Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life AMC believes that the market has bottomed, and one will see gradual recovery hereon.
While gradual growth has been visible in the market, uptick in earnings is needed for it to scale higher from current levels, says Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life AMC.
Patil believes that the market has bottomed out and hereon, gradual recovery will start. However, he expects earnings growth to remain tepid.
In FY17, earnings will grow at near 15 percent, he says adding that the nominal gross domestic product (GDP) growth is likely to better than FY16.
It is a stock-specific market, he says adding that investors must be willing to take the ‘downside risks’.
In global markets, Patil says a pause is expected in the current rally. Some volatility is likely in coming months, he adds.
In the current quarter as well as first quarter of FY17, stressed assets situation in banks will continue, Patil says
Patil says banks will continue to reel under stressed assets for another quarter atleast. No profits are expected in FY17 on back of high provisioning, he says. However, the corrected valuations in banks can be looked at.
Large cement companies are priced to perfection in the near-term. It will be important to see whether the sector can sustain the growth in longer term, he says.
Patil is also overweight on the non-banking finance companies (NBFCs) and says that retail-based companies will see better growth than corporate-based.
Below is the verbatim transcript of Mahesh Patil’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: You have been through many of these cycles, ups and downs in the market, what phase of the bull market are we in right now? Do you expect to see some pause or consolidation or would you be worry that the market has stopped out around these levels?
A: We are at a phase where we are coming in from a kind of a downturn I think. We have seen the markets hit a low. It corrected almost 27 percent from its peak. That is a significant correction and more importantly on the economy front we are seeing some kind of a green shoots coming in the economy. Still there are early days, we have seen oil consumption in double digits, electricity consumption is also around 9-10 percent.
Auto numbers, two-wheeler numbers showed a decent growth last month. Cement demand is showing good growth for the last two months. There is a belief that economy probably has bottomed out and you should see a gradual recovery from here.
However, the earnings growth has been kind of a pretty tepid. We have seen this year earnings growth has been downgraded. We are expecting this year will end by around slightly 2-3 percent negative for the Nifty earnings.
Last three years, if you look at Nifty earnings are kind of flattish. It has been around 1 or 2 percent kind of the growth. So, the earnings growth has kind of belied in the last three years. Markets would look at for earnings growth to come in if it has to really scale higher from these levels.
We expect probably earnings growth would be another quarter away; first quarter of FY17 is where the base affect will be supportive.
A decent momentum what we are seeing sequentially if that translate down then you could see a recovery next year. So, until then we have fourth quarter numbers to go through where again the growth looks to be pretty tepid. The banking sector, especially in PSU banks and the corporate banks there could still be earnings challenge over there. So, we have to navigate this quarter.
On the global side also we feel that after the recent rally what we saw a risk on rally globally, I think there will be a some kind of a pause. There are other global events which are there like the Britain exit which will be there in June and you might see some volatility around that level. So, this is phase I would say a consolidation phase another quarter or so. A domestic side, next year looks good at least from earnings stand point.
Latha: Should we understand therefore that we could get better chances to enter the market? Is that what you are saying that the result season will provide enough depression to traders and global events like Brexit so that is a better time to accumulate?
A: The markets are not going to be linear and going to be one way up. You will see those ups and downs and as you rightly said that could be an opportunity at least stock specific. We could see stocks reacting if the earnings are a bit disappointing. I have been mentioning that it is going to be a more of a bottoms up market. We are positive on the market but market returns will probably be in the 12-15 percent in that range.
A stock specific depending on what price you enter and how you really time it and what valuations you get in can really enhance your returns going forward. That is an opportunity probably you will get in this because there has been decent rally in some of these stocks on the lows what it has touched in the month of February. So, it is really disappointment, I think there is some kind of a downside risk which I think one should be prepared to enter into those dips.
Latha: Cement is everyone’s buy, is it that the big boyz have priced in UltraTech Cement has priced in everything and therefore it is better to buy midcaps? How would you play this sector, is it priced in the first place?
A: The data points are positive, so we have seen as I mentioned earlier volume growth is picking up. Even pricing scenario in the north based plants where last couple of months has been a positive and going into the next fiscal year we are seeing better earnings growth coming in the cement.
This year - FY16 - hasn’t been a great year. I mean south based companies did well, so that is on the macro but the valuations therefore in some of the large names if you look at either or an EV to EBITDA multiple or EV per tonne multiple we find them to be fairly priced.
Sonia: That is why you don’t have any of the larger ones in your top holdings because you find them expensive?
A: We have them, for longer term we still like but from a near term they are priced in pretty much. One has to wait out and see how this growth sustains, so we will have to look at monsoons and how the pickup happens because any kind of slowdown in growth could see some pricing pressure coming in over there.
So, probably they are price to perfection at this point of time. One has to look at pockets of value down the line whether it is in the midcaps space or other stocks. So, that is the way we will view this sector.
Sonia: What about banks because in one of your funds you have recently increased your holdings in ICICI Bank. Do you think the worst is over for some of these private sector banks?
A: Again the private sector banks you have to classify into two parts, one is the banks with more retail book and the other one with the large corporate book. We think that we might see another couple of one more quarter where the stressed assets levels could increase. That will have some implication in terms of even FY17 because the provisioning levels will be higher.
So, we don’t see any big profit growth in FY17 but clearly some of the large corporate accounts where they have been stressed we have seen some movement there in terms of trying to sell assets.
Even in the steel sector, we have seen some kind of a positive sign on the global and also on domestic because of the protection level which has been given. So, given all these factors we think that things are likely to kind of bottom out. More importantly the valuations in some of these stocks have corrected which prompted us to look at, at a certain price.
Latha: What is your sense of earnings growth FY17?
A: FY17 earnings growth for us is somewhere around 15 percent growth. That is again lot of it is coming because of the base effect which is there. Some kind of acceleration on the topline because we expect nominal gross domestic product (GDP) growth to be better than what it was this year.
Even interest rate cuts, we have seen some transmission of that and we expect more transmission, another 25-50 basis point in the next fiscal year so that should aid the bottom-line growth.
Latha: This huge liquidity talk which the Governor gave us does that make non- banking finance companies (NBFCs) a buy?
A: NBFCs have been doing well. In fact we have been overweight on NBFCs both the mortgage finance companies and even the consumer finance names. That is primarily because most of the NBFCs which are focused on the retail credit has seen a better growth.
The asset quality there has been much more better than what we have seen on the corporate side. With interest rates going down, especially the wholesale rates and we are expecting some kind of a steeping of the curve, so that should help the cost of borrowing for the NBFCs.The Great Diwali Discount!
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First Published on Apr 8, 2016 10:00 am