May see RBI cut rates by 25-50 bps over next 9 months: Birla AMC

Inflation, he thinks, should moderate during the second half providing the Reserve Bank of India room for rate cut of about 25-50 basis points sometime over the next 9 months.

Selective information technology companies will continue to grow at a steady, albeit low growth rate, he says, adding, negatives from Brexit may not have been fully priced into some stocks yet.

Midcaps index, though, he says looks expensive advising caution that any negative global event could have much larger impact on midcaps than others.Below is the verbatim transcript of Mahesh Patil's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Anuj: Are you still buying in this market, are you deploying cash?A: Yes, we are still getting inflows on a regular basis in our funds especially funds which are doing well and looking at this market, though the broader market is not going, there are a lot of stock specific action, which is there and after looking at the quarterly numbers, we are trying to find pockets where there is sustained visibility of growth.Latha: Where did you find that sustained visibility of growth?A: If you look at this quarterly numbers, on balance I would say that they have been more or less in line of expectation. There have been some disappointments in a few sectors like IT for example and few stock specific and some in the banking sector but by and large, numbers have been in line with expectations. There have been more positive surprises marginally -- if you look at -- than the negative. However, we are looking at the domestic sectors for example, auto, private sector banks continue to do well even some of the non-banking financial companies (NBFCs) we have seen a strong performance over there.Even in the oil and gas sector, we are expecting good numbers to come in. So there are some of the domestic as the second half we expect the monsoon impact to flow through.Sonia: I know you don’t want to talk individual stocks but I have to ask you, in your BSL Frontline Equity Scheme, you do have Grasim as one of your top holdings and there is so much talk about the Aditya Birla Group now perhaps reaching out to shareholders -- shareholders are a bit disgruntled with the scheme. Has the group talked to some of the domestic investors like yourselves and what would you do at this point in time?A: The group will probably reach out to -- just like any other action which happens like mergers and acquisitions (M&A), they will have to reach out to the investors to explain their point of view. The benefits of the merger and the synergies what they would come through and that is the process which would start on of trying to explain -- each investors would have a different point of view. However, overall it is a decent consolidation which one is looking at and the merits of that is something which the individual promoters of companies would want to explain to the investors and put their point of view and that is the process which will start now.Sonia: So they haven’t reached out to any shareholders?A: I think they will start now because there is still time until the final voting happens on that proposal.Anuj: The disclaimer would be you are part of the same group.A: Yes.Anuj: In terms of portfolio allocation, banks have been the leaders in the market, IT has fallen, pharmaceutical has been stock specific, which stocks do you back at these levels?A: Banking has done pretty well in the last two-three months and even going forward, we think that the banking sector will lead because if the economic recovery is something which we are betting on and lower interest rates, still there is some room for rate cuts, that is what our belief is.We think inflation while it has spiked up but looking at where food inflation is likely to be looking at the good sowing pulses and the area under cultivation is up around 30 percent, we expect it should moderate in the second half. So there is some room for rate cuts around 25-50 bps over the next nine months. That should bode well for the banking sector as the credit growth also picks up in the latter half, we should see a steady outperformance.Besides that, on the domestic side the consumer discretionary space where the last quarter has been good in a few sectors, we have seen a pick up in the urban side and a rural demand will also pick up. But again there also, the cut in interest rates should help in terms of the discretionary spends.The Pay Commission payouts will start to come in from the next month and that would also spur a demand on the consumer discretionary.Latha: You specifically said private sector banks but the rally is lately in the public sector banks, will you add that?A: The rally in public sector bank has in the last three-four months primarily because there was a huge sell-off, they were oversold and the valuations were good but I think public sector undertaking (PSU) banks -- our view is that except for a couple of large PSU banks, we will still continue to be sluggish in terms of their profit and loss (P&L) because while the non-performing assets (NPAs) -- they are behind us, they have peaked out but the provisioning impact of that will continue to be on the P&L for the next couple of years or so.As a result we believe that the return on assets (RoAs) will still remain a bit depressed, even the return on equities (RoEs) will remain depressed and as a result, we don’t see a sustainable kind of a rally in the PSU banks. Obviously, a couple of the PSU banks, which are much stronger and have been able to done the clean up much earlier should be able to ride this and be able to do reasonably well in the coming year. So it will be more selective on the PSU banks.Sonia: I was interesting in your view on the IT space because one of your top holdings is Infosys and it is interesting that while the market is at a 52-week high, Infosys is closer to its 52-week low. Do you reckon that there could be more pressure in the IT space because of the issues it is facing?A: IT sector -- there has been a slight disappointment and one has seen a downgrade to the overall earnings, the topline growth, which is expected to be around 12-13 percent, now probably will be around 10-12 percent for the sector as a whole.Also the fears about the impact of Brexit are still not factored into that. Recently, we had Infosys talking about one of their clients where they had to cut down on that.So there is a fear that there could be a further downside if at all the Brexit impact gets factored in.Sonia: Would you advise buying into that downside because these are good opportunities for long-term investors and generally in hindsight?A: IT sector -- I don’t see anything significantly going negative. The growth rates will be slightly lower. So it is a question of about what relative growth we are seeing in the market vis-a-vis the growth in the IT sector. So whether a 10-11 percent kind of a growth is good enough for one to look at it -- so the derating in IT sector has happened to some extent and they would be stocks, which would probably protect if there is a sharp correction in the market. They would act as a defensive to some extent, I would say.So in that context, one can look at it but if you take a slightly longer-term view, the sector -- the growth rates will be slightly lower than the broader markets. So at a price definitely some of these stocks, good companies and they will continue to sustain though at a lower growth rate but I think the returns there would be slightly moderate than the broader markets.Latha: Year-to-date (YTD) there is stunning outperformance of the midcap space, so from now to end of year, which ones will you back, midcap or Nifty?A: Our view has been that midcaps, there are always bottom-up stories, which are there in the midcap space while the broader midcap index looks expensive. It is probably at its highest P/E multiples in the last ten years. So to that extent there is not much value in the broader market but stock specific, there always be opportunities, which are outside the index, which one would look at. However, clearly from a near-term perspective, looking at the valuations and also the fact that globally things are still not clear, still global uncertainty prevails and in the next second half if there is a global shock or some kind of a risk-off, the correction in the midcap space can be much larger.So given that from a near-term perspective, one would be more comfortable on the largecap considering liquidity and that is what which one would look at especially at these levels of markets.Anuj: Not too many non-banking financial companies (NBFCs) at least in your large holdings, is that a space that you are avoiding right now?A: NBFCs has been a sector, which we have played pretty well. Obviously, most of the NBFCs are in the midcap sector space. So to that extent, the allocation over there might not be large but a lot of NBFCs in the mortgage finance side and the consumer side is where we have a decent holding, probably not in the largecap funds but in a multicap and midcap funds.Latha: When you say 7th Pay Commission and consumption story, where is the value in that space whether you look at paints or whether you look at FMCG, is it all valued?A: If you look at by historical levels, stocks are trading at a multiples, which is higher than the long-term average. That to a large extent across the markets, it is not only in that space but broader market itself is trading because of the liquidity, which is chasing and also the fact that the cost of equity has come down. Also one has to understand that the earnings are still pretty depressed, while we have seen a decent results but the volume growth in some of these sectors is still pretty low and if the earnings growth and volume pick up happens then the valuations can still sustain. I don’t see there is any reason to expect a rerating but earnings growth is what the market will look at in these stocks for them to outperform.