On an earnings perspective market attractive for next 12-24 months: Sanjay Dongre

Q&A with EVP and Fund Manager, UTI Mutual Fund

With some of the major IT and bank companies annnoucing their September quarter earnings Sanjay Dongre, EVP and Fund Manager, UTI Mutual Fund, in an interview with Tulemino Antao shares his view on the sectoral trends and investments through the mutual fund route. Edited Excerpts


Markets have been range bound during the month so far. What is your broad range for the Sensex or the Nifty by the end of the current calendar?

With the sensex at 27000 levels, the market is quoting at 15 times earnings of FY17 and is at an average valuation at which market had quoted in the last ten year period. Hence the upside as well as downside in the market is limited in the near term. However, corporate earning seems to have troughed and favourable turnaround in micro economic variable may result in the earnings growth of 8-10% in FY16 though it could be back-ended. Earnings growth is expected to 15%+ in FY17 as higher expenditure by Govt coupled with lower interest rates may lead to higher GDP growth in the economy. Substantial

growth in the earnings is likely to be witnessed in the cyclical sectors which are direct beneficiaries of the domestic recovery and revival in the investment cycle. From earnings perspective, the market is looking very attractive for next 12-24 months.

What are views on the Sep qtr earnings by IT majors such as Infosys, TCS and HCL Tech? Further, with Oct-Dec quarter being a traditionally a weak quarter for IT exporters do you see some impact on sequential dollar revenue growth?

Most of the IT majors have guided for lower revenue growth in Oct-Dec quarter on account of higher-than-usual furloughs, lower working days (seasonality) and slow ramp up by some of top 10 clients. On a broader basis, clients are allocating higher budget towards digital segment due to digitalization of their businesses. On the other hand, traditional IT services are facing pricing pressure and flat allocation of client budget. MNC IT companies are filling the gaps in the skill sets required in digital technologies through number of small acquisitions while the Indian IT companies have been slow in investing in new

technologies to ride the digital wave. Unless the Indian IT companies do the skill set based acquisitions to fill the gaps in new technology domain, revenue and earnings growth would lag behind that of MNC IT companies. In such an environment, Indian IT companies may underperform in the medium term.


What impact do you see for FMCG majors on their volume growth in the second half of the current fiscal especially from rural areas in the backdrop of weak monsoon this year?

Demand for consumer non-durable products is expected to remain weak both in urban as well as rural markets on account of slower pace of economic recovery and weak monsoon this year. However, lower input prices are helping the FMCG companies to register higher margin. In an environment of lower input prices, unorganised sector tends to display higher competitive intensity. Hence the FMCG companies are utilising higher margins to reduce the product prices and increase advertising and promotion expenses in order to maintain market share. FMCG sector is the best inflation proxy in the market place. In the environment of stable and lower inflation, earnings growth of FMCG sector is bound to suffer and hence may under perform in the stock market.

What is your call on the cement sector with the monsoon coming to an end and construction activity picking up pace?

In the near term, profitability of the cement sector is likely to be negatively impacted on account of decline in realisation and lower volume growth. In the medium term, lower supply additions and revival in demand on the back of recovery in growth in the economy may lead to reduction in supply – demand gap which augers well for the pricing environment in the cement sector. Earnings of the cement sector are very sensitive to pricing. Hence the cement sector may outperform in the market in the medium term.

Among the rate sensitive, auto stocks seem to be in high gear with most of them launching new models. Do you feel there is still steam left in auto stocks after the recent rally?

Moderate recovery is expected in Car segment on account of positive consumer sentiment, expected decline in the interest rate and increasing possibility of faster pace of economic revival. Investment led segment such as MHCV are expected to register more than 15-20% growth. Decline in the commodity prices may result in the improvement in the margins. Lower
fuel prices and lower interest rates may result in the lower cost of ownership of the vehicle. New product launches and increasing distribution network would be a key to increasing market share. Such auto stocks would outperform the market in the event of faster pace of economic recovery.

What is your advice to a first time investors who wish to invest in equities through mutual funds?

As equity assets class have far higher volatility compared to other asset classes, best way to even out such volatility is to invest through SIP (Systematic investment Plan). The market valuations are still at average levels. Macro stability, characterized by low inflation, low interest rates, low fiscal deficit and low current account deficit would create the condition for a sustained pick-up in the GDP growth. Hence the equity markets are likely register reasonable returns in the medium term. In such case, investors are likely to earn handsome returns on the investment made through SIP. Depending upon the risk appetite, investor should allocate 75-100% of equity investment to diversified equity funds and 0-25% to midcap/thematic/sector funds.