Earnings to grow at 15-16% in FY17; like pvt bks: Birla Sun AMC

The global as well domestic situation is now looking better, says Mahesh Patil, co-Chief Investment Officer at Birla Sun Life AMC. The global markets are exuding some normalcy and the commodity prices have also seen some upmove, he adds. The only blip, Patil says, is subdued earnings growth. However, the worst in quarterly earnings is over, he says adding that there are expectations of a 15-16 percent earnings growth next year. With the expected implementation of the Pay Commission and good monsoon, consumer discretionary segment is bound to grow. Sectors like auto ancillaries will see decent growth despite slowdown in US and Europe market. Patil is bullish on private banks having large retail base. Private banks, which have gained fair amount of market share and where asset quality issues are minimal, are a good bet for long term, he says. While the public sector banks have seen decent clean-up post Q3 numbers, asset quality issues will persist for some time, he adds. He expects non-banking finance companies (NBFCs) like housing companies to do well on back of government focus on low-budget housing. Patil also recommends power transmission and distribution sector. More pick-up will be seen in domestic market with implementation of the UDAY scheme, he says. For a 6-12 months period, it is better to invest in some medium or large fund, Patil says. Despite weak sentiment, he expects positive mutual fund inflows in 2016. Below is the transcript of Mahesh Patil’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: The market has run away like a horse that has bolted the stable. Can you mount it even now or do you think that we have had too good a rally, and now, it will catch its breath?A: The markets, if you look at the way it corrected since the beginning of his calendar year, it was probably overshooting on the downside. There were a lot of global concerns which took the market down. And we also had a bit of a quarterly earnings season which was not good, especially in the banking sector. But post that, we have seen normalcy on the global front. Commodities which were really going down in the latter part of the last calendar year, have since seen some stabilisation and some upmove from there. And, globally also, we are seeing again a loose monetary policy likely from Japan and China, and even the European Central Bank (ECB) is likely to come with some more monetary easing. So, in that backdrop and the fact that we have probably seen the worst in terms of quarterly numbers, even from these levels from a medium to long-term, things should be pretty okay because earnings growth is still pretty much lagging. But our sense is that next year you should see hopefully, and with greater degree of confidence, that it should at least be in the mid-teens. And we did a pretty detailed exercise internally with our analyst team looking at each and every company, especially the top-100 companies and looking at it more critically on the backdrop of what is happening globally and the recent quarterly numbers. But we are fairly confident that next year, we should see at least 15-16 percent kind of a growth for some of these companies.Sonia: So, 15-16 percent earnings growth is what we are expecting next year. I was going through some of your funds and your funds have outperformed the market quite a bit, both your Birla Sun Life Frontline Equity Fund and your Top 100 Multicap Fund, and I noticed a trend that you have a lot of defensive stocks – the private sector banks, some of the quality names like HDFC Bank in most of your funds. Is this a space that will continue to do well, irrespective of all the problems that we are seeing in the banking industry?A: In the banking sector, the private sector banks, especially the retail banks, have continued to grow at a good pace. Despite the poor credit growth overall, retail growth has been in the late teens. And, some of these private sector banks have been able to get market share. We have seen the market share gains, especially from the public sector undertaking (PSU) banks and here again, the asset quality issues have been pretty minimal, they are able to contain that pretty well. So, we have seen some of these banks with a larger retail focus grow at around 20 percent compounded annual growth rate (CAGR), not now, but also in the past 4-5 years and that they should continue to do so even going forward. And these are more compounding stocks and good from a longer-term perspective and especially at a time when there has been concerns about credit quality. We have seen market also willing to pay a slightly higher premium for these banks in terms of their multiples.Latha: Let me talk about the segment of financials which you normally have not dabbled in – the public sector banks and the non-banking finance companies (NBFC). Any of these spaces look attractive to you?A: The public sector banks, after the quarterly numbers, we have seen a decent cleanup in terms of their books, and that gives some comfort in a few names, in terms of trying to assess where the real adjusted book value is. And also, the fact that the RBI has allowed banks to increase their Tier-I capital by recapitalising some of their real estate assets. So, that provides a lot of cushion for the PSU banks; at least takes care of their short-term problems. But, the asset quality stress still would continue probably into the next year also. Some of it will flow in.So, we would be a bit selective on the PSU banks, especially only looking at the larger names over there. And, going forward, you will also look at some consolidation happening in the PSU banks smaller. So, one does not really know what really you will land up with going forward. So, very selective on the PSU banks, I would say. On the NBFC front, we have seen that the housing finance companies have shown a pretty decent growth, especially at a time when the credit growth has been pretty sluggish and also the cut in interest rates, has led to some net interest margin (NIM) expansions. So, that is a sector. And if you look, in the Budget also there has been a good focus on housing sector, especially the low cost housing sector. So, that is a sector which we see continuing to grow and do well going forward.Also, in the auto finance companies, especially the commercial vehicle finance companies, there again, the concern on the stress in the asset quality is easing and there has been a pick-up in terms of new vehicle sales. So, that is an area where we see a good growth in the next couple of years.Sonia: I was going through your infrastructure fund and one of your top holdings is Crompton Greaves. I know you do not want to talk about individual stocks, but this stock has been in focus because it sold its loss making power business yesterday and now, it is virtually debt free. Is this a story that one can still play on if they have not got into it yet?A: I would say specifically in the power equipment space, there are two categories to it. One is the power generation sector, where we are not seeing any meaningful capacity addition in the next few years, because there is enough capacity, the plant load factors (PLF) are pretty low, and new generating capacity, especially in the conventional coal based power, we are not likely to see any new projects coming in at least for the next couple of years or so. So, that is an area which we are not bullish. But, I think the transmission and distribution (T&D) sector is where we are seeing a decent investments coming in. Again, the government’s focus through the Ujwal DISCOM Assurance Yojana (UDAY) scheme where they want to reduce the T&D losses, so the capital expenditure (Capex) is more veering towards T&D sector in terms of strengthening the grid in setting up new power substations, metering. So, that is an area where we are seeing good traction and companies in that space and Crompton is mainly supplying to the T&D sector. So, we should see some pick-up on the domestic side which is going to be the balance of the business which will remain after they sell off the international business.Latha: You are in broadly in that intermediate goods, automation, power, T&D sector – Wapco, Cummins, Crompton, Honeywell Automation. What about auto ancillaries?A: Auto ancillaries are also fine. They will not qualify for this fund, but auto ancillaries, there are two parts to it. We have seen some slowdown, a lot of Indian auto ancillaries also exporters to the global original equipment manufacturers (OEM) and there we have seen some kind of a slowdown in Europe. Even in US, we have seen that the commercial vehicle sector is likely to slowdown next year. So, there is some moderation in terms of growth or downgrades, but on the domestic, we are seeing decent growth and we expect the auto sector volume numbers on the domestic side to pick up next year. As we think that discretionary consumption will take a leg up next year, because there are a lot of drivers there for that, especially the Pay Commission, even monsoons, if they are better, you should see auto sector posting better numbers next year than what it did last year.Sonia: You have a lot of funds that you manage, some of the diversified funds, some of the pure infrastructure funds, thematic, sector based funds, if somebody has a 6-12 month horizon, where do you see more value now? In a diversified fund, or do you think now is the time to invest in some of these sectoral funds?A: The way the market is and we are still seeing a lot of sector rotation happening. There is no clear trend which is emerging in the market. So, it is better to be in a more diversified multicap or a largecap fund at this point in time. Unless there is a clear direction which emerges in a particular segment, because the thematic would obviously be more volatile and one has to really capture the trend early to make a good returns over there. At the moment, even on a portfolio strategy, we are not taking very aggressive call on any sectors, trying to take marginally, the consumption theme is what we think will do well. So, probably that one theme which can probably be looked at from a more sustainable longer-term a consumption theme.Latha: Just to wind up on that note, in January, we were all worrying that with the share market tanking, our investors turning away from systematic investment plans (SIP) and basically mutual funds generally, what has been the tally year-to-date? Will we have 2016 inflows better than 2015?A: What you look at currently, even despite the sentiment being slightly weak in the last couple of months, markets have been down. The mutual fund industry inflow numbers have slowed down in the month of February. We have seen that probably, 50 percent lower than what it was last year, but the good thing is that the SIP flows which is probably around Rs 2,700 crore on a monthly basis, that has continued. We have not seen any curtailment over there. There has been some short-term money which would have pulled out, some institutional money, high networth individual (HNI). So, that trend, as it continues, we should see at least, probably you might not see the same number of closes as last year, but we should continue to see positive inflows throughout the year.