Midcap performance dependent on economic recovery: SBI MF

"Interest rates coming down have contributed to positive expectations," she said.The fund manager, who looks after SBI Bluechip Fund, believes that companies like Titan are getting hit by technology. However, she says Titan stock is "poised for a rebound" on rising discretionary income of consumers.Andani, who also manages SBI Magnum Midcap Fund, said performance of midcap stocks would depend on how strong economic recovery is. Below is the verbatim transcript of Sohini Andani's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: Your fund has given a return of more than 26 percent in the last 5 years, 27 percent in the last 3 years and almost 20 percent in the last 10 years. Do you see a lot of opportunity in the midcap space now over the next couple of years and if yes what are the pockets of sectors that are seeing a lot of interest now?A: Yeah, the midcap segment as such has seen a sharp rally in last 3 years and the stocks have rerated in expectation of a strong earnings recovery led by the overall economic recovery, so the returns from here in the segment would be dependent upon the strength of the economic recovery and how strong the earnings recovery is actually. As the PE rerating to a great extent has already happened, so one will have to be watchful of how strong the earnings recovery continues to be, while the expectations are already being built in and as far as the segments are concerned it is across the board, it is in each sector you have pockets and companies which keep doing well over a period of time, so it is more broad based opportunity and generally in an economic rebound it is not only sector specific themes, it is across the board recovery in the midcap that you see.Anuj: You have been known for contra approach in the market for last 3-4 years, what are the best contra opportunities available in the market right now, where you think the consensus could be getting it wrong?A: Well, I don’t know whether I can call myself a contra player per se because we have been playing growth as a strategy in our funds and that is well accepted in country like us, which is growing at one of the fastest rates globally and you have an enough opportunity to grow into midcap space even in large cap space, but more so into midcap space across the sectors, so we are not particularly chasing any particular sectors here or theme here. The idea is really to look for the promoters and companies which have been investing for the future growth, they are doing the right thing which will give them the growth during the next 3-5 years and generally businesses which can generate good cash flows and capital allocation is efficient and this could be across many sectors actually.Sonia: So we are just going through your Magnum Midcap Fund and over there you have a relatively high exposure to the non-banking financial company (NBFC) space with names like Cholamandalam Investments, names like Bajaj Finance and we have seen the way these stocks have performed right, most of them are sitting at fresh highs. Do you still see more value here for retail investors?A: So the sector has done very well in the last year or so, it’s got significantly rerated, this is also because some pockets within the NBFCs like a CV finance segment which has started to see a pick up because CV volumes started to pick up and the growth has kind of picked up here for last 12 month or so. Also the fact is that the asset quality issues though they were there in the NBFCs these were far more better managed vis-à-vis some of the asset quality issues that the corporate financers faced. Also when the interest rates are coming down they do get the benefit on the margins from the lower cost of funds, so there were lot of sectors which contributed to the positive expectations and these NBFCs have been relatively well managed and they have delivered on their expectations, so what we have seen is as earnings have seen some rebound plus we have also seen a lot of PE rerating. Now, if you look at the loan growth, the loan growth is still not very robust and it’s been moderate and there is a possibility that the loan growth can pick up over next 12-18 months, there is no signs of immediate pick up from here, but over a period of time as we get into a positive cycle that is something that one should look for. However, we believe that a lot of PE rerating has happened, so from here on again the stocks will behave in line with what kind of earnings growth that they can deliver.Anuj: The other stock that I can see in your Magnum Midcap Fund which has done well for you is of course, Dr Lal PathLabs, I am assuming that you would have taken this call at the initial public offering (IPO) time, we have seen a lot of IPOs in this space, do you see diagnostics emerging as a big sector going forward and in that case would like to invest in the names like Thyrocare etc going forward apart from Dr Lal PathLabs that you already have in your portfolio?A: It’s a part of the pharma portfolio overall and how we are looking at the sector as a whole and may be a diagnostic industry as a part of it is that generally the pharma sector we have exposure to pharma stocks across in the portfolio and not only the particular stock that you mentioned, but we have been investing in this segment because the companies have been doing a fantastic job there. The sector has been facing some challenges of late because of the heightened regulatory activities by USFDA and which is posing the challenges for some of these companies plus coupled with the fact that there is a consolidation in the distribution in the US and that is also putting into some pressure on the pricing, so while the US opportunities still remains very good because of now the faster approvals coming in. We looked at diversifying our exposure to the domestic segment, to the domestic market, which with the pickup in the economic activity as the personal income levels go up, there is a huge potential for these industry in our country, the penetration levels are quite low and these businesses are very scalable in terms of you can expand very fast by improving your reach and if your management set up is well settled and some of the larger diagnostic companies are in that position today, so it was from our need to diversify from to a non-US markets where we wanted to take an exposure, so diagnostic was one and we have also taken an exposure to other stocks which are having a non-US market exposure per se, so it’s part of the overall pharma strategy, I would say.Sonia: In your Blue Chip Fund, I was just going through the kind of stocks that you have you hold on to Titan, this time the company’s numbers were quite weak both in the watches and in the jewellery segment and to be fair some of these traditional brands like Titan are getting hit by a lot of disruptive technology, lot of competition as well, would you keep the faith with names like these or would you rethink your stance on some of these stocks?A: Definitely, the industry is witnessing lot of challenges, but we believe that Titan is poised well for the rebound in the discretionary consumption and is part of the theme that we are playing on the discretionary consumption side, so we would look at it more from that perspective into investing and the challenges from the new way of doing businesses are present today across the board for many of these businesses. Some of the companies do take up this challenge and gear their business model to suit that kind of challenges and we would be positive on companies which are able to do that.