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Financial, consumer and pharma stocks to drive market over next 2 years: Mahesh Patil

The midcap index has started to relatively outperform a bit but it is still early days.

ET Now|
Dec 10, 2019, 01.10 PM IST
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ETMarkets.com
Mahesh PatilNEW, Aditya Birla Sun Life Mutual Fund-1200
Macros still have not deteriorated that much. If you look at the global macro, there is enough liquidity and financial easing and that is driving risk appetite to some extent, says Mahesh Patil, Co-CIO, Aditya Birla Sun Life AMC. Excerpts from an interview with ETNOW.

Only fund managers are complaining this year because they are finding it difficult to beat their benchmarks as only 10-15 stocks are outperforming. How long do you think this disconnect will continue, ignoring the underlying economic reality?
This trend has continued for almost one-and-a-half years where we have seen this kind of divergence. It is primarily because that the broader market is not not doing that well. There is concentration on a few companies where there is earnings visibility. This trend reached a level where it is suggesting that we should see some conversion. In the last one-and-a-half months, we saw some movement in the broader market. The midcap index has started to relatively outperform a bit but it is still early days.

Unless the broader economic growth starts to improve, you will see other sectors of the economy slowly starting to participate and then there will be options for investors to look at some of the other sectors where the valuations are attractive, and not just the top 10-12 companies. It is a question of growth visibility in some of these spaces. Once that starts to emerge, the breadth will improve and money will start to move away from some of these highly priced stocks.

Will growth only get delayed because just when it appeared that the macros were good and micros were bottoming out, we got a print on inflation; we got an uptick in crude and we got RBI stalling rate cuts. We are in a situation where micros are bad and macros have become poor. Fortunately, global markets are doing okay and that is a big factor why we are stalling and not falling?
I would say that macros still have not deteriorated that much. If you look at the global macro, there is enough liquidity, there is financial easing and that is driving risk appetite to some extent.

We have seen money moving into risk asset class and that is the reason where money has come in. It has also come into a lot of companies which are in distress. A lot of distressed funds are looking at opportunities in market - both in the infrastructure and the NBFC front.

That is helping a lot of Indian companies to deleverage at this point in time. At the same time, we have seen some improvement in the global PMI indicators because of the liquidity that is driving growth with the lag. It is likely to improve and so on the domestic side, the exports could see some kind of pick up in the coming months.

While inflation has moved up a bit, oil prices are slightly higher. I do not see there is enough room for oil prices to go up further because there global demand is still fairly weak. There is supply coming in and despite production cuts, do not see that going up above $70. I do not see the macro has deteriorated too much. Yes, the RBI rate cuts are probably deferred now. But the ball is now on the fiscal side. The budget in February could see some easing and probably some fiscal stimulus coming in to revive growth. The market is expecting that to take us out on the current slowdown that we are seeing in the economy.

We have seen some improvement in the global PMI indicators because of the liquidity that is driving growth with the lag.

-Mahesh Patil


All hopes are pinned on the big divestment drive. BPCL roadshow is expected to begin this month. You guys are very bullish on the entire PSU cluster. Would you say that the best is behind us because a lot of these stocks have already rallied or do you think the story is yet to play out and even now is a good time to buy in.
The PSU basket has underperformed quite a bit because of the constant supply of paper which was there from the government through the ETF route. Most of these companies are in the core sector like oil and gas sector, the utility space, the metal space and they are to a large extent dependent on domestic economic growth, which has slowed down in the last few quarters.

But as I said, these have bottomed out. So, they will continue to grow in line with the broader economy. While a few stocks have rallied, there have been talks about strategic disinvestment but the broader PSU basket is still quoting at levels at PE multiples or price to book value multiples or any other parameter like 10-year lows. There has not been much change in the earnings outlook. It is the PE re-rating which has happened.

Which other PSU besides BPCL and Concor seem to be sought after?
One is not necessarily trying to play the strategic divestments. What will happen is if you see success in one of these two names, the broader pack itself will get rerated a bit. That is what we are betting on. The earnings outlook has not really changed, the PE multiples have derated. If you see the probability of more strategic sales happening, it will lead to some rerating. Even if that does not happen, the dividend yield of some of these companies is fairly good.

The government has now gone after these companies and are trying to ask them for a larger payout which is good in terms of capital allocation. Earlier, these companies used to sit on cash and they used to mis-allocate capital which is not likely to happen and that means the dividend yield in some of the names at 5-6-7% is almost close to bond yields and whatever normal growth you get. The overall GDP growth will mean that these companies would give you fairly reasonable returns with very good downside protection. The margin of safety is very good in some of these names.

Every decade calls for a trend. Where are the chances of subpar returns for the next five years and where are the chances of exponential returns?
That is very difficult to predict in the near term but if you take a slightly longer-term view, the financial space has done well and would continue to do well because sectors where companies are gaining market share will continue to do well even if the economy growth is not that great.

So in the banking and financial services sector, private banks will continue to gain market share. While the overall credit growth is still weak at around 8-9%, we see them getting market share and that trend will continue. Over a medium term, we have seen corporate banks managements have changed. They are addressing and transforming the bank, getting the right mix in terms of retail and corporate will continue to see rerating. That in turn will drive returns because it is not only earnings growth but PE rerating potential is also there. So that is another trend which will give you a good return.

Apart from that, while consumer discretionary has seen a slight slowdown, the shift from unorganised to organised is where you will get market share. The organised players will continue to get market share and continue to grow at higher than the broader industry and that trend will continue. It started 1-2 years ago after GST, but the consolidation in that space will drive growth. It is a 5-10-year kind of a theme which will give you outsized returns. It is not only penetration, but also about market share gain.

Apart from that, from a tactical or a near-term perspective, I would say pharma sector is one where earnings valuations are bottoming out. The pressure on the US generic space is easing off and should be able to drive good returns in the near term. These are the broader two or three themes which we see playing out over the next couple of years.

Financials broadly account for 35 to 40% of the index now, including insurance. Should the allocation towards financials be changed? The problem with financials is that insurance and banks have very different kind of models, but when they fall, they fall together, when they rise they rise together?
There is no doubt that the overall weightage of the financials in the broader market has gone up, but I would look at it this way. We are at a stage where the overall economic growth has been weak. We have gone through a large credit cycle and if I take the next 2-3-year view, things will only improve. Credit growth is not going to be around 8% or so. It will improve from here.

We have seen some stress emerging in the corporate NPA cycle but largely the big corporate cycle is behind us. I do not see any reason for the overall weightage of the financials in the broader market to come down any time, though it might not go up significantly from here.

In a lot of other markets, including developed markets, financials account for a large part of the benchmark indices. It is still early to say that things have peaked in the overall banking and financial services sector. It is not only banking, there is a lot of other financial services. While NBFCs have seen some kind of a pressure, their market share has gone to the banking sector, but insurance and other plays are starting to emerge and the opportunity for some of these sectors where penetration levels are still low, provide a large roadway in terms of growth. This sector will continue to dominate the overall market for quite some time.

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