Banking and building material stocks attractive after recent fall: Sorbh Gupta, Quantum MF

As on September-end, the average assets under management of the fund house stood Rs 1,241 crore.

Despite being sector agnostic, giving some colour in terms of sectors, Gupta said, that largecap technology companies are reasonably valued and offer good upside as IT companies have realigned their service offerings towards fast-growing digital services and seeing a revival in growth rates.

He also feels valuations in banking and financial services and building material have also become attractive.

Quantum Mutual Fund is also seeing growth revival in capital goods and consumer names but they continue to be prohibitively expensive. Excerpts from the interview:

 Q. Do you think the selling pressure will continue in the broader market until next Diwali or is it the right time to catch the falling knife but selectively?

A. A combination of high valuations and increasingly tight liquidity condition, both domestic and global, has resulted in the sell-off in the past two months. While the valuations in certain sectors like building material, and banking and financial services have become more realistic, other sectors like consumer staples and capital goods still appear overvalued.

The tight global liquidity scenario is expected to continue as interest rates globally are rising. So, there will be bouts of sell-off in the near to medium term. On timing, we believe the market is giving lot more opportunities to pick stocks at comfortable valuations for value managers like us now, than say six months or one year ago.

Q. What are the major factors which will impact markets till next Diwali?

A. Rising global interest rates, tariff war and sustainable domestic economic recovery are factors that will have an impact on the markets in next one year. Rising interest rates can impact equity flows into emerging markets like India. The market rally in the past couple of years can more easily be explained by tranquil liquidity environment, than earnings growth.  So, reversal of this remains the key risk for the markets.

India being a domestic consumption-driven economy, tariff war does not have a significant impact, however, it can impact some export-driven sectors like IT and Pharma.

We are amidst economic recovery. There is a pick-up in consumption demand both in rural and urban areas. The capital goods companies are also seeing improvement in their order book. Any deviation on the trajectory of this recovery will have an impact on the market.

The outcome of general elections in mid-2019 could be a sentimental dampener or booster. However, notwithstanding the type of government (coalition or absolute majority), over the past 30-35 years, the Indian economy has grown at an average of 6.2 percent YoY. So, for a long-term investor in equities, election outcome should not matter much.

Q. Most analysts have complained about high valuations of Indian equities. Do you think that concern is somewhat taken care of now?

A. We have been highlighting this for some time now. Between FY14 and FY18, Sensex earnings have been flat, however, the benchmark has gradually moved up. This has been generally true for the broader market also.

As explained, the valuation of stocks in some sectors like building material and banking and financial services have become more reasonable, other sectors like consumer staples and capital goods still appear overvalued.

Q. Which are the sectors you are upbeat on, and which ones are you avoiding?

A. Ours is a sector agnostic approach and our investment decisions are based on valuations. Among sectors, largecap technology companies are reasonably valued and offer good upside. These companies have realigned their service offerings towards fast-growing digital services and seeing a revival in growth rates.

Valuations in banking and financial services and building material have also become attractive. Both these sectors grow at a 1.3x to 2x of GDP growth rates and with economic recovery unfolding, growth rates should pick up in companies operating in the sector.

We are also seeing growth revival in capital goods and consumer names but they continue to be prohibitively expensive.

Q. How are you reading September quarter results from India Inc. up until now?

A. We have a little less focus on quarterly numbers but our interaction with company management and related channel checks suggest pick-up consumer staples & consumer discretionary demand both in rural and urban areas. The CV demand uptick and improving order book of capital goods company is also indicating improvement in economic activity.

Q. Foreign investors have been consistently pulling out money from Indian markets. What is your view on them?

A. Higher interest rates and strong economic activity in the developed economy is making emerging markets including India look a little less attractive in the near term.

We have seen this happen in the past too, our view here is, India is a long-term growth story and GDP growth rates can be in the range of 6-6.5 percent for a sustained period of time. Double that of the world GDP growth rates. This will attract long-term capital in the future too.

Q. What is your advice to investors at this point and time?

A. We suggest investors must have a long-term view and use the near term volatility to allocate capital towards equities. Sharp falls like witnessed in the last two months are good opportunities to add lump sum investments with a long-term perspective. Investors who find it difficult to time the market falls should use SIPs to build their allocation towards equities.