said.Currently, valuations of even oil marketing companies are perfect and can give high double digit return on equities, Sonthalia added. Meanwhile, Gautam Sinha Roy, VP, Motilal Oswal, believes due to the running US FDA and currency devaluation issues, the pharma sector has become quite attractive from a 3 years perspective.Roy is of the view that with La Nina and 'massively disruptive schemes' being executed by the government in infrastructure and financial sector, the rural theme is likely to bounce back beautifully. _PAGEBREAK_Below is the verbatim transcript of Gautam Sinha Roy and Manish Sonthalia’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: We are no experts in the Brexit ramifications, but I read a report recently which suggested that the Brexit crisis perhaps is a screaming buy for retail investors, at least investors in India. Would you think like that as well? Sonthalia: It is a black swan event that is true. How much India is going to get impacted is our trade links with European Union (EU) as well as UK and that will have ramification on our currency as well as our gross domestic product (GDP) if the global slowdown was to happen due to the Brexit event. I think we can safely say that for FY17-FY18 we could shave off 10-20 bps of GDP from our earlier estimates; 7.7 percent going down to 7.6 percent, for FY17 7.9 percent going down to 7.7-7.8 percent. That is all about it.Apart from export related sectors where companies are deriving revenues in foreign exchange or you are importing, that your cost of production is involving some sort of an import component or you have liabilities in foreign exchange, these are the sectors which are going to get impacted. If you are producing in rupees, the reporting currency is rupee, I don’t see too much of an impact and that is why with this uncertainty and good rains, if you were to get that sort of situation, I think it is a win-win for India; it is a good time to buy. Sonia: Pharmaceutical seems to have come back into action, in fact Lupin, Cipla, all of them looking very good, Aurobindo Pharma. In your Motilal Oswal Focus 35 Fund, you do have Lupin. What is the sense you are getting about whether this sector has come back into the buyers list and what would your prognosis be here on? Roy: I think the sector had become very cheap over the last one year because of all the USFDA issues which will eventually get resolved and somewhere the buying is starting preceding that before the issues get resolved. Another thing which is helping is the US dollar depreciation which people are believing will happen. So, net-net, prognosis is very good, valuations are extremely attractive, it is one of the largecap sectors where valuations are very attractive today. So, from that perspective, future returns in pharmaceutical from a three year perspective should be really good is what we believe. We continue to own some of the frontline names in pharmaceutical as well as a few midcap names which we really like. Anuj: What about Tata Motors and Maruti Suzuki; that Brexit impact is clearly showing up in these two stocks. Tata Motors of course for last two-three days has corrected, Maruti was down because of yen’s appreciation but has made a bit of a comeback, how will you play these two stocks? Roy: I think the currency impact is something which is worrying the market and it is a short-term thing. Long-term, the business prognosis for these companies continue to be the same. They continue to be pretty good for Maruti as well as for Tata Motors and that is a trade that we are believers in, that if you like the long-term prognosis, the growth story of these companies, then we essentially remain invested and probably because of currency volatility you get a great opportunity to buy these stocks, you simply use that. Although it has not moved so much, the stocks have not moved so much that you will call it a great buying opportunity, market has been behaving itself very well post Brexit but I think if you get that kind of opportunity you will have to wait for that because end of the day, currency volatility is part of this world; in a globalised world you will see currency to be quite volatile and sometimes it is in favour of you, sometimes it is against you.However, over a period of three to four years, I think these volatilities don’t really matter. What matters is what the company is delivering, what the business is growing at and that is where we are believers and that is what we try to buy at a relatively good price I would say. Anuj: The stock of the day is ITC in terms of the kind of push that it is given the index. What is your call on the stock? Even Hindustan Unilever (HUL) has done well but that is very expensive right now but at current level do you think there is still money to be made in ITC and HUL? Sonthalia: I think there is money to be made on all consumer facing stocks if they are of decent quality and management pedigree because growth is going to accelerate. There have been concerns about valuations but valuations I don’t think are going to come down. Earnings is only going to accelerate and that will push prices of all decent consumer facing stocks on the upside. So, you choose your pick, whether you want to be on the tobacco side, personal care products or hair oils and so on and so forth but both discretionary and staples should do well._PAGEBREAK_Sonia: The other good pocket or the other pocket that is giving a lot of wealth to investors these days is the oil marketing space. HPCL, BPCL are sitting at new highs today, 52 week highs, and you guys have some of these stocks in your funds as well. Is it too late to enter now or is this a space that will still give you money over the next six months? Sonthalia: I think oil marketing companies (OMCs) still have a room to go on the upside. All the three major OMCs valuations are perfectly fine. We are talking about single digit prices to earnings multiples with high double digit return on equities and growth factor anywhere between 15-20 percent depending on how the gross refining margins shape up and even marketing margins are very stable. Till about USD 100 per barrel, we should be firmly believing that we are in a decontrol environment. Post USD 100 per barrel, we will see how things play out but I think single digit prices to earnings multiple are way too cheap valuations for this sort of high growth in this sector. I don’t think it is going to restrain; we are still headed on the upside.Sonia: We were talking about some of these faces like the OMCs, etc, one face that you don’t have much of an exposure in is the cement space but we do have stocks like Grasim, ACC, Deccan Cement hitting new highs every day. Do you think that this is a space one should get into now and would you guys look to increase exposure here?Sonthalia: The growth is going to come back for cement companies but valuations are bit too prohibitive. When we are talking about decent companies trading at FY18 EV/EBITDA in excess of 11-12 times, 12 times EV/EBITDA on an FY18 basis, I think it captures in most of the growth. Where you have some sort of a mispricing vis-à-vis the growth is the midcap cement space. I am more inclined to look at cement companies which are present in central India where there is not too much of a supply that is going to come in from let us say next two to three year perspective. We are evaluating some of the names; maybe we will buy some of them in the portfolio. Sonia: It has been a good day for the market so far and one theme that is upon us is the monsoons. Good monsoons at least up until now, there is some deficiency but nevertheless it is raining here in Mumbai and one theme that you have spoken about is the rural focus NBFCs, the names like Gruh Finance, Repco Finance and some of these FMCG companies like Britannia and Emami. Are these spaces that one can still buy into now? Roy: Yes, absolutely. If you look from a three year perspective, these are great spaces to invest in. Especially after two years of deficit monsoon and El Nino now converting into La Nina, if we expect that monsoons will be better, not only this year, in the coming years too hopefully, then that rural theme will bounce back beautifully. The other thing which is happening is there is a lot of focus from the government side, central government side on building infrastructure in the rural side as well as helping people get a safety net in terms of crop insurance scheme or mass insurance scheme, Jan Bima Yojana what they call or even a Jan Dhan Yojana, direct benefit transfer (DBT), I think all these massive disruptive changes which are happening will have huge ramifications on the rural economy and that is one part where the base is also low because there has been no growth for last two to three years or very little growth. So, I think from base effect as well as new disruptive changes happening, that is an enormously positive area that one should look at. As you mentioned, we have quite a few portfolio stocks which are direct, indirect or partial plays on the rural and that will be a very healthy area for stock picking going forward. Sonia: What is the view or rather what is the threat to your bullish view now in the market, what is the one big threat that we have upon us? Sonthalia: If this contagion spreads of the rest of the EU and we are talking about peripheral nations also having some opinions about separating from the EU, if that happens, then there will be bigger ramifications. If it stops at just Brexit, I think we should broadly be okay. This whole episode playing out over the next three to five months, this black swan event, the contagion should not spread to the rest of the EU. I think we should broadly be fine.