NBFCs, oil & gas & corp banks are big on Birla Sun Life's list

Despite global events like Brexit, Indian markets will not see any big headwinds as monsoons have picked up and GST Bill stands a big chance of getting passed and liquidity in the system is much higher, said Mahesh Patil, Co-CIO at Birla Sun Life AMC. Even with the oil and gas space having lesser stock value, he maintained these companies have delivered and have shown improvement in refining margins and volume growth has spiked, too. "The valuations in oil and gas sector remain attractive in high single-digits," he said.With huge scope of opportunities in NBFCs, Patil added that this lending space is growing at 40 percent and expects earnings growth in NBFCs to be good. He is also positive on corporate banks. He said: "They have gone under recovery and the clean-up process and we shall not see a further deterioration in their asset quality, but the earnings growth will take time to bounce back."Below is the verbatim transcript of Mahesh Patil's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: Great time to be buying into the market now but do you get a sense that there are more upsides in store?A: One, the big events are behind us, Brexit is behind us. On the global front while one would still be a cautious because the full impact of Brexit and what the repercussion would be is something which is still unknown. To that extent there could still be some shocks from the global side.However, there is enough liquidity around globally and central banks willing to pump in more money, so given that the market should remain pretty steady. On the domestic things we don’t see any big headwinds at least in the near-term and we have seen earning season, which was good, some mild recovery, monsoons have picked up, goods and service tax (GST) looks like it will go through in this parliament session, at least there is a good chance of that happening. So given all these factors while the markets valuations are slightly on the higher side, the liquidity which is around our view has been that you should see markets scaling newer highs.However, one should not rule out any kind of mild corrections along the way on the back of global factors.Anuj: We need to show the data of the Birla Sun Life Pure Value Fund, 99 percent equity fund 3 years compound annual growth rate (CAGR) 34 percent year return and 5 year annualised returns of 20 percent and that has been the talking point in this market, where do you get value in this market? In that it is interesting, I am looking at this portfolio, you have a lot of oil marketing and public sector undertaking (PSU) stocks Hindustan Petroleum Corporation Ltd (HPCL), GAIL, Chennai Petro do you think this space can still make money, is there still value in the space?A: This has been a stock pickers market so bottom up stock ideas have given very good returns if you look at in the last 2-3 years. There are many stocks which have probably been multi-baggers and if you have a portfolio approach which is not linked to the benchmark but pure bottom, there is enough scope to generate good alpha from the market and that is what the fund return shows over there.Specifically on the oil and gas sector, it is a sector that is probably a sector where it is not fully appreciated in terms of the kind of transformation of some of these PSU oil companies have gone through. Market is still sceptical whether they will be able to sustain some of those kind of free market mechanism which has been there and the companies have been able to deliver -- there has been good improvement in the refining margins for some of the domestic refiners and even the volume growth has surprised positively. If you look at in the recent data, the consumption of petrol, diesel and other petroleum products has been strong. The valuations still remain attractive in the sector, one of the few sectors where the valuations are still pretty benign I would say in a high single digits or so.So, there are very few pockets of value I agree, but valuations are not always be looked at in terms of absolute terms, in multiple but also in context of relative that is where we look at in terms of adjusted for future growth.Sonia: Let us continue the discussion there because apart from oil marketing companies, the other space that has made you big money in this fund is non-banking financial companies (NBFCs), whether it is your exposure in Muthoot Finance or even in something like Equitas which is one of the stocks of the day as the Reserve Bank of India (RBI) has finally issued the small bank licence. Do you see more gains in stocks like these?A: One is the overall banking sector and the banking NBFCs, but there are lot of niches which are there, pockets of growth within the whole NBFC sector and markets, which are not catered or served by the larger players and that is where the opportunity has been, whether it is in the gold financing companies. They went through a setback after the regulatory, in fact lot of NBFCs went through kind of regulatory overhaul couple of years back, but I think over that companies have been able to make adjustments and especially in the microfinance space and small lending space is an area which is still pretty much untapped and huge opportunity to grow. Companies which have been able to put good processes and risk management system in place, we are comfortable in terms of their scalability because something the sector which are growing at around 40 percent one would be wary because you wouldn’t know where the credit quality issues could hit you.However, where there were comfort on management and other processes, we have backed those names. The sector has been rerated also quite a bit in the last one year or so. So should not expect any rerating but the earnings growth in this sector in some of these NBFCs should remain pretty good compare to the broader market.Anuj: Other interesting thing is again for couple of your funds HDFC Bank has been your top holdings and that has done of course remarkably well, but in the recent exposure you have increase some exposure to ICICI Bank as well. All I am trying to get from you is that where are we right now in terms of economy facing banks compare to retail banks, because retail banks have had stolen a big march over some of these economy facing stocks. Do you see bit of a comeback for the economy facing banks?A: You are right I think the retail banks have been more steady and more secular growth. So some of these banks have been able to grow despite the markets ups and downs and whatever we saw on the credit side to grow at a steady pace and that will continue and they will continue to be a compounding story.However, I would agree that on the corporate banks where they have gone through a lot of pains in the last couple of quarters, we think the lot of clean up has happened. There are steps taken by some of the banks to now go after recoveries, there were still early days and the economy we think the things are bottomed out a few sectors where there was stress like in power sector, in the metal space.Lot of positive developments have happened, which gives a feeling that we should not see a further deterioration over there in terms of the asset quality. Though it doesn’t mean that earnings growth will come back immediately in this year, because there still be impact of the provisions, which will continue to throw into the profit and loss (P&L) but there is some value because these stocks were derated, they will see some upside but if you take a slightly longer-term view that is where the delta can be in some of these names.Sonia: The other big pocket that you like is the fast-moving consumer goods (FMCG) space. We have seen a breakout of ITC, it is sitting at a new high now in fact, a lot of that confidence came in post the Q4 when the cigarette business remained quite steady. Do you expect to see further gains in names like ITC, Hindustan Unilever Ltd (HUL) specifically the FMCG sector?A: Last year has been a slightly tepid year for the consumer plays because of the slowdown in volume growth mainly driven by the rural side and also some disruptive competition in a few category, some new entrants coming in. So that is somewhere stabilising now and again slight underperformance of some of these names last year, we think that the consumption story in India looks to be pretty strong and much steady.With rural economy picking up a bit going forward on what we see good monsoons this year, this is a sector which at least the earnings visibility looks pretty steady. The sector is expensive, the stocks are no longer cheap but in this kind of a market environment where the earnings visibility is there and a decent earnings growth, I think the valuations will remain high.So it is a decent sector to be in, we have been trying to pick some value over there because wherever we have seen underperformance in the last one year or so and try to build exposure, but should not expect any great returns, but I think more steady returns and in this kind of a market environment where we have not seen across the board rally. There are pockets of growth. I think the sector will continue to attract premium valuations.