Equity markets have been complacent because of liquidity: Mahesh Patil

Interview with the co-chief Investment Officer of Birla Sun Life Asset Management

In a conversation with Hamsini Karthik, Mahesh Patil, Co-chief Investment Officer, Birla Sun Life Asset Management says there may froth in mid-cap stocks, even as the relatively large- to-mid-cap stocks continue to offer value. Edited excerpts:

At 30,000 the belief is that the rally is not substantiated by fundamentals. Do you see pockets of froth now?

Market valuations are not cheap at these levels. It is really expensive compared to the long-term historical average. There is some froth in a few cases. But broadly, it is not like that market is totally out of whack. I don’t think we are in a bubble stage at all. Earnings are depressed. But I think we are at a point where earnings recovery is likely to be round the corner. 

Did you see that recovery in March quarter results?

Not much. We will take another quarter or two more. We will have goods and services tax come in, so that will be earnings disruption. But it looks like the basic ingredients for a recovery are in place. March quarter was in-line with expectations. But expectations were also quite mellowed down this quarter. Even as earnings are depressed, some of the mid-cap companies are coming out of losses. That is why the valuations are very high. If we remove the loss making companies, valuations are not that expensive. But on the whole, there is froth in a few pockets of mid-caps. We need to be careful. 

How has your allocation to mid-cap stocks been in the last one year?

A lot of inflows we’ve had is for large-caps, multi-cap and balanced funds. We have less money coming in the mid-caps, and rightly so as there is some uneasiness in that space. Mid-caps have been a bottom up story. We have also seen more money going into the largish mid-caps and we’ve tried to identify those with decent valuations. The sweet spot is more about companies which are between the very large-caps and mid-caps segment. From BSE200, if you remove the top 50 stocks, those are the ones in a sweet spot now. We would have also increased our exposure to this category of stocks. 

What are the risks that the Indian market is not factoring now?

Global markets have taken all the negatives in its stride. But there is a sense that globally we could see a correction in the coming months. Recovery in the United States has not been as strong as expected. We don’t know yet how things like Brexit will shape up. China has stabilised pretty well in the last six months. But how long it would continue we don’t know. Indian markets have brushed aside all these risks. None of this is priced-in now. We have been complacent because of the liquidity. So it’s tough to predict the downside risk here on. A cautious approach would be good. 

Where are the pockets of growth in terms of sectors?

Automobiles especially four-wheelers and two wheelers, tyre manufacturers, private banks and non-banking finance companies are a few segments we see growth. We also see growth in consumer discretionary, media, cement. For pockets of capital goods, we see green shoots in public sector capital expansion for the capital goods sector. 

What about the traditional defensive sectors?

I don’t see much growth for the IT sector. Health care looks decent, but expect a high growth. But, the sector has some impediments even domestically, like the generics prescription issue that has come up now. So, while the sector looks good to post seven per cent growth, it is slightly hazy there. For consumer staples, those dependent on whole sale channels are still impacted by demonetisation. Patanjali has also hurt the FMCG sector, taking some market share away in tooth paste, soaps, hair care and honey. Rural growth is still slow. Double digit volume growth is very difficult for the sector. Even if it manages to growth in higher single digit from the current low single digit, that is positive. 

Among other sectors, metals should also continue to show good growth, but it is very volatile. A lot of companies are seeing debt repayment taking place, so interest cost should also go down for the metal companies. 

Domestic inflows have compensated for the foreign money outflows. How sustainable is this?

The money is coming in a steady way though systematic investment plans (SIPs). A lot of this is retail investor money and first time investors. SIP which is sticky longer term money accounts for 60 per cent of the inflows. That is why even during the sharp correction post demonetisation the money didn’t move out. A lot of money has come in the balance fund and hybrid funds category as investors have been sceptic about the stock market.