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Till elections, it will be a flat market with a bit of volatility: Gautam Sinha Roy, Motilal Oswal AMC

Only the stocks where earnings growth is a very strong 20% plus would excite us today, says Sinha Roy.

ET Now|
Jan 24, 2019, 12.57 PM IST
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From a Nifty print perspective, the sheer delta in corporate banks will do the trick this year. Beyond that, one remains hopeful that there will be a pickup in the economy and corporate earnings, Gautam Sinha Roy, Associate Director -- Fund Manager, Motilal Oswal AMC, tells ET Now.

Edited excerpts:

Is it looking like a good run for the markets going into the budget and post that?

Well yes, but with bouts of volatility because election results are a clear risk. People do not know which way it is going to swing and incrementally irrespective of the news flows -- be it the state election results or some of the developments post that -- it is all very confusing right now. Volatility will continue to play out up to the elections and it should be a sideways market. Plus, if you see domestic liquidity getting drier incrementally than it was last year, that will also play a role here. It will essentially be a flat market with a bit of volatility.

What is your view as far as numbers are concerned? Various fund managers say that numbers are on the cusp of a pickup. Do you think that expectations are already high for India Inc?

They have been very high. If you look at the EPS expectations print on Bloomberg from the Nifty or Nifty 500, it has been very high for a very long period of time. The disappointments have been very strong for the last four, five years. Having said that, the biggest driver of earnings delta this year is going to be corporate banks. The return to profitability of corporate banks is pretty much sanguine. It has to happen and definitely the reported numbers have shown improvement because of this delta in corporate banks.

The problem is where do you go beyond corporate banks? Once this delta adjustment happens, is there a structural earnings growth story? We are not seeing great growth across sectors.

Growth has been there in pockets like retail banks and the financialization theme like insurance companies post demonetisation. Premiumisation had been growing in consumer pockets. Last year, we have seen select IT companies do well. Metals did well for a patch and so it is a hotchpotch of mixed bag earnings growing . It is not a clear secular earnings growth trajectory that we are seeing even now. But yes, from a reported Nifty print perspective, the sheer delta in corporate banks will do the trick this year. Beyond that, one remains hopeful that there will be a pickup in the economy and more importantly in corporate earnings. But it is not very broad based.

Where are you building your position through the earnings quarter that has been reported? Is it to be overweight on high priced consumers because they are delivering?

From a valuation perspective, consumer really remains an outlier. One has to be very selective about the stocks that you are playing in consumer. Only the stocks where earnings growth is a very strong 20% plus would excite us today. Beyond that, structurally the banking set, especially the CASA funded banks, including the corporate banks where NPA improvement is happening, remain a very interesting place to be in.

The structural play on financialization of savings is still there. These valuations had also become a bit expensive for the listed entities like the life insurance companies. But the growth story still remains. Given that this is an election year, there is domestic volatility. IT companies have gotten back into the growth mode and are delivering better print than they were a couple of years back. IT remains a good place to be into. So it is a mixed bag. It is not a very concentrated kind of investment strategy today. You have to be in different pockets.

Beyond that, one remains hopeful about return of the investment cycle because that had also been subdued for a very long period of time and had been showing signs of pickup in the last one year. That is being driven by government and semi government entities. There has not been any private sector capex return. One has to be mindful of the election risk too and that order inflows will be weak as we head into elections.

But, structurally, can the investment cycle pick up? Yes, it can. The real icing on the cake would be if the real estate cycle also comes back. Real estate also has been in doldrums for a very long period of time. Any pick-up in real estate activity would lead to a lot of follow-on activity. Overall GDP as well as employment will benefit from that. It is something that we will look forward to through the course of the year.

Generally you never talk about capex, infrastructure. You always want to play the quasi infrastructure or companies that have a structural growth and not probably cyclical. Are you seeing a cyclical pickup in some of the sectors which could be interesting?

We are not seeing very strong signs of that yet because the bottom has clearly been made. We have seen these sectors not performing for a very long period of time -- be it real estate, overall private sector capex, overall investment cycle, so to speak.

Given that a bottom has been made, the chances of an improvement from here are definitely strong. But we are not seeing very strong signs of that. Again, the signs that we have seen have been pocketed. They have been transient like at one point of time, steel demand and cement growth were very robust. It is not like we had seen great signs of it, but things are very bad either. One remains hopeful that overall investment cycle will pick up from its low levels.

So that remains a trajectory that one will be watchful for but the chances of that happening is high because we have been through the downturn for a very long period of time.

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