Max Life insurance is underweight on IT sector. The sector has seen best of its growth in the recent years and is unlikely to see the growth it has seen in the past, according to Mihir Vora, Director and Chief Investment Officer, at Max Life.
The Indian market is fundamentally sound and sentiment is likely to remain positive, but there has to be clear signs of macro and micro growth to take the marklet to the next level, says Mihir Vora, Director and Chief Investment Officer, at Max Life.
The insurer is underweight on IT sector. In an interview to CNBC-TV18, Vora said the sector has seen best of its growth in the recent years and is unlikely to repeat the performance. IT as a sector would underperform the market going ahead, he said.
IT biggies like Infosys, TCS and Wipro failed to impress in the June quarter. Infosys missed analyst estimates and lowered its constant currency revenue growth guidance to 10.5-12 percent from 11.5-13.5 percent.
Meanwhile, Vora said that the company is underweight on FMCG sector as the valuations are not justified.
Below is the verbatim transcript of Mihir Vora’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: The million dollar question or the billion dollar question now is this a market which is still a buy?
A: Is the market a buy? I would say that the market is on a fundamentally strong grounds overall. So, for the long term we do expect earnings growth to be healthy. However given the fact that we have already seen the best of the results of the last quarter coming out and it is still low single digit kind of a number overall we do need now growth acceleration to take the market forward. We need tangible signs of growth acceleration specially in the private sector capital expenditure (capex) going forward.
So, I would say given the fact that global liquidity and flows continue to be strong and we have negative interest rates in a lot of the countries, especially developed countries globally liquidity and global flows should continue to keep the sentiment high. So, I would say while we need some extra fundamental kicker from the Indian markets to go up further the sentiments should remain positive. So, I would say let us say we are in a zone where we should see some kind of a consolidation or a time correction I would say.
Latha: I particularly wanted to ask you about some areas in the midcap space which have started losing air as it were. We have seen sugar stocks declining a goodish bit and now logistics after the Allcargo Logistics Limited numbers we have seen even more of a fall though some of them have been falling before that like we are in logistics. How would you approach the space, it was such a big Goods and Services Tax (GST) play?
A: What you do see is that when stocks get bid up for a particular event they too tend to correct little before or start correcting after the event is done because yes, the GST bill is passed or rather there is a good chance that will be finally implemented or passed in the winter session, but stocks had already been bid up in advance of that. So, you would see a correction and a round of profit booking in the stocks where this was the only play rather than the quarterly fundamentals.
Sonia: One of your top holdings is Infosys. I know you don't want to comment on individual stocks but I wanted your thoughts on the sector which is in a bit of a doldrums right now. Is this the best time for long term investors to increase their allocations to some of these top tier names like Infy and Tata Consultancy Services (TCS) or do you think that you will get better levels over the next six months?
A: Tech as a sector we are underweight. We do believe that the best of the growth that the sector has seen is past us. So, for the kind of growth that we have seen over the last five or ten years is not going to be the kind of growth that you are going to see for the next three to five years. So, it looks like more of a 12-15 percent, at best 15 percent kind of a number as far as earnings growth for the sector is concerned.
So, in a country like India where you do believe that the local story is going to be much stronger in the coming future, tech as a sector would underperform as far as earnings growth is concerned. So, structurally we would be underweight. However we must recognise that the sector has companies which are very high quality as far as operations are concerned, as far as the cash flow generation is concerned, as far as the capital efficiency is concerned. So, it is not a sector which will kind of go down by dramatic amount if there is a slight disappointment in numbers.
So, we have seen a couple of disappointments in the last couple of quarters. So, stocks have been bid down and have underperformed for quite some time and this is a sector where you do want to pick up quality stocks when they have underperformed or a long period of time.
Anuj: I am looking at your top overweight calls. You have industrials, consumer discretionary and private financials and all of them have done well. Out of them industrials may still have valuations comfort but consumer discretionary in private financials may not. So, incremental thoughts on this space?
A: Consumer discretionary also includes automobiles where there is some valuation comfort and the numbers are still okay, earnings as well as topline numbers. So, I would say that we are not too worried about growth and valuations in the automobiles segment specifically. We used to be overweight on auto ancillaries but some of them have disappointed over the last one year. So, we have kind of reduced holding there.
As far as the industrials and financials are concerned the bet continues to be on the domestic recovery aided by government spending as well as private sector capex picking up in the later half of the year. And private sector financials of course they need to pick up the slack which public sector banks have left as far as credit growth is concerned and we do believe that much higher than average growth rates will continue in this segment for a while.
Latha: Generally where are you seeing the markets in 2016 or the rest of it? Do you think there is a lot of gains left or are you keeping cash and you are expecting that you are going to get stocks much cheaper than current levels?
A: For the rest of the year if you are talking about the calendar year I would say that there are limited absolute gains that we see in the broader indices. Maybe 5-10 percent at best till December. So, we are doing a couple of things, we are being more stock specific and we are keeping a little bit of cash on the sidelines to pick up those opportunities if there is a sharp opportunity in any stock or sector.
Sonia: How are you reading into the global cues because that seems to be the only area where we could get any kind of curveball over the next 3-6 months, if there is a fed rate hike, say by the end of this year do you think that there could be a big turn of trend in emerging markets like India?
A: The global markets are anyway in very extraordinary times I would say with 30 percent of the global bond indices trading at negative interest rates. So, we are really in uncharted territory and like we saw in last August and in the month of February 2017 any change in perception or any change in the direction of the currency or the perception that central banks are not doing enough to keep the party running will create these sharp volatilities in the market. So, we cannot rule out incident or two like the one that we saw in August or January in the next 6-12 months.
Latha: You spoke about consumer discretionaries and you spoke about the automobile sector. How are you placed in other areas of consumer discretion? Are you still comfortable with FMCG, if you can categories which parts of that space you like?
A: in FMCG we are underweight. We just cannot understand the valuation. So, in spite fiscal some stocks showing some growth especially because of improvement in operating margin we are still trying to get our heads around the valuation. So, we would continue to remain underweight even if the sector shows a bit of growth because there is no comfort as far as valuations are concerned.
Anuj: The question I was coming back to private financials in particular, there is a bit of a dichotomy, you have seen the economy facing stocks starting to make a bit of a comeback, retail stocks are anyway doing well and private Non-Banking Financial Company (NBFCs) have done remarkably well though some of them are trading at 4-6 times price to book and you have exposure to all of these spaces. Which one are you most bullish on right now?
A: We are actually bullish on all the segments frankly as far as private sector financials are concerned including NBFCs, macro finance and private sector banks. The big picture being that 60-70 percent of the banking system which is the public sector undertaking (PSU) banks doesn't have capital to grow and if we are to grow at anywhere between 7-8 percent which our hope is or at least the government is trying to make that happen you do need a credit growth of 15 percent.
To generate overall system growth of 15 percent in credit the private sector financial which are 25 to 30 percent of game have to grow at levels which are far in excess of 15 percent and that trend is not going to change unless we see a big move by the government and the Reserve Bank of India (RBI) to figure out a way how to capitalise the PSU banks. So, this will continue for a while.
Sonia: I wanted to also ask you your view on the cement space. Do you still see any kind of valuation comfort there because you do have exposure to some of the wealth creators like Ambuja Cements, UltraTech Cement. Is there more scope there?
A: Cement is a sector which has surprised for many years now both in terms of valuation as well as stock price movement I would say. However the big picture here is that we see the larger companies growing not only by Brownfield and Greenfield expansion, more Brownfield rather than Greenfield but more importantly because of the stress in some of the other groups which have cement capacity the larger companies are beginning to grow inorganically also.
So, not only is the markets and valuations factoring the organic growth and the price power that the sector has demonstrated even in bad times but it is now also beginning to understand that the larger companies might actually grow a bit faster than organic growth because of acquisitions. So, that is the premium that the market is paying.The Great Diwali Discount!
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First Published on Aug 23, 2016 10:04 am