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Why this fund manager is betting against consumption

We are cautious on the consumer space, where we think valuations are stretched specifically with the consumer staples pack. Between the consumer staples and consumer discretionary pack, there is still some upside left on the consumer discretionary side. But we are fairly cautious on the staples pack. On the consumption basket, we continue to be cautious on the auto sector.

ET Now|
Dec 06, 2019, 05.15 PM IST
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Shibani Sircar Kurian-1200
Shibani Sircar Kurian, Fund Manager - Equity, Kotak Mahindra AMC, is cautious on the consumer staples side as well as auto. IT, pharma and real estate are other major avoids. Excerpts from an interview with ETNOW.

What is the mood of the market given that we seem to be going into a bit of a pause mode -- be it the RBI or the market?
There is a dichotomy between what is happening on the macro front in terms of numbers and GDP growth as well as the way the market movement has been. When we are talking about the market, we are clearly talking about the Nifty, which has moved up quite sharply. But the underperformance of the broader market vis-à-vis the Nifty is something that we must take into account.

Over the last two years, the underperformance is as wide as almost 30% and clearly from a midcap perspective, risk reward is in favour. Now for the broader market underperformance to narrow from here, we really need growth to get back on track. The issue is that the revival of growth is not likely to be a sharp swift revival. However, we do expect that things will start to bottom out and you will start seeing gradual slow and steady improvement in terms of growth over the next few quarters.

What is clearly important in this market environment to note is that the reforms that have been carried out over the last three, four months will now start bearing fruit and therefore you will start seeing some of that improvement in terms of growth -- be it the corporate tax rate cut, getting NBFCs under the IBC and therefore a faster resolution.

Some of the larger NPLs getting resolved and one such resolution which we saw also some flow through of the past policy rate cuts in terms of lending rates coming down with the external benchmark linked lending rate. All of that means that over the next 18-24 month period, you have opportunities to look at stocks from a stock specific bottom-up approach. Therefore one should look at stocks which are delivering on growth and are clearly market leaders but which are still trading at relative valuations as I said on the midcap front, risk reward is clearly in favour.

In terms of opportunity, would you be entering at lower levels because the sentiment after that brief uptick seems to be fading from what we have seen in the last few sessions? I guess there is no near-term triggers in sight?
The way to look forward is to identify businesses which are strong and which are cash flow generating businesses which have strong managements and good corporate governance. This is the right time to identify such companies which over the next 2-3 year period will deliver in terms of returns.

Across our portfolios, the risk reward is clearly tilted towards the midcaps and we believe that as growth starts to revive over a period of time, the underperformance starts to narrow.

From an overall sector perspective, we are looking at companies which have more domestic presence. We have been cautious on the export-oriented sectors specifically on IT. But within the domestic space, there are clear opportunities in private sector banks and insurance -- both life and general. We also believe that as public capex revives over a period of time, there is a lot of opportunity in infrastructure, industrials and the cement sectors where we are building positions.

We are also looking at oil and gas as an opportunity, specifically on the gas utility space where there are opportunities. It is bottom up in nature and clearly stock specific in many of the sectors that I spoke about. Start looking at some of these names as the market is still volatile.

The latest CLSA report on Reliance Industries says that the Jio tariff hike is going to be a big game changer for the company. What is your view on RIL?
Sorry but I cannot really comment on stock specific names, so I will avoid the RIL question. But coming to the telecom space, we had been cautious for the last almost two years and at the margin, things seem to be turning better for the industry as a whole.

Clearly the market share game that was being played because of which tariffs were under pressure. is now behind us. Incrementally tariffs are going up and that trend is likely to continue. That means profitability in the sector improves.

Of course, there will be near-term headwinds in terms of payouts that they need to make. While we had been cautious on the sector for a fairly long period of time, incrementally we see things turning around and therefore sector profitability improving. Of course, it remains to be seen whether it is a three-player market or a two-player market, but at the margin, all the players seem to realise that there is a need to deleverage the balance sheet which is a positive.

What are your preferred bets and what would you completely avoid?
We are cautious on the consumer space, where we think valuations are stretched specifically with the consumer staples pack. Between the consumer staples and consumer discretionary pack, there is still some upside left on the consumer discretionary side. But we are fairly cautious on the staples pack. On the consumption basket, we are also cautious on the auto sector. While there was some improvement post the festive season in terms of volume pick up, clearly the latest numbers show that there is a lot of weakness in demand.

Post BS-VI, price hikes would also be evident and we believe that this slowdown could be slightly long drawn and prolonged.

The export oriented pack which includes IT and pharma, specifically on the IT side we do believe that there are possibly headwinds to growth over the next few quarters. At this point in time, of course, deal wins have been fairly robust and some of that deal wins will translate into revenue growth. The bigger issue with the IT sector is clearly on the margin front where the incremental cost of doing business has gone up. That is reflecting in margins which are coming under pressure. Also, as large deals start to ramp up, clearly the nature of that business in terms of higher subcontracting cost results in margin pressure. That is one sector where we are cautious.

On the pharma space, it is fairly stock specific. We like pharma companies with domestic presence. Their growth is still in the double digits whereas on the US generic side, we still see both regulatory as well as pricing-led pressures on profitability.

On the real estate pack we have been cautious where we believe that the issue of oversupply is something that is still there. However, we are also seeing a trend where some of the real estate players are emerging stronger and therefore there will be a clear market share shift and opportunities in some specific names. Therefore there are fairly stock specific opportunities on the real estate space as well.

On the banking and financial services space, which is again a very large area, our focus has been on private sector bank names, specifically the private corporate banks. We have been cautious on the PSU pack as a whole and we believe at this point in time, a lot of effort would get translated towards the consolidation part of the story.

We are focussed on specific NBFCs which are likely to emerge stronger in this environment.
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