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Be stock-specific, the market is still facing headwinds: Mayuresh Joshi, Angel Broking

The rally that we witnessed yesterday was really broad-based, says the fund manager.

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Last Updated: Mar 06, 2019, 10.42 AM IST|Original: Mar 06, 2019, 10.35 AM IST
Mayuresh Joshi-Angel Broking1200
The markets will probably gyrate and the volatility might continue though the positive bias might stay, said Mayuresh Joshi, Fund Manager, Angel Broking, in an interview with ET Now.

Edited excerpts:

The setup is looking fairly healthy at the moment. The broader end of the market is participating and the flows are fairly encouraging. Are we going to see a prolonged move on the upside or is this a flash in the pan move right now?

The FIIs have probably reposed confidence in our markets and the domestic buying is justifying the move that we are seeing. The rally that we witnessed yesterday was really broad-based. A lot of stocks and sectors probably moved, but my own sense is certain headwinds are still left for the markets to counter.

On the global scale, we have discussed about it time and again in terms of what happens with Brexit, the US-China contours of negotiations on the trade war and what probably happens with oil. The volatility on these aspects will probably keep currencies probably a little bit on the tighter side. Then we have the general elections over the next few months. So yes, the markets probably were stuck in the range but very close to the upper end of the range.

The markets will probably gyrate and the volatility might continue though the positive bias might stay. I am adopting a stock specific approach in markets like this.

What is the sense that you are getting when it comes to IT? Do you believe that it will continue to outperform?

Ticking off the positive elements that the sector has probably gone through, you could be right. The digital investments as a percentage of top line has increased significantly whether for the top-tier players or mid-tier players. Anywhere between 30-40% is where the digital percentage of revenues are which is a high margin business.

The second element obviously is in terms of onsite staffing. There was a significant amount of hit that a lot of these players have taken to recalibrate their entire business model and the wage hikes that typically happen in the first two quarters. The EBIT margins which probably got affected have gestated to a large extent, the kind of impact that one probably sees from these factors.

The third element obviously is the order book and the order book takes off because of the wins that they are probably getting, specifically in key areas like BFSI, retail, manufacturing, life sciences that holds them in good stead.

The fourth element obviously is utilisation levels. The utilisation levels have started picking up, but attribution levels for a few players are still on the elevated side. As the bench strength starts getting improved and as the execution starts improving, you are probably going to see the earnings traction happen both in the constant currency and dollar terms.

The risk-off factor probably is slower than expected discretionary spending from US corporates in the event of a slowdown that one probably talks about. BFSI which is very critical for a large number of players, is one sector to be closely monitored.

The second element obviously is in terms of the slowdown where you are probably going to see lower utilisation levels and higher onsite costs. Having said that, the top tier names is something that investors can hold at. We hold Infosys within the top tier names and HCL Tech in our portfolios.

What is your outlook on autos? Which are the stocks you prefer?

The slowdown is here to stay for at least next few months, a) they are working on a very high base, b) you are probably looking across the spectrum of the auto universe -- two-wheelers, four-wheelers and even the MHCV players.

There is high inventory level in the system at this point of time. Over the next few weeks, the liquidation of this inventory is going to be very critical and liquidation of inventory will obviously happen at a discount. Add to that, if we talk about two-wheelers, the entry level segment is where the heavy discounting and undercutting is still continuing to probably have a foothold in terms of market share gains.

The premium bikes have witnessed certain amount of slowdown pressures as well because of ownership cost moving higher due to higher insurance cost as well as costlier fuel cost in the quarter gone by. There were delayed purchases from the buyer end.

On the PV side, the competition is hotting up and for volumes to normalise, it will take a few months. It is not going to be a V-shaped recovery in terms of volumes that one can really expect from the auto universe.

It is a very slow and gradual recovery process that will happen. Even on the MHCV part he LCV market has held up pretty well, the HCV part is probably still languishing because of concerns on what probably happens through in view of axle load norms.

Again as pre-buying will starting taking place in the second half we will see traction coming but there will be price hikes in the last quarter as well. I am being very, very selective. Eicher Motors is something that we own the two-wheeler space. It has gone through a lot of pressure points but the new twin 650 cc launches that they have done has seen good response. The export market is holding up for them as well.

Maruti probably looks very interesting. Though the correction has been very sharp, the recovery will be very gradual but valuations probably look very attractive at this point of time.

I always find this argument rather silly that you should do defensive buying when markets are uncertain and buy staples and auto stocks because they will not fall?

Mayuresh Joshi: So to a certain extent I think a) one must really look at how the earnings recovery and the earnings trajectory is going to pan out. Cyclical sectors go through volatile times and in these volatile times you are going to see these sectors getting beaten down. But there is a huge amount of impact that can also come through in terms of strong earnings recovery. How do you position yourself specifically in terms of the sector allocation that you are probably expected to do with the expectations of strong earnings growth and earnings recovery is something to be seen.

Financials that you are probably alluding to have probably gone through the worst possible patch. They have also moved up quite sharply. But as credit growth starts picking up in the system, a large part of recognition has probably happened on the book. The valuations probably can get rerated even from the current level. You are talking about specific NBFCs. They have got beaten down out of shape because of liquidity concerns. But the well-capitalised, less-leveraged NBFCs will recover the most as the recovery process starts coming into play. One really needs to understand the dynamics in terms of which sectors might do well.

Consumption, again is a large basket, but within consumption, there are sectors which can get played out. Our sense is we are probably looking at the paper sector which in our opinion can do really well over the next few quarters and even certain stocks within the hotel industry.

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