Upbeat on retail-oriented banks, pharma, auto: UTI MF

V Srivatsa of UTI Mutual Fund expects to a pause on rates in the RBI's upcoming monetary policy as for the next 3-4 months inflation could be a big source of worry. 

Speaking to CNBC-TV18, he said that in the coming quarters there will be revival in the pharmaceutical sector and the pent-up demand due to demonetisation is likely to play its part in the automobile space.

He further said that he is positive on the retail oriented banks and large cap private sector corporate oriented banks.Below is the verbatim transcript of V Srivatsa’s interview to Prashant Nair and Reema Tendulkar on CNBC-TV18. Prashant: Since today is the policy, what do you expect and how do you think the market will respond to a cut or no cut? A: My sense is there will probably not be any cut. There will be a pause because I think probably three to four months down the line, inflation can be a big source of worry. So, keeping that in view, my sense is there may not be any cuts, there could be a pause and market is probably aligned to that. So, if there is a cut, there could be a positive surprise as far as the equity market is concerned. Reema: The bedrock of this rally, this near 900 points up move that we have seen in the last one month has been very strong domestic institutional inflow. We know the SIP run rate for the last many months was Rs 3,000-3,500 per month but has it picked up say in the month of January or December or even in February, what are the early trends, should we expect a material pickup in the SIP monthly inflows? A: Yes, I think the figure you mentioned, there has been a steady increase in that figure and probably the investments into the equity market is also a reflection of how much returns the investor has made in the last three to five years and that experience has been very good. So, if you look at the last five years, while the overall equity market has not done very well, but some of the funds have done far better than what the equity markets have done. So, as on, the end investor experience is very good. The confidence of putting in more money increases and also the investor is today matured and probably more educated than what he was 5-10 years back to understand that equity is a volatile asset, but in longer term it gives better returns than any other asset class. So, that kind of maturity and knowledge has kind of sunk into the end retail investor. So, I see these flows continuing and probably gradually increasing to probably Rs 4,000-5,000 crore over a period of time per month.Prashant: It depends on investor experience whether you have had a positive experience of the market which I guess most have had especially with midcap funds, etc. but it is also I guess a function at the margin about what are the avenues you have right and the government has been trying to move people away from physical assets to financial assets, that is also responsible for this trend? A: True, so, today what has happened is that traditional forms of investments like FDs or other corporate fixed deposits, or other bonds are kind of giving lower returns and equity also has a convenience attached to it. So, you have less of documentation, you don’t need to maintain any forms, so, that compliance cost is also low. However, I think the underlying point is that if any investor has been doing an SIP or has been investing at regular intervals over the last three to five years, it is very likely that the average return the investor has made would be far higher than any other form of investment. Reema: Flushed with money what are the fund managers chasing right now. Banks and consumers have led the rally for the last many years but valuations are now pretty much at peak levels once again, the temporary impact of demonetisation has gotten erased, is that where the money is chasing or new ideas emerging, what could be the top sectoral bets for UTI MF? A: In terms of the funds that I manage, whatever incremental money that I am getting, some portion of it is getting allocated into pharmaceutical. So, even in my earlier interactions I have been quite positive on the sector even though it hasn’t performed very well in the last six months to one year. However, clearly over the left couple of quarters, I see the possible end to all those US FDA issues. That will again accelerate the growth and assets, domestic and emerging market story still stays for these companies. So, in the current scenario, I am seeing a lot of value on the pharmaceutical sector. On the banking side, I think there has been a very massive rally in PSU banks. So, to that extent, I think there is some kind of rerating has taken place. So, for the PSU banks to rally from here, one would need some clarity on the growth whether they will be able to lead the credit growth over the next two to three years, I am not too sure of that given their capital constraints that most of the banks are facing. There could be one or two outliers though amongst the largecap PSU banks. So, banks I would still be more positive on the retail oriented banks as well as the largecap private sector corporate oriented banks. However, I would probably still say an incremental money of mine would still go into pharmaceutical. The other sector that I would look out for is automobile. I think that sector is also kind of taken the brunt of demonetisation and next year we should start seeing growth resuming in a big way. Unlike consumer here, the sales are probably not lost. So, if a consumer wanted to buy a particular vehicle in November, he would probably buy it in April or he can even buy it in the March quarter. So, you could see a big pent up demand coming up in the automobile sector next year and I would be quite positive on that as well. Prashant: We understand that the scrappage policy which we have discussed over the last two years or so will finally be taken up tomorrow by a top government committee and the matter under consideration is only scrappage policy for trucks and buses but let us talk about trucks. How significant can this be if the terms of the scrappage policy, what was outlined by the ministry in the white paper? A: I think this can be a big booster for the MHCV sales because we still have large proportion of trucks which are more than 10 years old. So, there can be a huge demand which can come up and fortunately we also have big capacities available with the top three to four players. So, I think this is probably very good for the overall automobile sector as well because MHCV is one of the biggest components of the whole Indian automobile sector and that will also spiral all the way down to the auto ancillaries because a lot of auto ancillaries as well depend upon the MHCV sector. Reema: Lots of news surrounding IT major, Infosys, whether it is a buyback or a strife between the promoters and the CEO. Do you hold the stock and if yes, what are your thoughts on Infosys as well as the IT sector? A: We do hold it in a big way but as you know, I can’t comment on any individual stock but broadly what I would give my thoughts on the sector is that there is possibly some kind of headwinds which are there in terms of or rather un-ponderable or some uncertainty with regard to the visa issues. So, one needs to wait and watch over the next two to three months and what form it takes shape. However, I think there is a very good opportunity for these companies to do a lot of corporate restructuring in terms of buyback or increase in the dividend payout because at today’s price, the free cash flow yields are closer to 7-8 percent.Unless we see a very drastic reduction in the earnings by 40-50 percent, we believe that the cash flow characteristics of this business remains very strong. So, there is a case for all the top companies or rather most of the companies in the sector to do value accretive buybacks. Some of the midcaps which have done over the last three to four years, have actually got the benefit of a higher P/E multiple than what the rest of the companies get in the sector. So, I think this presents a very good opportunity for them to go in for a buyback or other forms of restructuring where the excess cash can be returned to shareholders in a tax efficient way.Prashant: Just to go back to the first question, you said that the market may be surprised if we don’t get a rate cut, you don’t expect a rate cut, you mean on the downside right? A: I think probably the markets will remain steady at these levels. So, my view is that the markets have gone up quite a lot in the last probably year-to-date (YTD) on the back of two factors. One is the Budget was probably much less harsher than what the market expected. The flows were very strong on the global as well as on the domestic side. Third, I think the results where there was a huge fear of impact of demonetisation that has been much less than what the market expected at least on the consumer and the automobile and the banking sector which were expected to face the brunt. So, I think all these factors have helped the market give a very sharp rally without a big change in the underlying fundamentals. So, I would say the best positive case would be that the markets would remain steady at these levels.