Top 4 sectors for bottom-up stock picking in midcaps: Shibani Sircar Kurian, Kotak Mahindra AMC
We have been cautious about the entire consumption basket: Shibani Sircar Kurian
How do you view Jubilant’s numbers? What is the trend you see within the consumption space, in particular QSR?
Let us talk about consumption as a sector because I would not be able to comment on company-specific numbers, but clearly the one standout from the result season so far has been a definite slowdown that is visible now on consumption, specifically with respect to rural consumption.
For a significant period of time, rural consumption growth outpaced urban and now it seems to be converging, with rural growth slowing down while urban is still more or less holding out. So far the commentary for most of the companies suggest that there are concerns on the rural growth story. Therefore at the kind of valuations that most of the consumer names, specifically on the staple side, have been trading at, there has been pressure, especially across the sector.
From our portfolios, we have been cautious on consumption and we have been fairly stock specific. At this point in time, the discretionary names are still holding out better than the staples. However, valuations clearly are stretched and there is no room for error.
If this rural slowdown does continue for a period of time, then you will start seeing multiples correcting as well. This earning season, what has really stood out has been the miss on the consumption side and commentary of many of the managements specifically on rural outlook.
Your views on Eicher. We saw a rebound today.
Again I cannot make stock specific comments but on the auto side, which is also a corollary of consumption, in two-wheelers, four-wheelers as well as CV space we have clearly seen a slowdown. There has been an overall demand slowdown, an increase in cost of ownership and with NBFCs facing liquidity crunch, there has been a slowdown in availability of credit. All of these factors have led to slowdown in auto sales. This slowdown can continue for a few more months as well.
As we enter the next quarter, we have to see whether there is any revival or not. We have been cautious about the entire consumption basket which includes the auto names and that is reflected in our portfolios as well.
Which are some of the pockets of market which will be well positioned to buy into right after the elections?
Certain segments and sectors still do offer opportunity. We are positive on private corporate banks. We still believe that a large part of the earnings growth for FY20 will be driven by the revival that you are going to see on the private corporate facing banks.
Another segment where we are positive is cement and industrials. Within cement, we hope that volume growth trends continue and some of the pricing improvement that you have seen over the last few months also stick on. As capacity levels improve, you will see overall improvement in terms of profitability flowing through as well. So, that is one area.
Industrials is also something that we are positive on. We believe that while we are not seeing the revival of private capex happening in a hurry, if we get a verdict of a stable government and there is revival in terms of public spending and focus on infrastructure spending specifically with respect to roads and railways, then industrials could be a space to look at over the next one year or so.
Another sector where we are positive on is the chemical space and we have been positive for a while here. We believe that structurally India is in a very sweet spot in terms of increasing their global market share in the overall outsourcing pie.
These are the few pockets of opportunities that are still there in the market. As a whole what we have also seen is that over the last year and year-and-a-half, the way the midcaps have corrected, the valuations present an opportunity to do some bottom-up stock picking in terms of high growth high quality stocks. That is how we are really approaching the market.
What about the oil and gas basket?
Oil and gas we have split it up into two parts. In terms of the OMCs, we continue to remain cautious given the fact that there is still uncertainty on the policy front as well as movement in terms of oil prices. Where we are positive is in the gas utility space. We believe that there is a structural story for demand growth to continue to improve.
For most of these gas utility companies, a lot of the infrastructure and capacity buildup has already taken place and therefore as demand and volumes continue to pick up, you will start seeing improvement in terms of utilisation.
Structurally, that theme of clean green energy, use of more gas in the overall fuel basket will continue to rise and within the oil and gas space, we are structurally positive on gas utilities and that forms a part of our portfolios.
What is your view on pharma?
Pharma has been a tough space to be in and that has been the case over the last few years. When we look at pharma companies clearly as a sector, it is very difficult to take an overall view so we have approached it on a fairly stock specific basis.
Also within the pack, if you look at the domestic names on the domestic formulation side, there seems to be some stability in terms of growth trends and you are getting early double digit kind of growth which is likely to continue. We are more positive on this space.
On the US generic space, while the pricing pressure on the US generics market has come down, but it is still there. As more and more drug approvals are coming through, the competition is clearly increasing and therefore pricing pressure is not going to go away in a hurry.
Also, as you rightly mentioned, the regulatory hurdles seem to be increasing and at the margin, it is very difficult to predict what will be the regulatory impact across companies. We are approaching pharma largely on a stock-specific basis with a view that that domestic formulation space is a better area to be in, given that there is some stability and visibility on growth. That’s how we are looking at pharma as a pack.
Where else do you see some visibility in a pickup in earnings in next quarter?
So far, the earnings have been largely in line. There have been a few misses as well. We will end this year with very low single digit earnings growth. If you look at consensus numbers for earnings growth for FY20, it is still close to about 23-25% in terms of growth on the Nifty.
For that to happen clearly, the corporate banks have to perform and you have to see that improvement taking place because a large part of the incremental earnings will have to come from corporate banks.
Even in case of the retail private sector banks, we see more or less steady trends in terms of earnings growth. Another pocket where we think earnings can deliver is on the cement pack, where we believe improvement in terms of utilisation will result in better profitability.
Our hope is that even on the industrials and the capital goods names, we will start seeing some improvement. As order flows come through and capacity utilisation levels start to pick up you will start seeing earnings come through. But our belief is that if the market is looking at about 25% plus earnings growth for the Nifty, there is still some room for disappointment and that is something that we really have to keep in mind as we go and progress down the next few quarter of FY20.
Right now, we are looking 16-18% earnings growth which is still a significant improvement over last year where we will end up with a low single-digit earnings growth. Usually what happens is consensus earnings is very optimistic at the beginning of the year and as the year progresses, you start seeing earnings downgrade and therefore we are in a position where earnings clearly have to deliver and the pace of downgrades have to come off, unlike what we saw in the last three years.