Domestic earnings picking up; use volatility to buy: Birla AMC

Recent jitters arising out of global macroeconomic events such as the Federal Reserve meeting tonight and the British referendum next week have posed a danger to equity market sentiment.But Mahesh Patil, Co-Chief Investment Officer of Birla Sun Life Asset Management Company, says any volatility would make for a good opportunity to buy stocks.As Co-CIO, Patil oversees management of Birla's assets of around Rs 1.36 lakh crore, and directly manages its flagship Front Line Equity Fund, in which Rs 10,000 invested 10 years ago would have turned into Rs 50,000."We may see some volatility, especially in currency markets due to Brexit. But [over the medium term] Indian market is mainly driven by domestic cues. The earnings story is starting to kick in," he said.Patil generally takes an aggressive growth approach to investment -- it is no surprise that he is bullish on high-growth private sector banks (HDFC Bank is the fund's top holding), even as he says some stocks may have run ahead of fundamentals.He added that he was also positive on NBFCs, calling them strong "long-term compounding stories".Below is the verbatim transcript of Mahesh Patil's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What have you made of the jitters in the market? We saw an unexpected rally towards 8,300 after the results and then the stalling. Is this the time that you are using to buy every dip as some people have told us?A: The rally in the market caught people by surprise and if you look at last one month, it is the Indian market, which has done well. It is one of the best performing markets in the region and across the world and primarily it was also driven because of the corporate earnings in Q4, which came and it was slightly ahead of expectations. After almost seven quarters, we have seen that earnings have surprised positively and that has given a support to the market I would say. So it is purely driven by our domestic fundamentals.However, global things are looking a bit jittery as you mentioned earlier and there are a lot of events. One event is behind us, which was the MSCI rebalance, next rebalance will be in June next year. So that is out of the window.Brexit is something which is as things are progressing in last one week, the probability of that has increased which was -- market never expected that. So that is something which can still weigh down on the global markets and how that will impact is very difficult to assess.Clearly, it will lead to turbulence in the currency markets and you could see some correction because of that but I think that is a good opportunity to buy in because we would expect at least domestic earnings story to kick in. We have been talking about it for the last quarter but finally we have seen that coming through.Sonia: What is the anecdotal evidence on domestic flows? Are you seeing flows pick up from the retail investor fraternity into mutual funds?A: Domestic flows have been pretty steady. They haven’t been as large as what it was last year. But I think we have seen steady inflows into the domestic funds and the retail flows are picking up as is evidence from the increase in the number of folios. So I think the retail penetration is increasing. We are also seeing good retail flows onto the debt side. That also has been encouraging trend.Latha: Domestic institutions have been sellers all through June just as you mentioned, the foreign institutional investors (FIIs) have been buyers through June, what explains this? You are not very comfortable at 8,300 levels?A: The buying and selling would be very minimal if you look at from the domestic side. Probably some profit taking in a few stocks, which have run up and trying to be opportunistic and looking at better entry point. That is probably what one would have seen in the June month because some of the rally in a few stocks probably was slightly ahead of expectations while earnings trajectory is that it will to some extent will factor in a few stocks especially in the banking stocks, we have seen a big rally in the last couple of months.Sonia: I noticed in one of your funds, you have increased holdings in some of the banks like ICICI Bank. Do you think the worst is over for some of these lenders?A: The banking sector has gone through a lot of turmoil in the last couple of quarters. The good thing is that we have seen a lot of actions being taken by the banks themselves by the Reserve Bank of India (RBI) and by the government to work together to resolve the non-performing assets (NPAs) in the banking system and the recent provisions, which the RBI has given to the banks in terms of shoring up the tier I capital, the news restructuring norms which have come in, I think that would help banks to address some of these issues on the NPAs more faster.The bankruptcy bill also which is likely to be take shape soon will help that. However, that doesn’t mean that things will revive pretty soon this year. FY17 will still be a pain for some of these banks especially the corporate banks but we think it is a time to start looking because it is also a cyclical play on the economy where we are seeing an improvement and some of these stressed banks where the valuations had corrected quite a bit. It was a good trade from a medium-term to long-term perspective._PAGEBREAK_Latha: What is the hierarchy in the finance space, will you still prefer only the retail banks?A: In the financial services space, it is the banks. Within the banks, you have got the private banks, they have retail banks and more corporate banks, then you have the old private sector banks and then the public sector undertaking (PSU) banks. So our preference has been for the private banks, the retail banks -- more the private banks because we think that private banks will continue to take market share. They have shown a good growth in terms of their loan book despite the average credit growth has been around 10-11 percent. Private banks had grown in excess of 15 percent or so and that they will continue to do so as the PSU banks remain stretched for capital. So that continues to remain our preference but some of the corporate banks is somewhere we would look at because there they have taken the pain.Latha: The bigger corporate lenders, even if they are PSUs?A: In PSUs, selectively where substantial pain has been taken and if one gets comfort that the worst is behind, more importantly where we are comfortable on the leadership with the measures they are taking that will help us look at some of the PSUs, the PSUs it will be very selective I would say.Latha: What about non-banking financial companies (NBFCs)? Look at the rally, 50 percent gain on year-to-date (Y-T-D), a Capital First, Manappuram, Muthoot, it is like just flying away and Bajaj Finance nothing stops it at all, can you still buy these kinds of stocks?A: The financial services sector has done it probably because of the fact that that is the only sector in the banking space, NBFC, banking and financial services space where the growth has been pretty good and steady.There is an opportunity over there. There are a lot of pockets, which are there in the NBFC space, you have the mortgage finance company, you have the auto lending companies where the growth has pick up, the consumer finance company and the retail credit growth has been very strong and looking at the under-penetration in the retail, this is a sector which will continue to grow.So given the higher growth rate as seen by some of these NBFCs, I think they are long-term compounding stories because the under-penetration in a few segments is pretty large. Even for example, the small ticket financing is the space which has picked up. The microfinance for example has been growing at a very rapid pace. We have seen a very regulatory changes happening in the NBFC space last two years, which is good in terms of NPA norms and all those things. So that makes the sector much more healthy and that is the rerating the sector has seen. I think the valuations are on the higher side but I think the growth would continue to surprise there.Latha: You don’t take profit on these microfinance institutions (MFIs) or NBFCs just yet?A: Unless there are some kind of asset quality issues in a few sector. I think one would continue to hold on, not for valuations.Sonia: The other pocket that interests me in your fund is the pharma space. You generally don’t like pharma that much but now you have included Biocon in your top holdings in the pure value fund, there is so much opportunity in the developed markets for biosimilars. Wanted to understand from you, what the scope could be for companies like these?A: Company specific one has to understand the product pipeline, which are the new products, which can make a significant change to the earnings from a medium-term to long-term perspective. That is why the pharma sector has been a mixed bag in the last one year.Overall if you look at the largecap, companies have underperformed in the last six months but there are specific midcap companies, which have done well.So similarly, in the biosimilar space also there has been a lot of investment, which has happened in the last four-five years and there are a few products, which can lead to a significant upside not in the near-term but in the next three-five years and that is where tracking the development in some of these spaces can be an opportunity with a slightly -- you have to look at these stocks from a three-five year perspective. You cannot look at it from a one-year perspective.Latha: where do you stand on consumers, they are all perennially expensive but is that still one of the safe havens?A: Consumers last year has been not such a great year from earnings standpoint. We have seen the topline growth has been a challenge. There has also been kind of a disruptions in a few areas because of corporate intensity but I think the rural monsoons are good, the rural economy picks up, there could be pick up in volumes in a few sectors. There could be some possibility to look at a few names in the consumer space where while the valuations are still higher, if the growth outlook improves, these are stocks, which would do well if the markets are rangebound because the earnings certainty is much higher in these stocks.So I would say we have been underweight the consumer sector for a long time now but selectively again here we are trying to look at specific sectors, segments where we think in this correction, underperformance one can look to increase our weightage.