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Long-term investors should stick to quality names now: Mayuresh Joshi, Angel Broking

In next few weeks, we are probably looking at more global action, says Joshi.

ET Now|
Feb 09, 2019, 09.56 AM IST
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The range for the markets can be a little bit wider over the next two to three months and also a little more stock- specific, Mayuresh Joshi, Fund Manager, Angel Broking, tells ET Now.


Edited excerpts:


What do you make of the market’s direction in the week gone by and what clues does it give you for the weeks ahead?

The two key events -- the budget and the RBI policy are now truly behind us. In the next few weeks, we are probably looking at more global action. What happens with Brexit is going to be very critical for global markets. The government moves on shutdown that the US markets are facing at this point of time is going to be equally critical. We also have to look at what happens with the global data points in terms of economic parameters, the GDP numbers, the PMI numbers, not just in the context of China but also the European economies ex UK. What happens with the European Union is going to be extremely critical.

At the same time, we are heading into the general elections and that will keep the markets on tenterhooks. Earnings in general have been very lumpy even for the quarter gone by. A consistent earnings growth is what the market will probably look at to probably justify the valuations that they are deriving at this point of time. You should be bracing yourself for volatility which will continue.

The range for the markets can be a little bit wider over the next two to three months. It is a little more stock-specific in my opinion rather than playing on the index. Good quality stocks have stood the test of time. Investing in quality names at this point of time is probably the only pertinent choice that long-term investors have.

There is big concern over Tata Motors after the near Rs 27,000 crore loss it showed. There are concerns around global growth. M&M also talked a little bit about overseas markets. Eicher Motors numbers are coming up in the week ahead. In auto, will more domestic oriented names see some interest going ahead?

There is general patchiness in the auto sector as a whole -- be it two-wheelers, passenger vehicles or even the M&HCV players. The lumpiness in reported numbers have played out in terms of prices. The second element is also that the input cost inflation had probably eaten into their operating performance and with the introduction of third party insurance and the volatility that we saw in crude prices, the cost of ownership had moved up. This made choices for the end user to be pushed back a little bit more.

The discounting factor still probably continues as the inventory pipeline at dealer networks remain a little bit on the higher side. A few players like M&M have few launches ahead of them which means that there will be elevated product and promotion related costs. As we move into the regime where BS-VI will start getting incorporated over the next four to five quarters, pre-buying will come in.

With a lot of modifications required for BS-VI, the cost of ownership for the new variants being compliant with BS-VI will go up. The discretionary demand patterns in the markets remain soft at this point of time. They are going to normalise but at what point of time is going to prove to be extremely critical.

For global facing autos, there’s uncertainty over the model and what probably is being witnessed in terms of the trends towards the EV side both in terms of R&D investments and the rollout of models expected over the next one to two years.

The cash flows are being kept in check, the top line and the volumes are not growing; the margins are under pressure and that is creating a huge valuation gap. The earnings are disappointing and again the earnings might remain a little bit subdued. The auto pack is expected to go through a rough patch at least for the next one to two quarters. Normalisation will definitely happen but in order to take a call, I will wait it out for a couple of months, look at the trends and then probably look at specific stocks within the sector itself.

Another pocket of the market which everyone appears to be fairly favourable on is pharma. What is your view? Also, which are the other pockets of the market that you are positive on right now?

I am being selective here. The numbers were encouraging to say the least. There are a lot of issues -- be it FDA concerns, pricing issues, the remedial costs associated with FDA issues and the expectations of clearances coming through, so that the ANDA filing can go through giving revenue visibility.
These are some of the factors that the market and the pharma sector can probably look at FY20 onwards.

Out of the numbers that have come through in terms of earnings profile, stocks like Cipla, Aurobindo can continue to do well. A disclaimer we hold these stocks in our funds.

Out of the other sectors, banking is something that we will continue to pursue and like over the medium to long term. The reported numbers by the private retail corporate lenders have been very encouraging. The advances growth is expected to continue on a very strong footing.

The asset quality pressures have come off and again the reflexion in terms of higher provisioning and reduction of cost to income ratios will mean that the credit cost will start coming down meaningfully over the next few years. That itself will lay a base with strong advances growth and strong capital adequacy for improvement in their ROAs and ROEs.

We hold on to banks like Axis, ICICI and within the midcap space, the midcap private banks like Federal Bank. In our opinion, the worst is probably over. You might have one more quarter of patchiness in terms of reported numbers but the overall earnings trends and the adjusted book value even at the current juncture looks pretty attractive to us.

We are being very selective in NBFCs as a space. We have liked gold financing companies and we continue to hold positions here. Our thesis is very simple, the loan to value and the expectations of asset-liability mismatch probably is not very apparent here. The asset quality pressures are coming off, adequacy remains strong and the new RBI dictate in terms of credit risk weights benefit the earnings profile for these companies as well.

Within the broader, we are very selective in cement companies and a few of the outer-bound consumption names. The ancillary consumption names related to hotels or paper stocks can also do well over the next couple of years.

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