Mkt presenting buying opportunity; likes cyclicals: UTI MF

Although the market is currently trading on a weak footing, Swati Kulkarni of UTI MF clearly believes it is giving an opportunity to buy and the volatility in the market is throwing opportunities for the day traders. However, investors need to pick up good quality stocks that have competitive advantage.According to her it is difficult to give downside levels for the market because it lacks depth, and moreover the factors that impact global liquidity are likely to impact our market too.She thinks valuations are currently based on subdued return ratios and growth, so while building a portfolio one could look at cyclicals like autos, industrials and cements. Banks you could play initially through private sector and then as the asset quality related problems get covered up with good amount of credit growth you could look at PSU banks. So look at these from next 2-3 year perspective. As defensive plays, one can also add pharma and IT as a hedge against currency fluctuation.She is not so upbeat on oil & gas space and metals. Oil and gas has been a marked underperformer and is still in the hands of regulators. However, amongst that one could look at diversified plays and gas transmission space, says Kulkarni.Metals too are globally driven and with China too moving from investment led economy to consumer driven, there is need to have a cautious approach there, says Kulkarni.Below is the transcript of Swati Kulkarni’s interview with CNBC-TV18's Ekta Batra and Anuj Singhal.Anuj: Are you using the dip to buy or do you think this is a market which could go through prolonged correction and a prolonged period of pain?A: Yes, the market is giving an opportunity to buy definitely and the kind of volatility that we see I look at it as a noise in the street and it might be throwing good opportunities to maybe day traders from a day to day movement as such. But from an investor’s point of view we have time to pick up good stocks which have good amount of competitive advantage and I look at it from that perspective.Anuj: What kind of market levels do you think we could see in this correction? I know you would not like to talk about the short term view but in the current correction that we are going through what is the downside. Do you think it is another 5-10 percent for this correction, or could things get even uglier?A: It is much difficult to put a number because one is that the market is just a representative, it is not the full universe that we talk about. There are sectors which are beating the market whichever period you take and when it comes to these kind of levels perhaps the Foreign Institutional Investor (FII) actions do matter because the debt suddenly in the market might become little less and hence it is quite possible that these levels can be breached maybe 2-3 percent more from here or 3-4 percent more. It is really difficult to call that specially if you have seen in US after the first quarter Gross Domestic Product (GDP) growth you have seen that the Fed comment of that not being a representative quarter. There is an expectation that there could be much stronger rebound in the next three quarters like we saw last year.Again the rate hike expectation related fears and the Fed rate have gone up plus China factor is there. The money flowing to China because China has outperformed very well in last one year and more so in last two months or so. So, these factors which affect the global liquidity do have an impact on the Indian markets especially when earnings season is not going to be that great. We see that towards the second half of FY16 only we could see increase in earnings and there could be an earnings upgrade which could be built in for FY17 onwards. These movements are very much anticipated, the volatility is very much anticipated, and it is nothing as a surprise that comes to the investors.

Ekta: If you had to take advantage of certain valuations or lucrative valuations considering the correction that we have seen which are the sectors that you would may be pick on or nibble into at this stage? A: When it comes to valuation one thing I want to mention is that, valuations what we are seeing now is based on the much subdued EBITDA margins or much subdued return ratios per se. You will have to build in where you could see growth in topline. So from that perspective the cyclical sectors like, may be auto, cements and the industrials is somewhere the focus should be. Banks also I would include banks you could play initially through private sector and then as the asset quality related problems get covered up with good amount of credit growth you could also like to play from PSU banks as such. So, I would look at these sectors from next 2-3 year perspective. Also you will have to add some defensives like pharma and IT. Mainly from a perspective of strong balance sheets, the cash flow generation and also in terms of the earning sustainability or that a hedge against the INR, exchange ratio basically if there is a Fed rate hike. So, from that perspective I would have this portfolio approach rather than going a particular sector whole hog that should be the balancing approach as such.Anuj: Nothing in the oil and gas space or metal stocks?A: Oil and gas sector has been an underperformer sector. You could perhaps look at some of the names in terms of diversified play. Some place in the gas transmission where the valuation seems to be on your side but clearly because the sector is still in the hands of the regulator still and there is no clarity on this. It is a bit of grey area that one has to invest through.As far as metals are concerned again it is a globally driven sector. We know China is reducing focus on investment driven economy to consumer driven economy and that remains as overcast as far as the global prices are concerned. So, I would be cautious on metal. The valuations may look attractive but you have to be quite nimble footed in metals and that is how we will approach these sectors.Ekta: Do you like IT considering the recent depreciation that we have seen in the rupee?A: Though IT per se in terms of the recent numbers as far as the growth is concerned, the cross currency headwinds and its impact on the earnings is not exciting. However, when it comes to the balance sheet strength and the cash flow generation that these companies make these companies can acquire growth that is one thing. Second is as far as the risk of Fed increase and exchange rate risk is better played through exposure to IT I would think and may be pharma because their exposure to US denominated revenues is far higher than other sectors. So, from a defensive perspective this sector also is under current consideration.