Financial sector is in the middle of a perfect storm: Pankaj Murarka

"September quarter earnings will be somewhat a mixed bag, as the pandemic has had varying impact on companies across sectors," says Murarka.

As economies unlock and get back to their normalised level of activity, equities should do well over the next two-three years, says PANKAJ MURARKA, founder, Renaissance Investment Managers in an interaction with Swati Verma. He advises investors to use dips to buy for the long term. Edited excerpts:

The market has witnessed correction in the last few sessions after a phenomenal rise since March-low. What's your view?

Globally, we are witnessing a pullback in risk assets across the board after a ferocious rally in the last six months. After the sharp rally, equity markets are ahead of the real economy and we are witnessing profit-taking. It is a healthy correction in the bull-market and investors with a long-term view should use this pullback as an opportunity to invest in equities. As economies unlock and get back to their normalised level of activity, equities should do well over the next two-three years.

What are your expectations from September quarter earnings?

September quarter earnings will be somewhat a mixed bag, as the pandemic has had varying impact on companies across sectors. We shall witness improved earnings from companies across Healthcare, Consumer Staples, and Technology sectors as they have not been much impacted by the crisis. Also, the agrochemical sector should deliver healthy results as the Kharif crop has been very good. On the other hand, some of the other sectors linked to the domestic economy such as automobiles, infrastructure, and banking are witnessing gradual recovery as the economy unlocks and would deliver tepid results.

Post Accenture’s results, what’s your view on the road ahead for the information technology (IT) sector?

The IT sector has been beneficiary of the crisis as the pandemic has accelerated the adoption of digital technologies across the world and companies are increasing their investments into digital capabilities. I am not concerned about valuations in the sector. Our preference is for large-cap IT companies, as they possess superior technological capabilities followed by some niche midcap IT names.

Your investment strategy since March 2020 low?

As investors, we use our SQGARP (Sustainable Quality Growth at Reasonable Price) framework for investing. Thus, we invest in growth companies with leadership DNA and business which demonstrate a competitive edge so as to sustain their growth over the long term.

Your overweight/underweight sectors/stocks? 

We are overweight Healthcare, Consumer, and Technology sectors. At the same time, we are increasing our exposure to autos as we believe that as the economy unlocks, the transportation sector should recover as mobility is the core need of society.  We are avoiding global cyclicals like metals and infrastructure sectors due to high leverage on the balance sheets of the companies and volatility in metal prices.

You don’t like financials?

We think the financial sector is in the middle of a perfect storm because all the pain of the real economy is lying on the balance sheet of banks and non-banking financial companies (NBFCs). The sector will witness some consolidation as strong franchises will emerge stronger from the crisis. Investors should use the crisis to invest in some of the strong franchises and avoid the microfinance segment. Given the unsecured nature, it might have elevated non-performing assets (NPAs). 

What's the road ahead for the telecom sector in India?

The Telecom sector has consolidated into an Oligopoly with four players from 10 players five years ago. It continues to remain a growth sector with data consumption growing at 40 per cent compound annual growth rate (CAGR). It is regaining its pricing power now. Hence, the outlook is positive and it makes for a compelling investment case.

Reliance Industries’ (RIL's) deal spree continues. Do you see more upside in the stock?

The investment RIL has made over the last decade has positioned it as a leader in all the cutting edge sectors of India viz. telecom, retail, and digital technologies. All these sectors will have an accelerated growth curve over the next decade as India transitions to a $5 trillion economy and RIL should reap the benefits of that. From a long-term perspective, RIL is a compelling investment case. As far as domination is concerned, it is a global phenomenon where few large conglomerates are dominating large industries and segments of the economy.