 "Bihar poll outcome could alter the pace of reforms: Ravi Gopalakrishnan")
Whatever be the outcome of the Bihar elections, the government might not be deterred from its reform agenda but the results could decide the pace of reforms, says Ravi Gopalakrishnan, head of equities, Canara Robeco Mutual Fund. In an interview with Chandan Kishore Kant, he says the corporate earnings cycle is bottoming out and the economy is on a gradual recovery path. Edited excerpts:
What’s your take on the second quarter corporate results announced so far?
The slowdown in the economy continues to remain a cause of concern, notwithstanding the government’s efforts to kick-start the economy. This has reflected in the corporate results of the past few quarters. The situation has not changed meaningfully and we expect the second quarter also to remain muted. However, we are seeing the bottoming out of the earnings cycle. Over the next couple of quarters, you will see pockets of strength in certain sectors like road construction, power transmission. This will be on the back of improved pickup in activity and also operating leverage kicking in, due improvement in capacity utilisation and lower raw material costs due to fall in commodity prices.
The Bihar election results will not impact the direction of the reforms agenda of the government but is likely to somewhat alter the pace of reforms. While constructing a portfolio, we generally take a long-term view based on the broad macro and microeconomic environment.
What’s your view on banking stocks in the backdrop of the recent surprise cut of 50 basis points by the Reserve Bank of India?
The cut was indeed a surprise to the market. While companies in the banking and financial space, particularly the ones which rely a lot on wholesale funding, are likely to benefit, for a broad-based recovery and change in the outlook of the sector, we would need a further 100 bps cut. We continue to prefer private sector banks vis-à-vis public sector banks, given the superior asset quality profile.
Would you be looking at the metals pack after the recent correction?
The metals sector is undergoing a structural and cyclical downturn on the back of a slowdown in China, a large consumer of commodities. While metal stocks have fallen a lot in the past few months, the worst is probably getting priced in. While it is too early to take a long-term call on the metals sector, we might see a bit of a bounce-back in the near term.
Is this market better suited for stock picking or are there opportunities for sectoral plays as well?
Given the state of the economy, we continue to remain a stock-specific market. While we are overweight on a few sectors like industrials, consumer discretionary and materials (cement), we believe the markets offer good opportunities for bottom-up investing.
When do you see an uptick in the capex cycle?
It will take a couple of quarters to bottom out. While we are seeing some recovery in a few sectors, a cyclical recovery will be seen in 2016-17. The steps taken by the government, to revive a large number of projects that are stuck or to restructure the power sector will gradually have its impact on the economy. Further, a lower interest rate cycle over the next 12–18 months is likely to encourage private capex revival.
What’s your call on information technology and automobile sectors?
The IT sector is likely to show steady performance this financial year. However, unlike the past year, the tailwind of a weak currency will not be available as the India rupee has been quite stable. The automobile sector is also witnessing a slowdown due to weak rural demand. Successive failure of the monsoon and the modest increase in minimum support prices have impacted demand. However, we are seeing a cyclical improvement in commercial vehicle demand. With the seventh pay commission benefits accruing, next year we expect demand to pick up.
We are selectively bullish on the passenger vehicle and commercial vehicle segments and also in the auto-ancillary space.
What’s your take on the second quarter corporate results announced so far?
The slowdown in the economy continues to remain a cause of concern, notwithstanding the government’s efforts to kick-start the economy. This has reflected in the corporate results of the past few quarters. The situation has not changed meaningfully and we expect the second quarter also to remain muted. However, we are seeing the bottoming out of the earnings cycle. Over the next couple of quarters, you will see pockets of strength in certain sectors like road construction, power transmission. This will be on the back of improved pickup in activity and also operating leverage kicking in, due improvement in capacity utilisation and lower raw material costs due to fall in commodity prices.
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How will the outcome of the Bihar elections impact the market?
The Bihar election results will not impact the direction of the reforms agenda of the government but is likely to somewhat alter the pace of reforms. While constructing a portfolio, we generally take a long-term view based on the broad macro and microeconomic environment.
What’s your view on banking stocks in the backdrop of the recent surprise cut of 50 basis points by the Reserve Bank of India?
The cut was indeed a surprise to the market. While companies in the banking and financial space, particularly the ones which rely a lot on wholesale funding, are likely to benefit, for a broad-based recovery and change in the outlook of the sector, we would need a further 100 bps cut. We continue to prefer private sector banks vis-à-vis public sector banks, given the superior asset quality profile.
Would you be looking at the metals pack after the recent correction?
The metals sector is undergoing a structural and cyclical downturn on the back of a slowdown in China, a large consumer of commodities. While metal stocks have fallen a lot in the past few months, the worst is probably getting priced in. While it is too early to take a long-term call on the metals sector, we might see a bit of a bounce-back in the near term.
Is this market better suited for stock picking or are there opportunities for sectoral plays as well?
Given the state of the economy, we continue to remain a stock-specific market. While we are overweight on a few sectors like industrials, consumer discretionary and materials (cement), we believe the markets offer good opportunities for bottom-up investing.
When do you see an uptick in the capex cycle?
It will take a couple of quarters to bottom out. While we are seeing some recovery in a few sectors, a cyclical recovery will be seen in 2016-17. The steps taken by the government, to revive a large number of projects that are stuck or to restructure the power sector will gradually have its impact on the economy. Further, a lower interest rate cycle over the next 12–18 months is likely to encourage private capex revival.
What’s your call on information technology and automobile sectors?
The IT sector is likely to show steady performance this financial year. However, unlike the past year, the tailwind of a weak currency will not be available as the India rupee has been quite stable. The automobile sector is also witnessing a slowdown due to weak rural demand. Successive failure of the monsoon and the modest increase in minimum support prices have impacted demand. However, we are seeing a cyclical improvement in commercial vehicle demand. With the seventh pay commission benefits accruing, next year we expect demand to pick up.
We are selectively bullish on the passenger vehicle and commercial vehicle segments and also in the auto-ancillary space.