Upward spike in commodity prices in focus: Motilal Oswal AMC

However, he warns that one has to be careful about regulatory challenges.

He doesn’t think IT has become more of a stock-specific story. Most of the companies in IT are facing similar challenges, he said.Below is the transcript of Taher Badshah’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.Prashant: I just want to start with banks. If I look at the Motilal Oswal Focused 25 portfolio, over 50 percent of your portfolio is in two sectors, autos and banks. Let me just address banks specifically. With the Essar-Rosneft deal which was announced at the beginning of this week, may have turned very bullish on corporate focused banks. You do not exposure to primarily what you would describe as corporate focused banks, ICICI Bank and Axis Bank. You have investments in HDFC Bank, etc. As a fund manager, do you feel comforted also because some of these banks are trading in deep discount to the HDFC Banks of the world? Are things changing? Is the tide turning? What is your view?A: At the margin, you may be right that there could be some tide, which turns favourably for some of the more corporate focused banks or some of the public sector banks but that does not necessarily mean that growth will get constrained for the other banks.Broadly, we are also seeing, in addition to some of the stress getting addressed, in addition to which we are probably also likely to see improvement in overall credit growth getting better compared to what it has been in the last couple of years. So if that were to happen then in any case, there is growth for the other banks as well. The private sector banks as well.Some of them have been smartly gaining market share as well from quite a lot of the other part of the public sector space because the public sector space is also pretty wide and if there is a lot to offer in terms of market share or a lot to take in terms of market share out there.So we do not think the growth opportunity is going to get constrained and in general, we have kind of kept a lesser eye on valuations while taking our stock positions or taking our portfolio positions. We have been more worried about or concerned about longer-term growth and longer-term structural benefits. So, from that perspective, we are fairly well positioned. Amongst the public sector banks, we do have a little bit of exposure now. It is not that we do not have any exposure at all and we are comfortable with that exposure that we have at this stage.Ekta: What is your view on the markets? We have been stop and start since the surgical strikes and the Nifty breaking even that level post that.A: The internals of the market are not bad at all and things are gradually improving. We have got a good amount of things going for ourselves from the government side both in terms of reforms, activity levels picking up, investments going up and so on, the foreign direct investments (FDI). So, that is happening.At the monetary level too, we are relatively comfortable both in terms of inflation as well as in terms of interest rates. But the only thing that is now coming back into focus is the upward spike in commodity prices and that is something which one has to guard oneself against and that is something which may kind of tell on some parts of the market. The other of course, being that we need to see, we are waiting for that hump of the growth to come back into the overall numbers.So, in that regard, at some level, there is a certain amount of valuation which is already being built in and baked in by the markets. It wants to see more evidence of growth coming into the system. Maybe this quarter will show up a little bit. Larger expectation is out of the second half. And if we see numbers supporting, then we will make further headway up into the market. Till then it will be a kind of gradual approach. I do not see any reason for any great deep corrections unless influenced by significant and unexplained events.Prashant: You have exposure to some pharmaceutical stocks. I understand that you have recently purchased some quantity of Jubilant Life Sciences. It has done phenomenally well. I do not know if you want to talk about the sector or prospects of the company, that would be great.A: We have got some exposure to a few mid-sized pharmaceutical companies and some of them have been with us for a fairly long period of time. Basically, these have been the kind of very bottom-picked opportunities where we have seen typically these companies being very strong in the domestic circuit and having decent cash flows out of that domestic business plus, looking forward to the opportunity of making a breakthrough in the US markets and other developed markets. So, it has helped us be in good stead, because larger part of the business till now has been driven by domestic and that has ticked along pretty well in terms of growth and without significant regulatory challenges at their end. Now, the US opportunity or the developed market opportunity, generics opportunity for some of these are now on the cards and we are looking forward to that part of the growth option to start crystalising. So, all in all, these stories have kind of panned out pretty well especially in the light of the fact that the sector has not done too well. And that has been the approach. It has not been a sector call.Prashant: Jubilant Life is a new addition?A: Yes, that is something that we have added more recently. But, again, the story is largely the same that we like companies, at least in this sector one needs to be a little more careful about regulatory challenges, if they are behind and if you are reasonably comforted with growth.Prashant: You would look to build positions here across funds because obviously, you like this story?A: This is not something which I can talk about, but yes, as you have identified, this is as part of the disclosure, it is in the portfolio as of now.Ekta: Has IT become more and more stock specific story as well, something that the pharmaceutical space is, especially post this quarter?A: I do not think so. There is still quite a lot of sector or broad market headwinds, which exist and a little bit of a structural headwind also, which exists for this sector. This structural headwind is entirely not crystallised and some companies, smarter ones are trying to defend it and fend off that structural headwind. But still there is a fair bit of a slower activity on the ground overall and I would not say that it is at this stage very stock specific, barring those, which are not necessarily linked to IT services, but probably are a combination of IT related, but product services. Those are opportunities which probably are less head-winded but otherwise, barring those most of them are facing similar kind of challenges.Prashant: As far as autos are concerned, as I began the interview by saying, autos and banks are some of the largest occupied top slots in terms of overall weight in the portfolio. In your assessment, are autos, especially players like Maruti, set for, they have kind of moved on into another gear altogether. Some of the numbers they are reporting monthly, they are very large and it is a big step up from as recently as last year.A: That is correct. I have said this on earlier occasions also that in case of stocks like Maruti in particular and particularly the car industry, we now need to get into a situation where the volume growth needs to come back. The last couple of years were substantially driven by margin expansions and benefits on raw materials and so on and then they have exploited it to great effect. I am happy to see that volume trajectory is now is getting into a new zone and getting stepped up.We are hoping that the conditions which are developing will sustain these growth rates from a macro perspective. To that extent, some of these names that figure in our portfolio are largely a consequence of that that we are seeing ultimately he next round of growth being more volume led growth and for companies, which are also becoming a little more strategically well positioned from the perspective of taking up the value curve. So, that story still holds relevant with many of our auto companies that we have in the portfolio and that is also the reason why it forms a larger part of our overall exposure today.