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Expect sharp recovery in index earnings growth next year: Pankaj Murarka, Renaissance Investment

One will have to be very stock specific in terms of bottoms-up stock picking, says Murarka

ET Now|
Feb 08, 2019, 03.59 PM IST
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Pankaj Murarka1-1200
We should expect at least one more rate cut in the next policy sometime in April, Pankaj Murarka, Founder, Renaissance Investment Managers, tells ET Now.

Edited excerpts:

Tata Motors has fallen the maximum in ten years, on the back of high volumes. What do you do? Do you buy this decline in Tata Motors or do you think it is a strict avoid considering other auto stocks as well have fallen and perhaps there are better opportunities there?

Clearly, they have had a bad quarter and they have had a series of bad quarters during the course of the year. But the company itself is undergoing a transition and probably this is one of those last bad quarters and they have taken a significant impairment. But from here on, one looks at the business. One, obviously after the strict correction there is deep value into the stock and from here to next quarter onwards, JLR will get back to profitable growth, though it will be somewhat gradual but it will start reporting profits from the fourth quarter. It is a bit too late in the day to sell, meaning our view remains positive from a medium term perspective.

In the current context would you prefer to go with some of the more domestic oriented plays in the auto space, given that the government currently has bias towards consumption post the RBI policy this week?

Yes. that’s right. The sector itself is going through a cyclical slowdown because over the last six months, it has got impacted by tighter financial conditions in the NBFC sector. Large part of auto sales are financed by NBFCs and on top of that rising crude prices and the consequently rising fuel prices and higher insurance cost also added to bad demand.

But most of these headwinds are behind us and probably we are seeing some recovery in the rural growth as well. We have seen a sharp selloff in the sector across the board over the last few months. We should expect a recovery both in the rural as well as the urban consumption and that should benefit autos as a whole. The domestic-oriented auto stocks should do well with revival of demand.

What should one expect going forward? Markets have been fairly range-bound since the elections, perhaps factoring in some growth concerns as well as rate cut. Over the next couple of weeks, directionally where do you expect things to move?

We continue to be positive on overall market. We have been into an earning recession where earnings have been missing for the last almost 8 or 10 quarters but now we have reached a stage where we have started seeing earnings growth, at least in the largecap or Nifty companies. Overall, the view on the market remains positive and as we look forward to next year, we are looking at sharp recovery in index earnings growth.

The good thing is that RBI has signalled there was a strong case for rate cuts because India probably has one of the highest real rates in the world. We should expect at least one more rate cut in the next policy sometime in April. The broader view on the direction of the markets remains positive.

Having said that, one will have to be very stock specific in terms of bottoms up, stock picking or building portfolios because there is a significant divergence in performance across stocks and sectors. One has to be cautious in the midcap and smallcap space.

It seems that the group of ministers meeting which is currently underway is pushing for zero GST. Of course, it is coming with its fair share of riders. Do you think this would call for a re-rating whenever the zero GST does get implemented for realty?Are we going to see prices correct in real estate sector?

It will certainly help at the margin but that will not be the only thing which will lead to revival in real estate sales because we have significantly high inventory at least in the six key metro cities across India.

Inventories are at about 7 or 8 years of sales on an average, whereas normalised average used to be 24 to 30 months. So, there is significant inventory in the system and at the same time, because of the NBFC issue there are significant leverage and liquidity issues with the developers as well. What we really need is a significant moderation in prices because in a lot of cities, real estate prices are significantly higher than what the affordability benchmarks are.

Some of these measures will certainly help at the margin but we need to have much stronger growth and job creations to help to have strong revival in the real estate sales.

Variety of different elements are at play here. SAIL for example is down 6% even though it has had a pretty good quarter. We are expecting Tata Steel numbers shortly. JSW had decent set of numbers. What is going on in metals pack?

We have been cautious on the sector for a while because we have a negative bias or outlook on the Chinese growth outlook. China is slowing very sharply and probably that will have rub-off effect on metal prices globally. Our view on underlying commodity prices continues to remain bearish and as a consequence, we are underweight and are avoiding the whole metal space.

What is your take on Aurobindo?

We like healthcare as a sector as a whole because over the last three years, we have seen significant earnings contraction in the sector followed by correction in stock prices. But more importantly, we have reached a stage now where earnings for the largecap pharma companies are stabilising.

We are also seeing a fair degree of stability in the US generics market where we had seen significant price erosions over the last two years. Going forward, the US generic markets will be much more stable. While some of the Indian companies had some regulatory issues, most of them have got through as well.

From a medium-term perspective, the outlook on the whole healthcare sector remains positive because a) the US generics market will start delivering growth for these companies and; b) some of these companies have made significant investments in the last three years in their businesses and probably over the next two to three years, they will start reaping the benefits of those.

So with the kind of correction that we have seen in stock prices valuation, for the sector is also moderated quite a bit. So we remain positive on the sector as a whole.

Also Read

Pankaj Murarka on when to start nibbling into midcaps and smallcaps

We are getting more pro-cyclical, looking at midcaps and smallcaps: Pankaj Murarka

Some staple stories better than discretionary part of consumption: Pankaj Murarka

PMS & AIFs: Market should be allowed to form own fee structures, says Pankaj Murarka

Expect 20% plus earnings growth on Nifty next year: Pankaj Murarka

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