Swati Kulkarni, Executive Vice President and Fund Manager, UTI MF in an interview to CNBC-TV18 spoke extensively on how to approach market going forward.
According to her one could have top-down approach toward market since earnings recovery is expected to come throgh going forward.
Sector specific, she says the valuation gap between the smallcaps and midcaps is also likely to correct in 2016. The commercial vehicle segment for the auto companies have started showing signs of pick up and the two-wheeler margins although not encouraging, valuations look attractive now.
With an overall pick up in urban infra and economy in general as well as passage of 7 th Pay Commission could bring back demand for consumer durables. She is still cautious on pharma space and says one needs to have a stock specific approach there because of the USFDA issues. However, once the USFDA issues are out of the way, investors will start focusing on their product pipelines, says Kulkarni. She has a neutral stand on pharma.
From the banking space she prefers the private banks on back of strong capital adequacy levels and retail focus. One can look at these from a 1-2 year horizon, says Kulkarni. So, if one is betting on cylicals, look at private banks instead of PSU banks because the asset quality concerns still persists for PSUs.
She recommends avoiding the metal space because of global growth and China slowdown concerns.Below is the transcript of Swati Kulkarni’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Anuj: It has been a remarkable year where foreign institutional investors (FII) have sold and you and the rest of the domestic institutional investors (DII) have come to the rescue of the market. However, in 2016, do you see this bottom-up trend for the market changing to a bit of a top-down? Or would you expect the same kind of move to continue where the Nifty will not do much, but stocks will do exceedingly well?A: Yes, that can be possible but from a top-down approach perspective, since the earnings recovery is expected, you could expect that even the top-down could also work and it could be probably the valuation gap that we have seen now in terms of the smallcaps doing much better than the largecaps. That is said to correct in the coming year.Ekta: One of the key outperformers have been a couple of these oil and gas stocks, for example Bharat Petroleum Corporation Ltd (BPCL), which has given strong returns of around 40 percent on a year-to-date (YTD) basis, top Nifty gainer. How would you approach it in 2016 and how much more do you think is left to go within a stock such as BPCL or the entire oil and gas space as whole?A: I would like to divide my answer and maybe we can look at downstream separately from upstreams.If you look at downstreams particularly, he marketing margins have remained compared to the administered price regime that we had, we came to a market based pricing. So marketing margins while there was not much of a hit as far as subsidy burden is concerned. You also had a support of strong gross refining margins, which have remained particularly strong because of the demand scenario that we have experienced.For example, in India, the petrol volume consumption has grown at double digit. Diesel is also in single digit, though it has come off in recent past. So, even globally, the product margins remained high and that the companies benefitted out of it.However, we need to see that competition also might gear up now that the subsidy or the administered price regime is going to end. So, from that perspective, whether this will continue in the future, a lot depends on the crude behaviour from here on. For example, in the current quarter or in the coming quarters, because the crude prices have come down drastically in the past six months or so, you could expect inventory losses to eat into the gross margin related benefit that these companies have. So, reported profits could be affected by that.If you look at upstream per se, clearly the falling crude prices have created a pressure on these stocks. One could look at some transmission related stocks in this particular oil and gas sector, because those could be away from the administered price regimes and also they could have some specific arguments over a long-term as the transmission volumes and the tariffs get rationalised.Anuj: Let us talk about some of the other sectors. I believe you are quite positive on the auto sector. Within autos of course, we have of course, commercial vehicles (CV), four-wheelers, two-wheelers, and the trend has been all over the place. Which pocket do you like most?A: If you look at the current volume reporting that has happened, CV has clearly started to grow and it is coming out of a very muted volume growth for quarters.You could also look at four-wheelers, that is the passenger vehicle, which has shown some kind of resilience as far as the volume growth is concerned. Two-wheeler is a place where the volume growth is not that encouraging, but valuation is on your side.One has to look at the drivers for the future growth here. For example, in CV, the mining and the pickup in the roads and railways and the pickup in overall economic activity could augur well for the volume growth in that space.Also, we could probably take a long-shot at the Seventh Pay Commission related. Usually, we have seen the demand coming for consumer durables and particularly, for cars. So, we could argue based on that and from that perspective, auto is a good early cyclical and that is the thought process for us to remain overweight in that space.Ekta: It has been a tough year for a couple of the pharmaceutical companies, but the likes of Lupin have still managed to outperform this year. How would you approach pharmaceutical in general and we have two new listings also which you can choose from.A: Pharmaceutical is going to be much more stock specific. I would say the US Food and Drug Administration (FDA) related concerns probably are priced in to an extent because you have seen many largecap pharmaceutical stocks correcting to the valuation of 22 times or so. If they are able to -- and I say a big 'if' because they need to come up with a remediation process and fresh approvals need to come from US FDA, which could take about 15-18 months.Once that happens, probably market will look at the pipeline and the new product launch and they will start building in that. You could look at earnings supplement from these products as well as the re-rating of the sector. It all depends on a very stock specific cases and it could be a best neutral stand at this point of time because of lack of clarity in terms of the approvals.Anuj: So, the space where we have seen a lot of wealth destruction this year has been even in the bluest of blue chip private sector banks. ICICI Bank, a case in point. I do not recall when was the last time I saw ICICI Bank go down 30 percent in a year. In private banks, do you believe that it is now a good time to go out and buy some of these names?A: We have been maintaining a bias as far as the banking sector allocation is concerned in favour of private sector banks.On couple of key positives, the capital adequacy and the retail focus that these banks have -- because it is very well accepted that the system related problems or systemic problems about the poor credit quality perhaps could be there across the banks, but probably the retail oriented banks and the banks with a better capitalisation could fight it a little better.You are right that some of the private sector banks have not done well and their valuations have now come to their historic valuation levels or even below that. So, from a perspective that the incremental asset quality issues probably can be taken care of by a private sector bank basket as such and you have a valuation support.So, these two arguments probably can make a case that if you want to play cyclicals, you could still bet on the private sector banks and from a perspective of one or two years, you could perhaps look at these banks rather than public sector undertaking (PSU) banks, which also have corrected, but the asset quality related issues are still lingering there. And that is the thought process and that because of the lack of the capital adequacy, as good as it is in private sector bank.Barring a couple of top PSU banks, I am not sure whether we want to look at tier II PSU banks at this stage.Ekta: How would you approach commodity stocks? Do you think 2016 will see a bounce back in all commodities and hence maybe help metal stocks and that would be a good bet?A: From a year-on-year (Y-o-Y) perspective, that maybe a case, but whether structurally, the demand is going to improve, that is one key question that we need to answer. For example, the global growth is not going to be that strong and we are having fears about China hard-landing and they shifting their focus to the consumption orientation rather than the investment orientation that they have been doing for the past decade or so. So, from that perspective, I am not sure whether the demand recovery is going to be a sustainable argument there.My thought process is to avoid this sector despite the attractive valuation that one may argue at. So, that remains there rather look at the sectors which are likely to benefit from this trend of benign commodity prices.
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