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Investment side of the economy is kicking back into action: Gautam Sinha Roy, Motilal Oswal AMC

Even globally facing sectors like commodity including metals continue to look interesting, says Sinha Roy

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Last Updated: Dec 03, 2018, 04.19 PM IST|Original: Dec 03, 2018, 04.19 PM IST
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Both the midcap and smallcap valuations are a lot more reasonable now and if you want to deploy fresh capital, you can look at that. Gautam Sinha Roy, Fund Manager, Motilal Oswal AMC, tells ET Now.

Edited excerpts:

Do you believe there is more steam left when it comes to Graphite as a story because these stocks have already run really well year to date?

They continue to do well. It is a function of the China demand-supply situation. A lot of the positives are obviously already in the price but for this very small niche sector which has really come into prominence over the last two years, things continue to look rosy. So, we continue to remain bullish on the sector but have to remember that most of the positives are there in the price. You should not expect multi-bagger returns from here but we continue to like the sector per se.

Starting from Opec meet, Brexit, the 2019 interim budget, local election results and general elections, there is so much on the plate from an event standpoint. As a fund manager what would be your positioning?

More than as a fund manager, from investor perspective, there are a lot of events coming up. There is a lot of volatility which could be induced in the market because of these events and most importantly, the state election results which are due in the early part of this month. The expectations around global events like trade wars are coming down and global growth is coming back into the fore. So, a lot of things are happening. There is a lot of volatility and from the investor as well as fund manager perspective, it makes sense to take advantage of volatility when it is on your side.

Essentially, if you see some good corrections in markets or individual stocks like what we saw through October which was the month where FIIs selling was one of the highest ever on a monthly basis and one has to build up allocations using those kind of opportunities. So, it is important always to have a buy list ready. The stocks that you really like and whenever such opportunities are presented because of global factors or even transient slowdowns like slower auto sales numbers coming in for the last three months.

If you really like those stories on long-term basis and you find that the near-term numbers are giving you that opportunity to build up position, that is what one should be doing. This holds more for investors because if you see the overall construct of the market has been expensive and investors if they get this kind of opportunities that is when they should be able to come in and get better returns in the future.

Having said that, the disparity between largecap and midcap valuations has corrected quite a bit this year. When we started the year, we had high valuations across the board and more so in midcaps. Through the course of the year, what we have seen is good for both fund managers as well as investors. Both the midcap and smallcap valuations are a lot more reasonable.

If you want to deploy fresh capital in that space, you can look at that. Even on the largecap side, because earnings have started catching up, there is more broad basing of earnings with sectors like IT recovering, pharma bottoming out and corporate banks bottoming out. The choice of sectors that you can invest in is broader and especially in an environment where the global growth uncertainty is lesser now after the so-called truce between China and the US.

Even globally facing sectors like the commodity sectors including metals could continue to look interesting. The risk of global growth which was going very high seems contained for the time being. But net-net, it should be a buy on dips kind of strategy.

Where else do you find value in the market? A big segment of the market is still struggling at 52-week lows, largely the mid and the smallcaps and very selective recovery can be seen even within the largecaps as the sector rotation is playing out.

This has been a year in which there has not been generally much returns. It has been a very sluggish year so to say, but within the overall construct, there has been rotation of sectors. That is healthy because till last year, the stock price appreciation was being very selective in a very few sectors mostly consumption facing ones.

This year, even the investment side of the economy is kicking back into the action.

Even the export side through IT and pharma has been a bottoming out story. It has not really given returns yet. The export side through IT is the chunkiest export story India has and that has also come back. From that perspective, investors have a lot more options to choose from to get decent returns. Going forward from here, even IT services continue to look interesting given the growth rebound.

There are very decent capital return policies and the valuations are not very expensive. Plus rupee devaluation has also helped them. All these things make IT sector continue to look good. Domestic large private banks continue to get market share both on the asset side as well as the liability side. As long as you believe in some of these banks and their lending practices and they are available reasonably cheap, they could be good names to look at.

This year, because these stocks have not performed very well, the valuations levels are also quite decent right now as we look at them. The other thing that we would be looking for of course is the CASA side. The the liability franchise being very strong, today the asset side is not a problem. One can grow at a very healthy clip on the asset side but if you can fund it through low cost liability, that is a great competitive advantage to have in this environment especially after the IL&FS crisis. That is one space which continues to look pretty good.

The demarcation between corporate and retail banks is not very high because if you look at the book composition of the so- called corporate banks , 50% plus is retail on the asset side and they have very granular retail liabilities too. That demarcation is not very strong.

Of course some of them might be available very cheap because of the old NPA issues and they are coming out of those issues. So from a turnaround perspective, these stocks also look interesting.

How would you look at exposure on financials? How do you see the credit growth story and the impact of that on the financial performance of these banks?

Through the course of the last three months, for Indian investors. that has been the most important thing occupying our minds especially given that the largest allocation in our portfolio are financials -- both banks and NBFCs.

What I have found during my research is that you have to separate the wheat from the chaff and that process is actually on in markets already.

Till like four months back, other than the ones with bad corporate books which had been discovered in the last three years, most of the financials were doing well. Now, one has to be particularly careful about the quality and the granularity of the lending that is happening and also look at the strength of the liability franchise that is there.

When we meet these companies, the key question is along those lines, especially on the asset quality side. Are there any hidden risk lurking just beneath the surface which market is not seeing now? One has to be very selective. It is still not a systemic problem. It is not a problem of over leverage at the household level still but there have been over lending probably in some pockets in SMEs or maybe in MSMEs too.

The demand or the need for credit is also there among in some of these spaces be it MFIs or be it MSMEs. Someone has to fulfil that need but one has to make sure that while the banks or NBFCs are fulfilling the needs, they are doing their credit evaluation and the recovery process very stringently. That is the main thing that we have to look for.

Unfortunately as investors you do not get to look at the current book composition of many of these entities. So, we rely a lot on past behaviour and their own, what sort of credit practices that they follow to be able to figure out which are the better ones to invest in.

The important sector is a high growth sector. You cannot stay away from them but one has to be very choosy and pick the right stocks there.

Motown sales numbers have come out. It is a different story for each company. Largely, though, there has been a declining trend. Do you believe this trend could stretch beyond a quarter or so?

Two things would have played a very significant role in this festive season. As crude prices were going up and our balance of payments was making a turn for the worst, that would have really impacted consumer demand big time.

The other thing was that this festive season was not followed up with a very strong wedding season. The wedding season gets bunched up in Q4 and interest rates were high. There was this IL&FS related problem where NBFCs would have slowed down on lending. A lot of things came together.

We believe that this is the break of a cycle because we had not seen extremely strong cycle in passenger vehicle sales or even in two-wheelers preceding that. There were transient issues which have affected the demand.

We believe that with time many of these things will settle down and the good companies will continue to do better going forward. Tha is the hypothesis that we are running. Meanwhile, the stocks have corrected a lot and we are finding some of them quite inexpensive. That is the kind of opportunity you need to wait and take advantage of as an investor.

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