While Indian auto sector has structural opportunities, the near term outlook on volumes is negative nd the valuations are not yet fully reflecting the same.
We believe FY19 earnings growth is likely to be in double digits and FY20 expectations are for strong growth on that base. From a 3-5 year perspective, India will continue to be a high growth economy with healthy earnings growth, Karthikraj Lakshmanan, Senior Fund Manager, BNP Paribas Mutual Fund said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpts:Q: The recent sharp market rally has been attributed t0 a pre-election jump on FII inflows. Do you believe there is more steam left in the market?
A: While in an election year the volatility tends to be high, going by past experience, the market focuses back on fundamentals and earnings growth post the results. In the second half of CY19, the market will likely start focusing on earnings growth.
We believe FY19 earnings growth is likely to be in double digits and FY20 expectations are for strong growth on that base. From a 3-5 year perspective, India would continue to be a high growth economy with healthy earnings growth.
On valuations, price to earnings on 1-year forward basis are higher than long-term average by around 10 percent, while price-to-book is hovering around the historical average.
Q: Could the pressure on bond yields in the US be the only reason for FII inflow into India?
A: It would be difficult to pinpoint a reason for strong inflows. Global Central bank’s dovish commentary is one key aspect for positive flows.
Besides that, the Indian market, especially mid and small cap had underperformed in the preceding year and valuations were attractive, closer to long term average.
Also, the market’s expectations of outcome from General elections could be the other factor.
FIIs had been net sellers in the last 1 year and to some extent underweight India which could also have prompted the huge inflows in a single month.
Q: How do you fare in the consumption space?
A: India has a large and growing consumer market. Close to 60 percent of our GDP is private consumption led.
Rising household income, urbanisation, lesser dependency ratio, nuclearisation are some of the key contributors to this growth.
Individuals today are also consuming more compared to a decade ago; and this changing consumption pattern is expected to benefit targeted sectors and companies that cater to these needs.
We believe consumption led growth is more structural and likely to continue for long. In consumption space, we have largely inclined towards the business to consumer (B2C) oriented companies.
It includes retail banks, insurance companies, retailers, lifestyle companies, media, paints and cement companies besides the traditional consumer staples and auto names.
Within the space as well, our focus has been on leaders, high growth companies and healthy cash flow names.
Q: What is your take on private banks and PSUs?
A: Private banks have gradually been gaining market share from PSU banks over the last two decades which is a structural trend likely to continue going forward as well.
Private banks are equipped with adequate capital and better access to the market for additional capital, if need be, beside stable management, focus on retail business and fee income leading to better return ratios.
Banking space has the potential for high growth even due to lower credit costs for corporate banks and higher retail growth for all as long as the retail credit cycle continues to be on a good path.
While private bank’s valuations have moved up, they are not too expensive from the past average basis.
PSU banks too are largely through with the asset quality issues and have got capital infusion from the Government and are still trading at lower valuations.
However, PSU banks have structural issues like the continuity of top management, necessity to improve the overall profitability of the business, better underwriting standards, market-linked pay for human resources and better adaptation of technology to bring down operating costs.
There are few PSU banks which have strong retail liability franchises, value from subsidiaries and a reasonably profitable business model which we believe could provide upside if maintained and improved upon.
Q: Are you still buying growth or value stocks after the recent midcap rally?
A: Mid and smallcaps had gone through correction for most of last year leading to the excesses on valuations getting corrected.
With the strong FII flows led market rally in the month of March 2019, the valuations have inched up from the lows.
However, across market capitalisation, there are pockets of opportunities where the higher earnings growth and/or superior cash flows justify the valuations.
We have always focused on sustainable earnings growth and healthy cash flow generation as part of our BMV framework (Business-Management-Valuation) in company selection.
We continue to look out for such companies across market capitalisation and generally have not shied away from paying a premium valuation as long as growth and earnings visibility justifies the same.
Q: Do you think the worst is over for the NBFC sector?
A: In the NBFC liquidity crisis since September 2018, the stronger parentage NBFCs and ones with retail-focused profitable franchises have been better off and have managed to sail through with slightly higher cost of funds. They have access to capital and liquidity for growth and should not be impacted much.
The wholesale NBFCs and the ones with no parentage are companies which have had issues with availability of funds besides the increase in the cost of funds.
While the liquidity situation has been improving gradually over the last few months, some of these businesses will have to settle for lower growth and profitability.
We have always preferred B2C businesses, more so in financials as wholesale lenders don't have the bargaining power on both borrowing and lending side leading to sub-optimal spreads and return ratios or disproportionately higher risks for lower spreads.
So we have not owned wholesale lending NBFCs. We continue to like the retail-focused NBFCs with good parentage and strong business models for whom funding and liquidity have not been a constraint even during the last 6 months.
Q: Are you bearish on the auto space or is it a good time to buy select stocks?
A: We have been underweight auto sector within the consumer discretionary space due to sluggish monthly volumes which have been due to varied factors like liquidity issues, higher insurance costs, more inventory in the channel and increased cost of vehicle due to regulatory changes.
Higher crude prices too impacted buyer sentiment for some period during CY2018.
While Indian auto sector has structural opportunities, the near term outlook on volumes is negative and the valuations are not yet fully reflecting the same.
Hence we continue to underweight the sector.
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