Bullish on autos, NBFCs; see no recovery in private capex: Gubbi

He is also bullish on private sector banks and non-banking financial stocks but not public sector undertaking banks because of no recovery in their balance sheets.

However, he is very skeptical about industrials since there are yet no signs of pick up in capex for them.Below is the transcript of Pramod Gubbi’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: Since you represent the sales side, I want to know what has been the feedback from global investors. Post the Fed move, the market had one big pop and after that we have seen a bit of a consolidation. For global equity markets what is the sense from here on?A: Foreign institutional investors (FII) into India are taking a more discerning look. A lot of the run up due to liquidity has not come through the traditional long only investors although they are also buoyed by the way the markets are rising and are participating actively in fundamentally strong stocks.But much of the fundamental or rather, the drivers for the rally is coming through the liquidity through exchange traded funds (ETFs) and more liquid funds, which allow investors to get in and get out quickly. To that extent, yes, people are cognisant about the liquidity and are worried about second guessing where and when that will end. They would rather stay invested in stocks that they believe are good from a fundamental and long-term perspective and take benefit from the buoyancy in the markets.Sonia: Since this rally is being driven by ETF money, where do you see that money flow into over the next 3-6 months?A: Given most of the ETF vehicles tend to pass itself in the largecap and the index stocks -- that is where the drivers are -- but the rest of the market because the opportunity is pretty much saturated in largecaps, at least the way we see it, tend to participate in relatively smaller or largish midcap names. If the liquidity continues to flow, there will be a more broader market rally, but like I said, neither I nor most of our clients want to second-guess if and when that liquidity is going to end. So, this is the big caveat that this liquidity has to support that sort of a broad market move.Anuj: The problem for this market has been in terms with leadership. It is struggling a bit off late in terms of banks, IT, of course, autos have done well, but they cannot contribute much beyond a point. Reliance has come back, ITC is making a bit of a comeback? What do you see as the leadership space going forward?A: Fundamentally speaking, where there is potential for earnings growth to sustain and therefore justify the sort of valuations that we are seeing may not be that easy even with the sort of earnings growth but relatively speaking it still remains consumer and consumer discretionary, private sector banks and non-banking finance companies (NBFCs) where earnings growth could somewhat justify the valuations.Elsewhere, given the state of the economy, we do not see any private sector capital expenditure (capex) picking up nor are we seeing any sort of recovery in the public sector banks’ balance sheets. So to that extent, it will remain limited to these sectors where we will see earnings growth buoyancy and an easy way to justify valuations.Sonia: It seems like there is a churn taking place in this market now and even if you look at what is happening today, reliance is zooming, a new 52-week high there, seems to have assumed leadership once again. How would you approach this change in texture of the market constituents?A: I would rather commenting on smaller specific stocks, like I said, if we take a top-down view of where the economy is headed, the sort of changes that this government has implemented, both policy wise and also certain other things like the attack on black money and stuff, it is clear that there will be pockets of the economy, which will benefit and will continue to grow the sort of stuff that I mentioned, consumer, both urban, and hopefully with the monsoons, rural consumption also holding up. Also, given the way public sector banks have left an open field in terms of market shares to be taken away by the private sector banks and NBFCs, those are obvious areas.And like I mentioned, industrial capex is unlikely to come up so, any sector exposed to private sector capex is unlikely to see any sort of recovery and hence, profitability in that sector will also remain fairly muted. For that to attain any sustained leadership in the market, I see it as a challenge. In the short-term maybe driven by liquidity might see a bump up, but for a sustained change in the texture of the market, in terms of leadership, we will have to see some structural changes or rather clear changes in the way the economy or rather the leadership in gross domestic product (GDP) growth is driven by those cyclical sectors.At this stage, we do not have any evidence that that is the case, so any sort of change is temporary in my view.Anuj: You spoke about ETFs and truth to be told, a large part of the money is via ETF and that has driven the markets as well. But what has been the feedback from the long-only India funds, some of the largest investors into India? Are they investing in India right now or are they raising cash levels, if you have had any kind of feedback from any of your clients?A: People are circumspect clearly, given the rally and there is not much money left on the table in terms of margin of safety as far as valuations are concerned. However, there is increased confidence in the way the economy is turning, people are fairly comfortable with the way the government is ringing in policy changes.To that extent, they remain structurally positive, but are a bit circumspect in terms of near-term valuations. The hope is that there will be some sort of a correction where global asset allocators will take a more longer-term view and start putting in money through traditional long-only funds rather than taking the temporary or easy way through ETFs. That is when the market will attain more sustainable rally than being parked in vehicles, which are easy to get in and get out.To that extent, the long-only clients are circumspect because the nature of money that has come in can be quickly reversed.Sonia: I wanted your thoughts on the auto space, because that has been the best performing space this month. Do you see the trends continue on the upside?A: Yes, we have maintained our view that auto is going to be a structural leader in this market given the penetration levels and also, the short-term drivers in terms of the Seventh Pay Commission and a pickup in consumer discretionary spending. So, all the ducks are lined up if you are comfortable with valuations, that is the only issue in terms of short-term and that also, we have maintained that good quality companies, which you often find in this sector, valuations can be overlooked if you are taking a relatively longer term view. So, that is a sector that we continue to support.