Financial, metal sectors are likely to lead earnings revival: LIC MF

Interview with Ramnath Venkateswaran, fund manager - equity at LIC Mutual Fund

A full-blown recovery in capex is likely to be seen in the next three – four quarters, which will be driven by new sectors like railways, defence, logistics and urban infrastructure, feels RAMNATH VENKATESWARAN, fund manager – equity at LIC Mutual Fund. In conversation with Puneet Wadhwa, he also shares his sector preferences. Edited excerpts:

What is your outlook for the markets for the remaining part of FY18?

Equity markets have been largely flat over the last two years and there are incipient signs that the underlying economy is gaining strength. It is quite likely that in FY18 equity markets will deliver better tax-adjusted returns than other asset classes. Stocks of companies that have been facing headwinds over the past five years are likely to perform better compared to the current favourites.

How do you see foreign institutional flows playing out over the next few quarters? Do you see active retail participation?

India, with its relatively strong macro fundamentals amongst large economies, will continue to remain on the radar of foreign institutional investors. However, predicting ‘flows’ or having a definitive view on the how foreign flows will play out over the next few quarters is a difficult proposition. Retail participation has been fairly steady in the Indian markets over the past few years despite the occasional volatility, which is probably indicative of heightened maturity of this class of investors.

What are your current overweight and underweight sectors?

We are overweight on corporate financing banks, telecom, utilities, select stocks in the information technology (IT), pharma (valuations are favourable while the business is improving at the margin) sectors; and remain underweight on consumer financiers, autos and staples (expectations embedded in valuations are high, while the fundamentals are stable or deteriorating at the margin for these businesses).

How far are we from a recovery in the capex cycle? Should investors give the manufacturing-related stocks a miss in this backdrop?

A full-blown recovery in capex is likely to be seen in the next three –four quarters, which will be driven by new sectors like railways, defence, logistics and urban infrastructure along with a pick-up in road construction activity. This will be unlike the previous cycle when thermal energy was the prime driver for capex in the economy. Companies, which had over-leveraged in the earlier cycle are slowly correcting their excesses and improving their balance sheets. Those that have their businesses aligned to the expected pick-up in capex are well-placed to deliver better returns for shareholders. 

What has been your investing strategy thus far in calendar year 2017? Are you fully invested at the current levels?

We typically do not take active cash calls, unless the valuations are completely out of line. Our key bets for the current year (as indicated earlier) are corporate financing banks, telecom, utilities along with select stocks in IT, pharma and agro-chemicals space.

What is your interpretation of the corporate earnings for the March quarter thus far? What are your estimates for FY18 and FY19?

Early trends from the March quarter results are broadly in-line with the market expectations: (1) IT sector is facing strong headwinds of technology change and companies are trying to adopt to this changed landscape; (2) Earnings of retail financiers, auto stocks remain fairly healthy; (3) corporate financiers are probably over the recognition phase and on course to make adequate provisions to strengthen their balance sheets; (4) domestic economy companies are showing early signs of improved pricing power. 

Corporate financiers and metal sectors are likely to lead the earnings revival given the depressed base of earnings of the past year and report more ‘normalised’ earnings. We expect the Nifty EPS (earnings per share) to be Rs 475-490 in FY18 and Rs 560-570 in FY19.