Krishna Sanghavi, CIO-Equity, Mahindra Manulife, expects FY25 earnings to get a boost from election spending, a pickup in corporate capex and exports.
As the market trades at record highs, Sanghavi said the consumption sector was one of the few segments offering reasonable valuations, considering the recent consolidation.
Sanghavi, who has spent 27 years in mutual fund and life insurance industries, told Moneycontrol in an interview that government owned banks are reasonably valued as many of them are adequately capitalised and have a road map for corporate credit. Edited excerpts:
Are oil marketing companies still cheaper compared to other PSUs?
PSU as a universe offers good opportunities to invest, as many of these companies are engaged in core sectors of the economy. Oil marketing companies (OMCs) have historically had volatility in earnings, as both refining margins and marketing margins have their trajectory linked to crude prices as well government policies.
OMCs have had a good 9MFY24 as lower crude prices have not been passed on to customers through cuts in petrol and diesel prices. It is tough to estimate fuel price cuts and change in profitability in near term. However, when we look at the medium term, the Indian economy needs more of petrol and diesel consumption and this, in turn, needs new refining capacities to meet needs.
The OMCs would have the growth path as they lead capacity creation and start earning refining profits when those capacities commence. Marketing margins remain linked to crude prices and the ability of OMCs to pass on the crude prices. We have had benign crude prices in the past year but crude prices are difficult to predict considering geopolitics as well as global growth dynamics.
So, while OMCs are cheaper than PSUs in railways and defence, the underlying variables on earnings growth vary. PSUs in the financial sector (mainly lenders) are as yet reasonable on valuations as many of them are adequately capitalised and have a road map of corporate credit demand for corporate capex in core economy sectors like power, refinery, metals, etc.
Do you expect Q4 earnings to be much better than those in the third quarter?
Q3FY24 results have been good, led by a healthy earning growth led more by margin expansion across many cyclical sectors. Oil marketing companies have contributed significantly to this earnings growth.
We believe that Indian corporates margins are at elevated levels and incremental earnings growth requires a support from volume-led growth in economy. We may not get that very quickly in Q4FY24 itself, as the headwinds of rural economy as well as global demand is unlikely to change in this quarter.
When we look at FY25, there would be tailwind of spend from elections (supporting rural consumption), corporate capex pickup post the election as well as some support from exports led growth as global economy stabilises.
Which are the sectors available at reasonable valuations?
With markets trading at all-time highs and many companies/sectors at premium valuations, we need to compare relative growth and valuations. On the market capitalisation front, largecaps offer better value than midcaps and smallcaps. In a way, it’s a little in reverse vis a vis what markets were offering a year ago, in February 2023.
When we look at individual sectors, we need to compare long-term valuation trends as well as growth trajectories. While many companies operating in the core economy sectors have appreciated well but look reasonable vis a vis the growth opportunities in medium term. These core economic sectors offer a growth visibility as the Indian economy offers potential for capacity creation in power, metals, refining, etc. These sectors are currently operating at near peak utilisations and good profitability.
The cash flows from these profits are likely to be used for future capacity creation and hence re-investment opportunity makes these sectors attractive despite a good run up in prices. Similarly, for PSU banks. They have been re-rated but that is supported by their financials. Profitability and asset quality for PSU banks are at their best, perhaps in the last 12-15 years.
Some of the favourite sectors of the past decade, private lenders and consumption stocks also offer value when we look at the peak valuations they enjoyed in past. However, investor ownership and gap closure in relative earning growth vis a vis PSU bank or core economy sectors is a variable to monitor.
The consumption sector offers a reasonable valuation considering last two-three years of consolidation, however, we need to track the growth in earnings as consumption at lower income levels is yet to pick up.
What is your strategy behind the new multi-asset allocation fund?
We believe asset allocation plays a crucial role in financial planning and wealth creation. Asset classes like equities, fixed income, commodities (both precious metals as well as industrial raw material) and Reits/Invits have their own risk-return profiles as well as time cycles linked to phases of economy. We believe each of these asset classes undergo their own periods of excesses in valuations. Markets have taught us that these excesses play out on both sides. The multi-asset allocation strategy aims to identify these excesses and benefit by active reallocation across asset classes.
The aim of the fund is to build a composite fund composed of an all-cap portfolio of equity, active duration management in the fixed income portfolio with reasonable accrual returns along with tactical allocations to gold/silver. The fund will endeavour to provide investors with the benefit of reasonable returns with relatively lower levels of volatility.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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