We are not very optimistic on the sector as capacity additions are likely to continue and pricing discipline will therefore be intermittent in nature.
The core earnings growth will revert to 12-15 percent in FY21, said Rahul Singh, CIO-Equities, Tata Mutual Fund in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Do you feel fractured mandate in general elections is the biggest risk in 2019?
A: Yes, the risk is there but the probability has reduced somewhat over the last couple of months. However, it should be noted that earnings drivers for next year viz. corporate banks, consumption and private capex are somewhat independent of election results and hence the impact on fundamentals would be less severe.
There could, however, be impact on flows which could determine market valuation.
Q: Banking & financials are leaders in the current rally. What is your take and are you still a buyer in these stocks?
A: These banks have gone through a deep cycle of bad assets recognition and provisioning. Therefore, the recovery period could also last couple of years. In addition, there are tailwinds on core business which will further support earnings.
Q: Many analysts are betting on double-digit earnings growth (around 20 percent) in FY20. What would be your forecast? Which sectors should investors focus on?
A: Earnings growth in next year could exceed but slightly optical as it's driven by sharp recovery in bad loans in corporate banks and couple of other sectors/companies.
The core earnings growth will revert to 12-15 percent in FY21. We would back the sectors which will lead this earnings recovery in FY20 - corporate lenders being one example.
Q: FII inflows of more than Rs 60,000 crore (Feb-Mar-Apr) have been boosting the rally. Many analysts saying it is mostly ETF money, so is it a risk to the market?
A: Out premium valuation over EMs is back to around 50 percent which is around the average levels although it went to 65-70 percent during 2018. That phase of overvaluation is behind and at the current premium to EMs, provided we have a reasonably positive election outcome, the FII interest should sustain if not increase.
Q: Does the rally of over 10 percent since February 19 indicate we are still in a bull run or is it just a euphoria led by FII money on undervalued stocks?
A: The macro level trends are supportive for flows and market valuations but some micro level factors are deteriorating especially on the consumption side. Overall, this could lead to broadening of list of stocks that can participate in re-rating contrary to what happened in 2018.
Q: What is your call on cement stocks? Do you still have exposure to midcaps or smallcaps in the sector?
A: We are not very optimistic on the sector as capacity additions are likely to continue and pricing discipline will therefore be intermittent in nature. Since valuations are not inexpensive, we are being selective and taking stock-specific calls in the sector.
Q: Auto was the underperformer in last one year. Will you wait for better levels before investing in auto space or is it a good time to enter?
A: Cost of ownership for vehicles across categories has risen and will further go up post new emission norms. The consequent pressure on demand would, in our view, throw opportunities to enter some high quality names in the sector from a longer term perspective.Disclosure: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.