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There is no quick solution to the slowdown: Sachin Trivedi, UTI MF

It will take six to may be two to three more quarters for things to eventually start reflecting on ground.

ET Now|
Sep 09, 2019, 04.59 PM IST
Sachin Trivedi, UTI MF-1200
We cannot find a quick solution to the slowdown that we have been witnessing for last at least two, three, four quarters, says Sachin Trivedi, Equity Fund Manager & Head of Research, UTI MF. Excerpts from an interview with ETNOW.

What are your thoughts on transmission in the banking system and in the economy? Do you see some progress on that particular issue in the last couple of weeks?
Sure. This is one of the key areas and key issues for the industry and you have seen the impact on two leveraged sectors -- housing as well as the auto sector. Both the consumer segments. One eventually ends up borrowing a lot to buy those products. Both these segments got impacted in the last couple of months also because the rates remain relative. The real rates are relatively very high. It is important that from the transmission perspective, RBI has decreed that banks would have to compulsorily link products to repo rates.

This is an issue because there is an asset side and there is a liability side. On the liability side, they are directly and indirectly linked to where your national deposit saving products are, being the PPFs or NSE products which is where the government has to take some steps in terms of cutting some of the rates, so that on the liability side, banks which are the competing products can also effectively bring down their deposit rates, to be eventually passed on to the borrowers. That is one thing which we need to keep in mind.

What are your thoughts on the auto space? Do you see the health of the sector improving if indeed there is a big GST cut?
If there is a government incentive which will help boost demand among consumers. On the demand side, a couple of things have been happening. One, in the last couple of months, there has been a sharp inventory buildup the manufacturer’s side which is getting corrected now.

Of course, when we talk to the companies, the sense we get is that the wholesale numbers, which are the production linked numbers, are correcting more sharply than the retail level activity. Some amount of inventory correction is also taking place. Manufacturers are planning for transition to BS-VI. That is one thing which we have to keep in mind when we see large cut in the numbers.

As far as demand is concerned, what really needs to be addressed is some of the buying section, especially the SMEs or the business group or the agri group, shows a lack of liquidity and some impact as far as the income level is concerned. That needs to be addressed and sufficient infusion of liquidity in the system, bringing down trade effective transmission could also bring some of those activities back as far as buying is concerned.

Of course, in certain areas, the manufacturers also need to throw newer products to excite consumers. In last one year, there has been a lot more increase in cost as far as consumers are concerned with some benefits but that has not really been appreciated by consumers.

Some of the successful models which were launched recently have seen a good amount of activity. From manufacturers angle also, they need to bring out a lot more new products in the market.

From government, angle there is need for some amount of confidence building which has to happen from the real consumer perspective. The transmission activity has already started to take place but of course we need some more push there.

Where do you actually get maximum amount of comfort in terms of margin of safety? When you analyse the earnings trajectory, how has the stock price valuation corrected for a 12 to 24 month view?
Just in Q1, at the beginning of the year, there was an expectation that we will clock 20% plus kind of earnings growth and large amount of earnings growth was definitely coming from banking space. Some of the PSU banks or even some of the private banks have got some amount of QonQ increase in NPAs, where a good amount of earning cut has already taken place and may be some more will take place going forward.

But that is a story which has been repeating for quite a while. For the last few years, we have been starting with good earnings growth but ending up with just a single digit growth. Looks like this year also, it will be the same because of the NPA situation which is emerging.

Within this pocket, if you look at a couple of private sector banks, well capitalised would be well placed as far as capturing the opportunity is concerned. The PSU bank pack, in my view, will be still busy with the merger process. A good amount of opportunity will get created for some of the well capitalised private sector banks.

So that is one space and of course a pricing power will come back to them. That is one space which is largely looking good to us. The other space we have to keep in mind, which is the pharma and IT and a couple of export related stocks, will get some amount of momentum or some amount of benefit which is linked to currency depreciation because we have to keep in mind that there is some amount of currency related benefits which will will start to come in for some of the IT, pharma related names.

When we look at the IT space, the valuations are a bit more than they were trading for one and a half year back. But the underlying business activity especially on the digital front is again quite healthy as far as IT space is concerned and that is looking good to us.

In pharma, again the pricing pressure as far as US business is concerned has come bit softer and the approval processes have started picking up. The domestic space again is single digit to early double digit kind of growth which continues for them.

Again this space looks to be a good space in terms of safety. Of course, the investors can look for a lot more safer names in terms of consumption because here we have to keep in mind that of course there is this slowdown which is hitting but we have to keep in mind that as far as the rain, the monsoon is concerned, in a couple of months the confidence in agriculture will come back, let us say in spaces like Vidarbha.

The water level in some of these states will substantially go up which will result in confidence coming back and income of farmers in villages and that in tier three, tier four cities coming back.

When do you see the economy bottom out and the slew of measures taken by the government start bearing fruit? The market will start moving up when the economy bottoms out.
The FM has already announced a couple of steps. Clearly, the most important thing here is that from the government perspective, they have started acting on the slowdown related areas. So, the efforts from the government with respect to releasing liquidity in terms of SMEs and smaller businesses, which is very important from their perspective, will result in the multiplier impact as far as the ultimate demand is concerned.

Also, with good monsoon some of the good measures being taken by on the government side should start to trickle in as far as the economy is concerned. It will take six to may be two to three more quarters for things to eventually start reflecting on ground. I believe that some amount of confidence building will start taking place and effectively the business should also start to get benefit out of it. But we cannot find a quick solution to the slowdown that we have been witnessing for last at least two, three, four quarters.

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