Deep value has emerged in auto and pharma sectors: Ajay Tyagi, UTI MF
You have to fish out companies with strong business models, balance sheets & steady cash flow generation
What will it take for Indian stock markets as well as economy to come back from this bearish phase?
Very clearly, this is not the first time that we are seeing a phase like this and obviously it would not be the last time. It is in the nature of the markets to extrapolate the near term events into the future and therefore form an opinion about whether things would remain rock solid and keep rolling forward forever or like in the present circumstances be pessimistic about what is happening on the economic front, unemployment numbers translating into weak earnings numbers and so on and again extrapolating them for the next few quarters or the next few years.
Clearly what fuels the market forward is always the steam of earnings momentum and earnings growth and that has been lacking for quite a few years now. There have been pockets and there have been sectors where we have had earnings growth but even there we are seeing some bit of a slowdown. Now these are sectors like private sector banks, domestic consumption -- both staples as well as discretionary. When I talk about discretionary, the most topical one right now is the auto sector. So investors have been extrapolating the slowdown into the future and that is the reason why markets are trading weak.
I can only remind investors right now that as far as the overall ability to grow for the country and the growth runway is concerned, we are still that economy which has favourable demographics, give or take $2,000 per annum per capita income which basically means that we are under penetrated across categories and therefore there is enough room to grow provided, we get the confidence back in the economy.
If you work on some of the numbers, yesterday HUL commentary was nothing great, L&T has guided lower. M&M Financial today has been punished for talking of rural slowdown ahead. When will the low base start playing out and recoveries set in?
It is always very difficult to call out whether the bottom is one quarter or three quarters away, but let me give you some bit of data points which would also remind all our investors about what is happening in the economy and why things are getting tougher. From September and August of last year, we have been in the midst of the NBFCs crisis.
It started with the IL&FS default and then manifested itself very quickly into a large section of NBFCs not getting to see rollovers. When they are seeing lack of rollovers. they are not able to lend on their assets side or they are lending a very small fraction of what they would have otherwise lent. As the lending has dried, we are seeing a big slowdown in consumer discretionary spends because over the last five years a lot of discretionary items whether on the auto side or consumer durables have been financed in this country to a great extent. We will have to solve this problem for the whole engine to kick start and therefore when we say whether it is two quarters away or one quarter away, we mean we will have to first get the whole financing engine back and that requires effort from both the government and the RBI.
I would say that till the time we get the NBFCs back on their feet, till the time we get some of the PSU banks which are slowly coming out of the PCA framework back on to the lending side we would continue to face these challenges.
The mutual fund community continues to witness decent flows. They are not toeing the line as they were a couple of months back but still have not fallen off the cliff very sharply. You are getting incremental money in the form of SIPs. But where is value emerging and for whatever reason?
I would say the deepest and the most sudden value that has emerged is clearly in the automobile sector. We have seen one of the best business models that have been built in this country very assiduously over the last 20 years, have been punished thoroughly in the last three to six months as if these are extremely poor business models.
Clearly value has emerged in that entire spectrum starting from auto OEMs to auto ancillaries, equally there have been pockets that have been emerging in the pharmaceutical space over the last couple of years and again this is on account of US generic slowdown as well as domestic formulations.
These are the two sectors where there appears to be a deep value right now and you have to fish out for companies which have strong business models, strong balance sheet, steady cash flow generation and therefore have that resilience to withstand the downturn and participate in the up move as and when the economy starts to do well.