Midcaps pricey; bet on stocks, not themes: Religare Invesco

Now for the first time they are getting a whole new set of entrants; small banks, payment banks and potentially at some point of time licences on tap as the Reserve Bank of India (RBI) has suggested. Therefore, for the first time you are set to see comparative intensity go up dramatically in the banking sector and financial sector but it would be a bit presumptuous for me at this point of time to give a very clear sense of where we think companies will lose out or will benefit but I certainly think competitive pressures will go up.

However, as we have seen every year, the sector post liberalisation, consumer choice improves, competition goes up, overall profits may go up but profitability starts to come under pressure and weak players get sidelined in this, so we continue to back some of the financial names that we think are well placed both in terms of the quality of the liability franchise and quality of their assets but the next two-three years will be very different from what we have seen in the past but I do not think at this point we have a specific view on specific companies because of this.

You mentioned Aditya Birla Nuvo. We do not talk specific stocks but it is a combination of two businesses. One part of it is Pantaloons Fashion & Retail and the other part is the financing business._PAGEBREAK_

Sonia: Would you recommend long-term investors buying into some of these beaten down A-grade pharma names, the likes of Sun Pharmaceutical Industries, Dr. Reddy's Laboratories etc that have had sharp knock this year?

A: When you say beaten down, you have to see what you mean by beaten down. If you mean the stocks are down 30-40 percent, maybe in few cases from their peak yes, but if you look at valuation basis, it hasn't compressed all that much, these stocks are still pricey, they were trading at a huge premium to their long-term valuations at the start of the year but earnings has seen massive cuts for some of these companies due to Food and Drug Administration (FDA) related issues, products specific issues and therefore now when you look at the numbers on 16 and 17, they are still pretty pricey and they are trading above their long-term averages buy a wide margin even now. So from a valuation perspective it is not an area which we think is still particularly attractive and there are lot of company specific issues that these companies will need to navigate before we get a lot more clarity but my basic issue is valuations.      

Latha: This year has not been a great friend for largecaps, not for those who bought Nifty exchange-traded funds (ETFs) for instance but certainly for those who have put in the right midcap funds. Should that be the choice as investors look at their mutual fund portfolios for next year?

A: I hope investors would be guided more by where valuations are rather than by looking at the rear view mirror in terms of where returns have come from because if you use this rear view mirror in the middle of 2013, you would have chosen not to invest in midcaps whereas at that point of time the midcaps were very cheap, they were trading at a significant discount to the largecaps and they were also trading at a discount to their historical average. So the simple answer is that do not look at the rear view mirror, look at where valuations are and the fact of the matter is that valuations on the midcap are now at a premium to largecaps, so if you ask me, it is not the most attractive at this point of time, maybe it has momentum but if I were to look at it from valuation perspective, it certainly less attractive than the largecaps, not to say that the largecaps are cheap but on a relative basis the midcaps are certainly not attractive.

Latha: What would be the big themes of 2016? Sectorally or as close as you can get to hinting at stocks?

A: The market has different moods. There are times where it is a lot more top down, it is a lot more macro, it is a lot more sector driven. Our sense is that India is well positioned in terms of macro. We do believe that the economic cycle will start to improve as we go ahead but if you read the RBI monetary policy last week, it is clear as they themselves point out that there are significant weak spots and issues that we need to deal with. So our thought process at this point of time is more about backing individual companies that we think and come out of this difficult period with their feet on the ground in a strong fundamental position both in terms of their business and their financials and we think those are the companies that will get the benefit of the recovery as and when it happens. So we still recommend that it makes sense to be a lot more stock specific than to think about it in terms of themes. Having said that we do recognise that corporate earnings growth in India has been mediocre for the last few years. It has been running at single digits. Our sense is that if there is a recovery and earnings growth were to accelerate, it would primarily have to come from cyclical areas and these cyclical areas could be financials, consumer discretionary, industrials but given where valuations are, we still think the discretionary and financials is slightly more attractive on a relative basis as compared to industrials. So you need to have a little bit of a cyclical theme in your portfolio to benefit from the upturn but be cautious about the valuations that you are paying for that upturn.