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Follow the monsoon; first signs of pickup will be in rural India: Jinesh Gopani, Axis Mutual Fund

ET Now|
Aug 01, 2019, 01.09 PM IST
Jinesh Gopani-Axis MF-1200


  • Q3 onwards, onwards, expect small and midcap earnings to pick up.
  • Consumption staples will pick up in next 1-2 months.
  • We are evaluating pharma in a stock-specific manner.
If monsoons are good and the festive season kicks in well, then maybe the December quarter onwards, we will see earnings growth picking up on the midcap and smallcap side, says Jinesh Gopani, Head of Equity, Axis Mutual Fund. Excerpts from an interview with ETNOW.

What are you picking up when you talk to your clients and some of your colleagues in other companies? Why is the sentiment in the market changing so fast?
If you see the earnings growth numbers, you will see what is happening on the ground. Obviously, things are slow. There is a slower economy. We are in a lean season of economic activity and hopefully only after monsoons, you will see real signs of pickup. All the high frequency data are slow. When we are doing our channel checks, things are not going to have J-curve where demand will just come back in a month or two. It is going to be a gradual recovery.

However, at least in some pockets, the bottoming out process is happening and if monsoons are good and the festive season kicks in well, then we will see the recovery happening and maybe the December quarter onwards, you will see even the earnings growth picking up on the mid and the small side.

What pockets do you see a recovery come by within the broader universe?
Consumption has been slow for the last six months. I am not talking about discretionary spend, but normal mass consumptions are slow. We would see some signs of pickup when the monsoons come and once it is normal, the rural which is also under stress, will see signs of pickup coming up. We are seeing that from a normal staple consumption piece, we should see pickup coming in the next one or two months.

As the first signs of decline came in from the auto pack, do you think the first signs of revival will also only come in from the auto pack?
The festive season will be a clear signal whether the auto cycle is reversing or not. Discretionary demand is very slow and unless and until the rural economy picks up and the urban economy bounces back, it will take some more time for auto sector to pick up in a big way.

But what will be the signs of a pickup in economy? Rates can come down, 10-year yields can come down, FIIs can probably start to buy. What will be the first signs that you will look for any pickup if it happens soon?
The first signs would be good, normal monsoons, balanced pan India monsoons and the rural economy will start kicking in because at the end of the day, in rural India, whenever money comes in, they end up spending it. It is not a big saver kind of an economy. So rural India is where you should focus on. If rural India picks up after a good monsoon which we hope for, then we will find the first signs of pickup happening there.

In private banks what will be your call? In the last five years, private sector banks was the one-way favourite trade for all funds, FII, DIIs. Does that change now? Should one be very selective in private banks?
One has to be selective in whichever sector you are investing in. Banks which understand the business cycles well, who understand the asset quality issues very well and have been able to navigate these phases in a better manner as compared to others, those are the evergreen stories. We should not forget India is an underpenetrated market. There is a huge demand for loans in tier-2, tier-3, tier-4 cities and that is where most of the good private sector banks are gunning their growth plans.

I do not think there is an issue in terms of growth, obviously the growth rates which used to be at let us say 25% can come down to 22-23% given the state of the economy at this juncture but from a structural point of view you would need credit growth rates of 12-13% for a GDP growth of 6-7%.

In light of the Fed ruling out aggressive rate cut going forward, what are you expecting from the MPC? Does it seem like the quantum of a rate cut by RBI could be even higher than 25 bps perhaps?
Yes. If you really want to give a stimulus to the economy, then a higher cut is important because that is one of the tools which can bring some reversal of the negative sentiments on the ground. But I do not think that is the only tool which can revive the economy. Along with that, many things have to be done. The first thing is the general sentiment change and then bringing in the animal spirits among the corporate world.

Some of the pockets that people have been looking at aggressively include utilities, infrastructure. Is that a space you will be looking at? Where do you expect to see a better chance of potential returns going forward?
We have some of the stocks in our portfolio and we are evaluating it but unless and until the private capex kicks in, the big move looks difficult and whenever we talk to the companies the expectation is the private capex will kick in only after 12 to 15 months. So, we are evaluating and if we get a stock at a good price with decent growth opportunities, we are participating.

When you talk about a stock at good valuation with decent growth, are you looking at it across sectors or are you looking at it where there have been a lot of cuts in various companies of late and where a lot of people were hiding out, names like HDFC. Some of the market favourites have also started to correct.
The fundamental philosophy of buying into good governed company continue and we will not like to go down the quality curve in that. If you get some company at a good correction value, then we will add up more.

After years of underperformance, any company that we are talking to is not pointing towards a recovery but is saying that in the US at leastm generic prices are bottoming out and in India they have started to see a pickup in branded sales. How would you look at pharma sector?
Pharma means again it is very stock specific because different companies have gone through a different business model that going within an ANDA approval and getting growth is where every company will have to chalk out their different business plans.

Many companies are going into biosimilars; some are going into specialty complex products. They are in the transition phase and may be over two to three years, growth should bounce back. We are evaluating them in a very, very stock-specific way.

Whenever pharma will bounces back -- this year, next year or after a couple of years -- the returns will be sharp or valuations attractive?
Normally companies which used to grow at 15, 20, 25%, have all come down to a single digit growth rates and also the ROEs have collapsed from high 20% type to single digits. Whenever the growth comes back, may be six months or 12 months down the line and improvement in ROE is seen, we should see them bounce back smartly.

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