 "Gopal Agrawal")
The markets are factoring in a minimum of 15 per cent growth in earnings, says Gopal Agrawal, chief investment officer for equities at Tata Asset Management in a chat with Puneet Wadhwa. Besides being bullish on the banking sector, he remains overweight on infrastructure and pharmaceutical sectors as well. Edited excerpts:
What are the chances of a market correction given the run-up so far in 2017 (CY17)?
Given the strong macro and growth recovery, it is unlikely that the market will correct significantly. Earnings growth expectation has reached close to 20 per cent per annum over FY17, to FY19 estimates (FY19E). Improvement in earnings and lower interest rate can drive the market higher.
What are your return expectations from the equity markets over the next year?
The market will track the earnings growth as we are trading close to one standard deviation above the long-term averages. The market is pricing in a minimum 15 per cent earnings growth for FY18E, and any deviation from it can lead to either the market moving in a positive or a negative territory.
What is your view on mid- and small-cap segments?
The mid- and small-cap segments tend to perform better during economic recovery and softening interest rate, which is the case now. It is likely to do well going ahead. However, valuation in certain pockets has run ahead of fundamentals, which can cause some volatility.
What’s your view on the banking sector given the recent developments?
The banking sector is in a sweet spot relatively. There is ample liquidity and lower deposit rates. Bond yields have also softened and there is a possibility of a cut in interest rates in the future by the Reserve Bank of India (RBI). All these augur well for the sector, as it will help reduce cost of funds. The credit off-take is also likely to improve with the government’s renewed focus on low-cost housing.
On the other hand, the resolve to sort out the non-performing asset (NPA) mess is also a welcome step. Earlier, we were not able to assess the health of a bank as there were chances of them hiding the details. With a clear directive now, markets will take the developments as a positive step, as there will be no question marks on the banks’ books. Those with a strong balance sheet and healthy tier 1 capital will be rerated. We remain bullish on the sector, as we feel the bad news is already known to the markets.
Which other sectors are you overweight and underweight on?
We are currently overweight on consumer-related plays. This includes retail private lenders, non-banking finance companies (NBFCs), retailers, consumer discretionary including automobile ancillaries, engineering and capital goods, cement and infrastructure and pharmaceutical sectors. We expect continuous strong domestic inflows to continue, as financialisation of domestic savings will continue and lack of compelling returns in other asset classes will also help the local flows.
Can you elaborate regarding your stance on pharma? Are you looking at the information technology (IT) sector as well as a contra play?
IT sector has achieved a scale, which has led to reduced growth expectation from the sector. However, strong free cash flow generation and strong pay-out will help to cushion the portfolio. Companies that offer differentiated cutting edge technology and services may outperform. The pharma sector is facing problem due to regulatory issues and price erosion in specific drugs. We expect it will resolve over time and valuation has reached to close to bottom for most of the companies in this correction.
