V Srivatsa on top 3 sectors for value buying

There are opportunities in metals, power utilities and industrials, says V Srivatsa, EVP & Fund Manager-Equities, UTI MF. Excerpts from his interview with ETNOW.

How do you expect this quarter to be for private sector banks especially corporate private sector banks because a lot of money is riding there? Do you think they will fulfil the expectations of the market?
Yes, the way the trends are going, they are on course to fulfil the market expectations. The big swing is going to come from the fact that there is going to be much lower credit costs than what it was last year or even the average of the last two, three years. Also credit growth is expected to be pretty good for most of these corporate-oriented banks.

When I say corporate-oriented banks, the top three, four have closer to 40-50% coming in from the retail operations which is anyway growing steadily and those metrics are probably comparable in line with the best in class retail oriented banks.

Clearly, while the stocks have run up in the last one year on the basis of much improved performance and earning upgrades, clearly there is still a little bit to go as far as the valuations are concerned. We still continue to be positive on the prospects of corporate oriented banks.

Despite so much gloom and doom around slowdown, earnings not catching up, pockets of expensive valuations, the SIP flows continue to be sustained at around Rs 8,000-crore a month mark. Do you think this flow is likely to keep the market in good fettle despite so much negative news? Is this a sign that the Indian retail investor has matured?
Yes, definitely. In the last 18 months, we have seen only improved money flows in spite of the fact that the returns from mutual funds have not been in line with the expectations. However, today even if I look at three-year, five-year SIP kind of returns across majority of mutual funds, they are in line or probably slightly better than alternative options for the investors. This is in spite of the fact that the last 18 months have not been very good for the mutual funds in general. Thus, equity as an asset class over the long term scores over most assets and there is a realisation to that effect that this is an asset which gives the best returns in the longer term.

It is also very much far more convenient and easier to handle. So all these positives are still weighing in and we expect these SIP flows to continue in the medium to long run.

The data for the mutual fund behaviour, the monthly data has been out and we are seeing increasing signs that some value buying is happening by most funds. What are the areas where your own fund has been buying in the last two months and do the valuations merit a closer look there?
One of the sectors that I have been looking to buy or I have added a little bit has been the metals side. There has been a significant correction in valuation and I believe, the best time to look at metal stocks is when the underlying prices are at the bottom end.

Looking at that, both ferrous and nonferrous looks good and so metal as a sector, given the way valuations are and the fact that most of these companies have sorted out the leverage issues as well looks good in the current market environment.

Apart from that, in the last couple of months I have also added a little bit of power utilities. This is again a segment which shows earnings growth for the next two years, looking at the pace of capacity additions across the sector and improvement in the PLF across the power utilities.

The third sector I am looking at very closely and added a little bit is industrials. Private sector capex in the last four, five years has been down. There are signs that the capex will probably pick up in the second half of the year or maybe in FY20. While valuations have been corrected quite a lot across the sector, the fact is these companies are generating very good free cash flows and making very good free cash flow returns. It makes sense to invest into them when you are seeing signs of an upcycle in the private sector capex.

So these are the three broad sectors that I would look at for investing.

How are you consuming the macro data right now?
I look more from the company’s point of view but yes in terms of key macro data that I would tend to follow, one would be the fiscal deficit and the second would be current account deficit. These two are more accurate. As far as the fiscal deficit is concerned, it would give a good sense of where the interest rates are headed and what kind of expenditure the government is doing.

And second is on the current account deficit because a large part of our corporate India’s balance sheet and income statement is dollarized either by having global sectors like pharma or IT or even some sectors like metals which is clearly dependent on the dollar for its revenue growth or realisation growth. This is another trend that I would look out for in terms of my analysis.

These are the two broad trends that I see when I look at my overall analysis for the portfolio.

Let us come back on the part of capital goods and utilities where you are looking at closely. When you talk of utilities, which are the kind of companies you are looking at? Also, are you looking at power-related capital goods companies or large engineering companies?
If I look at utilities again, it is a combination of both the public sector as well as some private sector. The public sector is largely on account of the fact that there has been good capacity additions in the last one year and even in the next one year and that gives a fair amount of visibility into the growth for the next two years.

More importantly, the valuations are at a five-year, seven-year lows. In terms of private sector, it is a combination of various factors. While growth may be absent, there are deleveraging opportunities which can improve the equity part.

Secondly, there are optionalities in terms of distribution franchisees or some plants being idle which can make the stocks quite attractive. It is a combination of both but yes, the reasons are different for inclusion of the portfolio stocks in the fund for both these subsectors.

As far as the capital goods is concerned, I am not very bullish on the power part of the capital goods for the simple reason that I see very limited capacity additions over the next four to five years because we have a fair amount of stranded assets in NCLT which can come up for bidding in the next couple of years and again today no bank is willing to lend to any kind of new power generation asset.

It would take a lot of time before something happens on that front. But what I am positive on is the non-power capex. If you look at sectors such as metals, cement and broadly ex-power, there are indications that the capex will pick up probably by second half of this year or next year and one clearly needs to be watchful of the companies which are present in the non power part of the capex.

Do you think the pessimism in the market is at its peak or could there be some more downside before the recovery sets in? If we leave the benchmark aside, it has been 15 months of broad-based damage in the market?
There is pessimism and the high frequency indicators are still looking weak. So I am not able to forecast when the automotive sales will turn positive or when there will be an improvement in sentiment in the consumer goods companies and a lot of other factors.

The day the trend changes, that will be a case of the optimism returning back to the markets. If I look at the other factors in terms of fund flows or global equity managers view on India, all the soft factors are quite positive but today what is stopping us from being very overly optimistic on the markets is the fact that the entire consumption space is struggling from automobile to FMCG companies to consumer durables. Whenever there is a change in that trend, that would probably be the trigger for the markets.

What is your prognosis for the broader markets especially if next year is concerned?
On a one-year basis, the market should perform in line with the last two, three years returns but in the near term, in the next three to six months. I would see some amount of consolidation ahead with a negative bias.

As I said, I would clearly watch out when these indicators on the consumption side would turn positive because India is primarily a consumption-led economy and clearly I think markets would be looking for signals here. Whenever there is a change in the signal that would lead to a lot of optimism and price performance.