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Consumption basket most attractively priced in medium to long term: V Srivatsa, UTI MF

Sentiment, liquidity have been driving markets up, says the fund manager

ET Now|
Apr 25, 2019, 06.03 PM IST
V Srivatsa, UTI MF-1200
Domestic flows have tapered down from the levels that we have seen a year back or 18 months back but they still remain reasonably strong in the last three-four months, said V Srivatsa, Fund Manager & Senior Vice-President, UTI MF, in an interview with ETNOW.

Edited excerpts:

What is your perspective on market up move? Is it a liquidity driven rally? Would you attribute it to FIIs or to DIIs?

My view is that the up move that we have seen in the last couple of months is largely driven by liquidity and also the kind of an improvement in the sentiment, hoping that the ruling party will again get re-elected to power and whatever reforms and policies which have been invoked for the last three to five years will continue.

Markets have probably priced in some part of the election outcome and this has also been accompanied by a very sharp rise in the FII flows as well as stable domestic flows. Of course, the domestic flows have tapered down from the levels that we have seen a year back or 18 months back but they still remain reasonably strong in the last three-four months.

You are seeing some pockets of under as well as over performance. Which are the pockets you are betting on and where are you a bit cautious?

One sector which has underperformed massively in this rally and even in the last one year, is the automobile sector. It is not without any reason because the demand has fallen off in the last six months. There are some near-term challenges in terms of migration to BS VI and also their cost-based pressures as well which is impacting the margins. So we have got a double whammy of a lower growth rate on the top line as well as an impact on the margins.

If you look at the consumption basket as such, probably, this is the one which is the most attractively priced from medium to longer term perspective. If I look at the relative valuations of an automobile, a retail, or a consumer durable industry, they are probably pricing in 11% to 12% long-term growth whereas the automobile long-term growth has now come down.

The implicit growth has come down to probably high single digits and that to me is a very reasonable assumption. So, there are some near-term challenges but honestly from a medium to a longer term basis, that is a sector that I would be looking to add and it is quite favourable right now.

The pharma performance has been mixed though the level of underperformance has come down in the last one year but still the sector continues to have its challenges. We firmly believe that we would probably see signs of growth in the coming quarters and valuations again have not kind of factored this.

Again on the banking side the corporate banking part has outperformed significantly in the last six months to one year and that is a sector we believe that will continue to outperform as well because as we see credit cost normalising we will see a huge bump up in the growth and today I think they are very well geared to take advantage of the credit growth over the next three to five years.

While the valuations have definitely gone up in the last six to 12 months, I still believe that there has been a change in the earnings momentum which will sustain the valuations. These are the three big sectors that I am still positive on.

In the consumer side. most of the valuations are factoring in very high level of growth over medium to longer term as well as a near term given the fact that you know there may be some slack in the rural economy which is evidenced by the lower automobile sales.

There is likely to be some pressure on the growth rates which is not factored in by the current market cap of these companies. So that is an avoid in the current moment.

Cement as a space has been quite a positive surprise. How are you reading into this space?

I do not have a very big presence in cement but I think the reason is again the fact that valuations have factored in a large part of the growth or the improvement in the profitability. Even if I look at the cement companies on these kind of elevated profitability assumptions over the next one to two years still they are trading upwards of 13 to 15 times EV/EBITDA, which is again expensive on a long term basis. Their ROCs are far lower than industries which command such a high multiple.

What about the pharma space?

In pharma, the biggest lever for growth is the fact that resumption of profitability in the US operations. The US part has been making losses partially because of very high R&D costs which have been incurred. Now companies are scaling down on the R&D cost and as well as the recent commentary on the US market is also good in the sense the pricing pressures have come down dramatically in the last three to six months. We believe that turnaround in the US operations will lead to a very strong growth in the profitability which is not factored in by the current market.

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