Mid-caps have run ahead of consensus earnings estimate: Mayuresh Joshi

Interview with Fund Manager (PMS), Angel Broking

In a conversation with Indrani Mazumdar, Mayuresh Joshi, Fund Manager (PMS), Angel Broking shares his view on the road ahead for the markets in the backdrop of the upcoming winter session of Parliament and possibility of the US Federal Reserve hiking key rates. Edited excerpts:

The Nifty has been trading in the range between 7,750 and 8,200 in the recent past on the back of muted second quarter numbers. How do you see the markets shaping up in the near term?

We still expect sluggish corporate earnings to continue in the second half of FY16. With commodity prices remaining benign and government capex picking up, private capex is expected to show signs of improvement by the first half of FY17, resulting in pick-up of the investment cycle. With the RBI cutting rates along with inflation at more manageable levels, we expect consumer discretionary demand to show a gradual improvement over the next few months.

What happens in the winter session of Parliament, including key bills like GST getting cleared, shall determine the short-to-medium term course of the markets. Albeit, in lieu of the aforesaid factors, we expect the markets (Nifty) to move in a range of 7,500-8,200 over the next few months.

Do you see a pick-up in the earnings cycle in the near future and what are your top picks in the large-cap segment if and when it occurs?

We might see a gradual recovery in earnings in the first half of FY17, abetted largely by fall in commodity prices and reduction in interest rates aiding improvement in the working capital cycle. The top-line growth shall gradually start coming through as the capex/investment cycle recovers and the execution mechanism may improves as discretionary demand picks up.

Our top bets in the large-cap space would be stocks like Axis Bank, ICICI Bank and HDFC Bank from the banking space; Infosys, TCS and HCL Tech from the IT Space; L&T from the Capital goods and construction space, UltraTech cement from the cement space, Reliance Industries and IOC from the Oil & gas space, Sun Pharma from the pharma space and Power Grid from the power space as well.

How do you see markets reacting to the upcoming winter session of the Parliament, especially with respect to the passage of the GST bill?

Markets are to a certain extent largely discounting the likely disruptions during the winter session of Parliament. If GST gets cleared and US Federal Reserve postpones the rate hike beyond December, we might react positively on the upside and probably break the 8,200 mark on the Nifty. If GST is cleared and a Fed hike is assumed for December we might have an offsetting situation where the said range of 7,500-8,200 would continue and markets would move sideways. If the GST is not cleared and Fed hikes its rates in December then we might actually break down below that 7,500 mark and then consolidate at lower levels.

Is the rally sustainable in the mid-cap stocks and what are your favourite picks?

At this stage, a lot of mid-cap companies have moved ahead of what the earnings consensus for these companies might pan out over the next few quarters. So, one really needs to be stock specific and have a bottom-up approach within the mid-cap universe.

Ashok Leyland, Eicher Motors, TVS Srichakara, Inox wind, JK Cement, MBL infra, KNR construction, Jagran Prakashan, IPCA Labs, Bajaj Electrical, Siyaram Silk Mills, Surya Roshni, MT Educare and Garware Wall Ropes are some of the mid-caps we prefer at this stage.

What according to you will be the RBI stance in the forthcoming RBI policy meet in the month of December?

The problem with the transmission of the existing cuts along with the inflation trend in terms of core CPI panning out and the US Federal Reserve stance are the determining factors. However, looking at all these factors we do not foresee RBI to move on the interest rates in the December policy.

Liberalisation of the foreign investment policy in sectors including real estate, defence, civil aviation and news broadcasting sectors is a move taken by the government to bring reforms in the country. How should we approach these sectors?

Structurally, it is an excellent move that the Government has initiated and over the long term it ensures FDI in these sectors shall have positive effect. Again, one must understand that the FDI move in these sectors shall take time as investors take into cognizance not just the sector dynamics but also how the global economy is faring.

India, on a macro level, is resilient in terms of its fiscal and current balance strength along with currency as compared to the emerging economy pack. However, stability in global economy data points specifically that China, Japan and Europe shall keep the global economy recovery soft. So, one must have a stock specific approach in these sectors.

Shares of auto companies have performed well in the wake of robust sales during the festival season. At current valuations, which would be your top picks?

Yes, the auto numbers during the festive season have been very encouraging but the larger point is whether these trends shall continue. With weak monsoons indicates the rural spending shall be soft and that shall have an effect on how volume growth shall pan out. Having said that, what we like from the auto universe is something like an Ashok Leyland and Amara raja on declines.

Do you see the correction in pharma stocks as an opportunity to buy?

One must be stock specific in this space since the recent FDA concerns that got flagged off are causing some amount of jitters. Also, valuations in comparison to their historical averages are looking reasonable prompting a stock specific approach. Our top bets are Sun Pharma from the large cap space and IPCA labs from the mid cap universe.