 "Markets are undervalued at this stage on fundamental basis")
Post the third quarter earnings and the recent sell-off in state-owned banks V Srivatsa, EVP and Fund manager, UTI Mutual Fund shares his views with Tulemino Antao on trends for the first half of calendar 201 6 and outlook on several sectors. Edited excerpts:
What is your take on third quarter earnings? What range do you see for the Sensex or the Nifty for the first six months of calendar year 2016?
The earnings for this quarter has been impacted by the huge losses by the public sector banks on account of higher recognition of stressed assets as per directives of RBI and since the base of these banks are huge , this has had an impact on the growth of profits.
Barring banks ,we have seen most sectors meeting market estimates. Positive surpriseshave come from downstream energy , consumers and healthcare while banking and auto have disappointed. Right now , there is a huge risk off rally going on global markets and most equity markets have given negative returns in the last one year and we are seeing outflows from equity on global level , while there is a case of strong fundamental upside in the markets , this is tempered by the huge liquidity pressures.
However , on historical basis , these global risk off rally do not last long any stabilization of Chinese economy or more QE by Japan or ECB can see risk off rally fading off and start of risk on rally. The markets are undervalued at this stage on fundamental basis and presents a very good opportunity to generate good returns from long term basis.
PSU banks which were beaten down on huge losses following higher provisions on rising NPAs seem to have suddenly seen a share jump. What is your overall outlook on the PSU banking space and which would be your top three picks for 2-3 year investment time frame?
PSU banks have seen their credit costs rising very sharply in the last few quarters as the stress in the system has continued and the exposure to the high leveraged groups are on the higher side. Apart from this factor , there are pressures on the NIM front and most of the mid PSU banks have not able to increase their CASA or retail assets base which would impart stability to the operations .
Also , the PSU banks would require huge capital infusion in the next one year and may not be able to participate in the credit growth when the economy recovers in the next one to two years. On account of these factors , we expect the PSU banks to under perform even on the long run . However given the sharp fall in the prices , short term bounce cannot be ruled out.
Is the overhang of the USFDA observations over select manufacturing units of Indian pharma companies over as of now. What is your call on pharma majors with significant exports to the US? Are mid-cap pharma shares offering value at current levels?
The US FDA over hang is still on , the comforting factor is that these problems are there with the top pharma companies for the last one year and the average time resolution for US FDA warning letter is 12-24 months and hence in the next two to three quarters , we would be seeing these issues getting resolved.
The US generics market is a very large market and Indian companies have established themselves as a credible player in the market and we expect the gains to continue. At this point , we see more value in the pharma large caps as they are trading only at a small premium to the mid caps and if they are able to resolve the problems , then the growth rate can accelerate.
The recent earnings from oil marketing companies reflect the impact of slide in crude oil prices. What is your take on oil marketing at current levels and which would be your top pick?
Oil marketing companies have benefited from the sharp fall in the crude and most of the gains from the crude are captured in the prices. Any investment in them would be converse play on the oil prices , if the oil prices move up , they would underperform. We believe that the crude has bottomed out at current levels and these stocks don't offer much upside from current levels.
Most paint companies have witnessed sharp gains on the back of robust earnings in wake of declining raw material prices. Are valuations looking stretched at current levels and which would be your top pick in the segment?
Valuations are stretched in this sector and capturing the benefits of the fall in the raw material prices.
Metal shares have witnessed a sharp sell-off in recent times in tandem with weak global commodity prices. At current levels do you see valuations attractive?
The outlook for commodity prices is not very good on account of poor outlook from China which decides the demand and supply for metals . However the stock correction across the sector is steep and from a longer term perspective some of the stocks are looking good. Given the high leverage in this sector , we would be focussed on cash rich companies which are competitive in their commodities for Investment.
In the broader market mid-cap shares have witnessed a sharp correction in tandem with the major indices. What is your outlook on the broader market?
The broader markets have seen a sharper fall on account of market liquidity concerns. On a fundamental basis , some of the mid cap stocks have corrected in the last one month and are looking attractive. We would focus on mid cap banks , NBFC , textile and logistics companies as these represent good growth opportunities and valuations have become very reasonable.
