Monsoon, consumption to be big plays for earnings: DSP Blackrock

The current momentum in the market looks short-term, says Anup Maheshwari of DSP Blackrock Investment Managers. He is relatively more confident on domestic fund flows sustaining but feels international flows tend to change character quickly and it is tricky to judge when they will reverse. Fund flows can stretch markets beyond what is anticipated, Maheshwari says,  advising investors to invest through time rather than putting large chunks of money at one go especially where valuations do not provide the required margin of safety. The first quarter earnings have been mixed so far, he says, adding, monsoon and consumption will be key for earnings growth in second half of current fiscal. DSP is betting on sectors like consumer discretionary, banks and utilities. He believes public sector banks will continue to struggle to deliver good return on equity (RoE) despite some visible improvement in the asset quality issues.  Pharmaceutical, which have been reeling under US FDA issues, are likely to come out stronger, says Maheshwari. Below is the transcript of Anup Maheshwari’s interview to Anuj Singhal, Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Anuj: What do you make of the current market situation? The fundamentals would tell us that the market is expensive, but liquidity is buying at the highest levels. On Friday, we had Rs 1,200 crore of buying. How do you approach this market in this kind of scenario?A: It is always tricky for us because you are not exactly sure what advice to give investors. At times like these, you are bullish long-term always, but when market moves based on flow, we know how flows can change also very quickly. So, ideally, we always want to have some margin of safety built in from the fundamental side to be able to give a higher conviction call. Unfortunately, in many cases, valuations are still a bit stretched and particularly, as we go down the market cap chain. So, it is tricky, but like you said, there is a lot of short-term momentum, flows can stretch market much beyond what people anticipate in the short-run, but that is not something which we can base our portfolio strategy. So, what we are saying generally to investors is invest through time rather than putting large chunks of money into the market today, especially where valuations do not necessarily give you a level of margin of safety that you directly look for.Latha: Mine is more of the same question. Globally, when you look at the yields, it gives you an impression that economies are going through recession and equities are giving you a sense that we are at all-time highs. What do you do as a fund manager? As you said, you play time, what does that mean? Do you go into cash?A: Our job is quite simple in that sense. Since we are mutual funds, we just stay invested. So, it is more the advice that you have to give to investors coming in perhaps, but that is the tricky part. We stay invested. At best, you would raise 5 percent cash, but frankly, that does not really impact your portfolio performance, because it is really the 95 percent that makes all the difference. So, long only mutual funds, the good part is we do not have to take very active calls. All we have to do is look at the best possible portfolio at a point in time which on a relative basis seems to make sense to us. So that is all we do, we do not really take big absolute calls. That is left to hedge funds and some other type of investors.Latha: Can you say a little more about how you look at the entire flows? Can it stay exuberant for a longish bit? What can give in the global markets and how would you prepare for it?A: The domestic flows, we are a little more confident on frankly and the ability of those to stay strong for a long period of time. Of course, domestic flows also get influenced by short-term market direction, but through time, the fact that equities is probably one of the few asset classes that still seem to show upside through time or better upside than the other options that continues to prevail. What we are not very clear about is the international flows which obviously are driving all markets up including ours to some extent. That flow tends to change character very quickly. And there is obviously fair amount of froth in those type of flows. So, that is the part that is a little more trickier which it can continue for a while, but who knows when it suddenly turns. So, if there is a lot of time you expend on trying to figure these things out but really not reach any conclusion, we prefer not to really focus on it. The domestic fund flow pattern is something that we are more confident of as a longer term trend.Sonia: Let us focus on something which you have a better grip on. I was going through some of your main funds. For example, you DSP Blackrock Top-100 fund and it is interesting. Your exposure to some of these public sector undertaking (PSU) banks like State Bank of India (SBI) is relatively lower at just about 3-4 percent of your portfolio, while the exposure to the larger private sector banks is higher. So, HDFC Bank, IndusInd Bank, ICICI Bank contribute 5-10 percent. Do you think the time has come to reverse that trade a little bit because some of the PSU banks like SBI are starting to show signs of a recovery?A: We have been increasing this. If you look at the portfolio from a year ago, our PSU bank exposure has gone up a bit. You have got to look at it in the context that the weight in the index of PSU banks is actually very low. So, we actually have higher than what the index is, which means we are slightly positively inclined there. But again, even in that space, it remains a very bottom-up stock selection, because not all PSU banks have the same calibre of balance sheet. It is quite evident from the results coming through. So, we see it is sort of a value option really more than anything else. A lot of the PSU banks will still struggle to deliver a good RoE on their balance sheets through time, but it has reached a point where from a pure valuation perspective, we are still okay to hold, that part of it is factored into the price.The private sector banks are still easier to hold on to because you have got good economics in place and you have got some predictability on growth. And therefore, that will remain a core part of the portfolio and the public sector banks depending on valuations at a point in time, perhaps we will have to be a little more active on those weights.Anuj: Are there any pockets where you are seeing clear signs of bubble, exuberance, the likes of non-banking finance companies (NBFC), entertainment, consumption? Anything which is a complete avoid for you from incremental investment point of view?A: As a category, midcaps to some extent, we cannot generalise it beyond a point of course, it is very stock specific, but the fact that valuations now are clearly stretched gives us some cause for concern. In fact, you would have noticed we have restricted subscriptions further in our microcap fund. So, that is one area that we clearly sense the fact that margin of safety is a lot lower than the broader market. But, beyond that, if we go across sectors, it is not all that bad. If you pick up some of the names within sectors, you can find ideas. It is not that you cannot. It is just that you would ideally like to buy them a bit cheaper than they are today because they have not necessarily seen the full earnings potential coming yet.But we are still quite positive on consumption as a theme. I think it is a great structural theme and within the consumer discretionary basket, we are still very overweight. Banking generally, it is still the largest weight across all funds in absolute terms. We like utilities to some extent, we like some smaller sectors like textiles and chemicals. And pharmaceuticals as well at some level will start looking interesting again. So, there are pockets of opportunity. It is not that you have run out of sectors to look at, but it is just a matter of at what point in time you want to add to which sector._PAGEBREAK_Latha: What about IT? We saw perhaps, the first headline casualty of Brexit in the Infosys news. What do you do? Buy it on dips nevertheless, keep away, reduce its overall weight in your portfolio?A: We have been running a big underweight position on IT for a while and the challenge there is, as we are returning to earnings growth or we are expecting to return to earnings growth, in that scenario, sectors where earnings growth is very muted such as IT, they would tend to underperform. So, we have been underweight this sector for a while. Some of those challenges continue frankly. The only reason to look back into the sector is just some very cheap valuations that are beginning to emerge. So at some point again, we will have to look at it. You can never say no to any sector, but right now, we are still running a fairly underweight position.Sonia: I noticed in many of your funds, you also have exposure to Grasim. I know you do not want to talk about individual stocks, but that was the big story of last week, the Grasim-Aditya Birla merger. How did you as an investor react to it and what should retail investors do now in situations like this?A: I cannot comment on it specifically, but a lot of it is already been written in the press and the stock price reaction pretty much tell the story in terms of whether investors are seeing this deal as value accretive or not. So, it is something that is before us, investors will have to express their opinion through their votes. So, we will come to that whenever they bring it to vote.Anuj: But, have the large investors got together and had a discussion on this move?A: No, not yet.Latha: You said not yet, so will they?A: You never know. At some point, now that you have a lot of these proxy firms quite active, institutions do tend to talk to each other and eventually, try and give feedback to the management about it.Anuj: Let us discuss the other large sector, pharmaceuticals. Of course, it is more a stock specific story here, but what have you made of the recent spate of US Food and Drug Administration (FDA) news and the fact that a couple of pharmaceutical stocks have got derated. Any temptation to buy some of these stocks at lower levels?A: It is a great sector going through a bad time. A good business at bad times normally produce some good returns eventually. These FDA issues are serious, but they are resolvable and we do think that through time, companies will come out only stronger from this whole experience and will get back to some degree of growth eventually. We are hoping that a lot of the pending Abbreviated New Drug Application (ANDA) approvals that they have not got because of these plant issues will also then come through and give them added growth. So, it is looking at as an interesting sector. It is obviously, not at all in favour and momentum at the moment, but through time, that will probably present an opportunity.Latha: Let me recollect the phrase you used. In a recovering earnings scenario, you will not look at IT. That is when you said that. How did you look at the earnings picture at all? What did you notice in terms of earnings growth? What are you pencilling in for the full year?A: A lot of the earnings growth for this year is clearly very back-ended, so in December and March quarters where we will start seeing the highest quarterly growth numbers. And that is also largely because of a base effect to some extent. So, we are hoping that we will close the year somewhere close to 13-14 percent growth although the first two quarters have been very muted or the first quarter at least has been muted. Even the second quarter may not be great, but basically, the third and fourth quarter, December and March will see a pickup.And in that phase, the key again grows into the next year and whether we are back into that 15-20 percent growth scenario or not. So, that we will probably have a better feel maybe six months from now. But December and March quarter should logically be a lot better.Latha: Was this one to your expectation?A: It is a little mixed frankly, but we should hopefully see a pickup, now that we have got some decent monsoons coming through, there are expectations that consumption will pick up at some point in time. The government is clearly now finally spending a lot more or looking to be a lot more aggressive on the fiscal side. So, all of that points towards the fact that the second half generally should be better. So, people are looking beyond just this quarter.