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| Q&A: Anoop Bhaskar, Head (equity), UTI AMC | | 'More rounds of earnings downgrades on the cards' |
| Sheetal Agarwal / Mumbai Jun 17, 2011, 00:54 IST |
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 Markets and corporate earnings are expected to be under pressure in the near term, says Anoop Bhaskar, head (equity), UTI AMC. In an interview with Sheetal Agarwal, he talks about the sectors he likes and the mid-cap segment, among others. Edited excerpts:
What is your view on markets and the factors that would drive these in the near term?
Over the next three months, we think there is more possibility of downsides than upsides. Though some reform/policy announcements towards FDI in retail, insurance and/or fall in global crude price will act as upside triggers. Also, a decent monsoon would mean that fears concerning food inflation will start to recede. If two out of these three events fructify, markets could see upsides from current levels. We believe 4,900-5,000 levels will act as good support levels for Nifty. This time, stocks outside top 70-75 might fall less than the largecaps, as these stocks have underperformed in the last 12 months. By September, we think markets will start bottoming out if inflation and crude oil prices start coolingi. Thus, it will be the best time to invest for the medium term.
Do you think the markets are fairly valued right now? Are you completely invested in the markets at current levels?
Nifty valuations of 13-14 times are reasonably fair, and will provide a good buying opportunity. At even higher levels, markets may not give reasonable returns. Currently, we have four-six per cent cash, as against one-two per cent last year, reflecting a change in our view on the market from optimistic to cautious.
What is your assessment of the March quarter results? Also, what’s your outlook on corporate earnings for FY12?
So far, the numbers announced are mixed. For the March quarter, banks other than SBI did better than expected. Consumer staples posted neutral to lower results than expected, especially on bottom line growth despite good volume growth. This reflects cost pressures in the form of rising input costs as well as one-off employee costs. Another worrying factor is the surge in employee costs. If such a trend persists, it will have a negative outlook for FY12 earnings growth.
Last year, several brokerage houses expected 25-27 per cent (earnings) growth in FY12 for the Sensex, Nifty companies. This is now cut to less than 20 per cent. We believe there will be two more rounds of earnings downgrades till September. If monsoons are below par, these downgrades will extend to the third quarter as well.
Which sectors are you bullish/bearish on?
We are under-weight on financials due to expectations of further rate increases. Low beta defensive sectors like pharma, consumer staples and IT are trading at premium valuations, thereby limiting upsides. While these provide earnings stability, high valuations make risk-reward unfavourable.
Stocks like HUL, Titan, Nestle, Bharti and Coal India have stable earnings, making them attractive for retail investors. One should look at stocks with higher possibility of rerating of P/E multiple or stable earnings growth. On a three-five year basis, we believe the infra sectors will perform better than broader indices and could be rerated purely due to lower valuations if macroeconomic concerns are mitigated. Yet, the earning stability and lower beta would make them overweight across our portfolios in the near term.
What is your outlook on mid-cap stocks in the near to medium term?
Though current valuations of mid-cap stocks are compelling, a key factor to look out while investing in such stocks is the interest rate cycle. Traditionally, these stocks are hit the most in the last leg of interest rate hike as they are highly levered and need more borrowings to fund capex. While their cost of capital goes up, their P/E ratio contracts. We believe, on a two-three year horizon, small and mid-cap stocks should outperform Nifty stocks.
How have you churned your portfolio in the last six months? Why have your funds (mid-cap) underperformed your peers?
We have reduced our weight in financials and auto and have added consumer staples – information technology and healthcare. As a contra call, we have added some realty stocks across our portfolios. In the real estate space, we like companies where debt position is manageable and payoff on projects are faster. Overall, the beta across our portfolios has been reduced compared to the second and third quarters of 2010-11. We have also raised cash to four-seven per cent levels. We remain cautious on the near term.
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