Last Updated : Apr 12, 2017 03:59 PM IST | Source:

GST woes short-lived; strong auto cos to ride out BS-IV hit: Motilal Oswal AMC

Large-cap companies will outperform its mid cap counterparts in the medium term, however, over a long term period midcaps will have an advantage over large caps, as chances of finding fast growing emerging companies are more in midcaps

Himadri Buch
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Large-cap companies will outperform its midcap counterparts in the medium term. However, over a long-term period midcaps will have an advantage over large-caps, as chances of finding fast-growing emerging companies are more in midcaps, believes Siddharth Bothra, Senior Vice President, Fund Manager, Motilal Oswal Mutual Fund.

In an interview to Moneycontrol, Bothra said that market earnings growth in FY18 could face challenges from supply chain rejig due to GST –which is seen as impacting short-term demand.

A full marathon runner, Bothra, believes that in the long term GST could be a game changer for India and positive for slew of industries.

He also said that markets will factor in the positives of GST as and when the benefits become clearer.

Bothra said that BS-IV norms may disrupt the auto sector in the near term but auto players with a strong consumer franchise would be easily able to pass on any price hikes due to adoption of these norms.

Below are the excerpts of the interview:

Q. How are you seeing the markets panning out ahead?

Bothra: We are bottom-up investors and as such continue to see a lot of opportunities to be excited about. And hence we continue to be positive on markets. Eventually, market returns would primarily reflect earnings growth for the broader market.

Though overall markets have moved up 36 percent from its February 2016 low, earnings growth in FY17 is likely to be ~-1 percent.

While, in the last 2-3 years, there have been a lot of reforms and new development initiatives taken by the government, the results of the same are not yet evident on the ground.

Going forward, there are several catalysts which indicate that earnings growth should pick up 1) key reform measures and other government initiatives should start becoming visible, 2) operating leverage from core industries which are currently operating at low utilization rates and 3) some resolving of key concern areas in the economy.

Q. What kind of earnings growth are you seeing in FY18?

Bothra: We think earnings growth for the Nifty 50 Index over next three to five years, should be significantly higher than the Nifty earnings growth of ~6 percent CAGR over FY07-17E, given that we are coming from a prolonged period of depressed earnings growth and low base.

However, market earnings growth in FY18 could face challenges from supply chain rejig due to implementation of GST – impacting short-term demand. Also, FY18 could continue to see some lingering impact of demonetization across a few sectors, though we feel this could get largely negated by the emergence of pent-up demand in various sectors.

Q. Is GST factored in the market movement?

Bothra: We believe long-term GST should be a game-changer for India and significantly be positive for many industries. Our sense is markets will factor in these positives as and when these benefits become more clear. The short-term rejig in supply chain due to GST could cause some turbulence, which we believe long-term investors will overlook.

Q. Portfolio of Focused 25 Fund is largely inclined towards banks and auto. Why?

Bothra: We are benchmark/sector agnostic and bottom-up stock pickers. The reason for higher allocation in the financial and auto space is that both these sectors provide significant opportunities to cherry-pick bottom-up ideas.

For example, while our weight in the financials is ~45 percent in our MOST F25 fund, almost ~17 percent is in life insurance. Unlike banks where there is high leverage, life insurance companies are net cash companies, with high ROE and low reinvestment requirements.

Given in India most of these companies typically resort to reinsurance to lower such contingent risks, these companies are also low-risk plays with almost consumer-stock like characteristics. Within auto also we have plays which are net cash companies that are market leaders in their respective segments such as Maruti and Eicher.

Q. Do you think auto sector as a whole will take a hit because of BS IV norms?

Bothra: In the near term there could be some turbulence for a quarter or two. But eventually we believe auto players with strong consumer franchise would be easily able to pass on any price hikes due to adoption of these norms. Moreover, this may open up tremendous opportunities for some of the tier 1 auto ancillary players such as Bosch.

Q. What about banking and financial sectors? How are you looking at private banks vs PSUs?

Bothra: We are positive on financials. We continue to favour some of the private banks with predominantly retail, SME, rural focus such as HDFC Bank, Kotak Mahindra Bank, RBL Bank and DCB Bank. While the banking space is seeing significant increase in competition from several other segments, we find that the incumbents here are actually at an advantage and aggressively adopting changes.

Q. What is your take on NPAs situation of PSU Banks?

Bothra: Resolving of NPA issues has been a key concern for the economy for a long time now. While there seems to be no immediate solution in sight, our sense is that it is moving in the right direction, given the spate of asset sales by few large corporates and increased government focus to find solutions for the same. Incrementally, developments are positive and likely to accelerate here.

Q. Which are the other sectors you are upbeat on at this point and time?

Bothra: Some of the key sectors to look out for would be ones which benefit from a shift to organized segment, a shift from physical to financial savings and rural focused plays.

Q. How are looking at defensive sector pharma?

Bothra: The sector has historically been one of the best hunting grounds for identifying multi-bagger ideas. Even if you look at some of our best performing stocks in the portfolio over the last 2-3 years it has been companies from the pharma sector like Ajanta, Alkem Laboratories and Jubilant.

Q. What is strategy you adopting in your funds?

Bothra: We are bottom-up investors. Our portfolio construct is focused and concentrated with typically 18-21 stocks, with top five stock ideas accounting for ~45 percent weight. We do not believe in taking cash calls so we are typically always fully invested.

Q. Do you think midcaps will continue to outperform largecaps ?

Bothra: This would depend on your time horizon, while over a long term period I believe midcaps will have an advantage over large caps, as chances of finding fast growing emerging companies are more in midcaps.

We believe in the medium term the risk reward is more favourable for large caps vs the midcaps. Over, CY14-16, the CNX Midcap 100 Index has generated 21.2 percent CAGR returns, while the large cap CNX Nifty Index has generated 9.1 percent CAGR returns , which is a ~12 percent CAGR variance between the two indices over CY14-16.

While, this variance can only be partly explained by factors such as superior companies composition in mid cap index or earnings disparity between the index, part of this divergence can also be attributed to more liquidity chasing midcaps during this time period.

This is also reflected in the valuation ratios of the two indexes with CNX Midcap 100 Index trading at 29.3x PER FY17, while the CNX Nifty is trading at 21.9x PER FY17 (Source: NSE Website).
First Published on Apr 12, 2017 12:16 pm
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