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What are the three pockets of opportunities going forward? V Srivatsa explains

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V Srivatsa, Fund Manager, Executive V-P, UTI AMC, sees very good opportunities in private banks. The second sector he likes is healthcare, specifically on the export-oriented side where he sees a decent amount of opportunity – both in terms of valuations and growth outlook. The third sector where it is more of a contra call is FMCG, where valuations are in line with probably a three- or five-year average, and the worst may be over in terms of the demand.

There has recently been a lot of volatility on account of this election outcome and verdict expectations, but going forward what is your market outlook? Have we made the top for the year or is there a lot more room to this rally?
V Srivatsa: In terms of the market outlook, we have had a very stellar run in the last couple of years. The Indian markets have been amongst the best performing markets globally and this is led by a decent amount of earning upgrades as well as stability in the overall economy and also in the corporate side. Going forward, we believe that the market valuation is at around 20, 21 times one year forward and, of course, the midcap and the smallcap are trading at a significant premium to the largecaps.

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In this kind of scenario, we really do not see much scope of the PE getting re-rated, but yes, we still are hopeful of a double-digit earning growth over the next two years for the Nifty as such. The market performance would more or less be in line with the earnings growth and so far, we have seen a very decent earnings growth in the last 18 months and we still see that momentum continuing on the back of a reasonably strong domestic economy, mild inflation and healthy outlook on the earnings side which should drive the market going ahead in the next couple of years.

Where do you see the earnings upside coming in?
V Srivatsa: I think banking still continues to be a good source of earnings growth. They have contributed in a big way in the last couple of years. We still see that continuing. Capital goods has seen a very stellar earnings growth and we see no reason why it should slow down, that should also continue. Apart from that, healthcare and FMCG also should contribute. FMCG has been a drag, that should also contribute. And the other one that I am quite positive on is commodities because that has seen a very sharp run-up in the prices which will start reflecting in the coming quarters.

What is the view on private banking names particularly because this is one space all the mutual funds and institutions have been very overweight on and that has been massively underperforming. What have you been doing about your private financial holdings? Are you trimming it down or are you looking at adding it just because the underperformance is expected to reverse soon?
V Srivatsa: We have been overweight on private banks for the last one year and that has hurt us in the short run, especially in the last six months. However, we still continue to be very positive on private banks, in spite of the underperformance, because the valuations are very reasonable vis-a-vis the market. So, they are still trading and this is one of the very few sectors trading at valuations below, say, a 19 level or even 16 levels.

Number two is that still we see scope of earnings growth and credit outlook still remains very good in terms of credit growth and credit quality also looks to be quite favourable. So, one factor which has impacted the private sector banks is that there has been issues with some of the large-scale banks, specific to those banks which has kind of pulled down the valuations. As we see those concerns easing, we should start seeing the outperformance of the private sector banks in the coming quarters. So, we continue to be very positive because on a valuation, especially on a relative valuation vis-a-vis the market, private banks look to be very attractive.

Where else is the opportunity right now? Should one be looking at bottom-up stories or would you go with the momentum, more of the same as the kind of strategy that would work?
V Srivatsa: Yes, specifically in terms of sectors, I did talk about private banks where there are reasonably good opportunities. The other sector that I like is healthcare, specifically on the export-oriented side. So, there has been a very decent outlook on the US generics. The prices have stabilised. The export-oriented healthcare companies are one where I see a decent amount of opportunity – both in terms of valuations and growth outlook.

The third sector where it is more of a contra call is FMCG, where valuations are in line with probably a three- or five-year average, but we do believe that the worst is over in terms of the demand and it is a very good play on the rural demand and margins have been fairly resilient there. So, these are the pockets of opportunities that I see in terms of outlook going ahead.In your first answer, you talked about how the valuations of smallcap, midcap are trading at a much higher premium versus the largecaps. In this context, are you looking at deploying more purely in largecaps and trimming positions in midcap and smallcaps? What is the strategy around that? I also wanted a word regarding these public sector entities which have been in another orbit altogether in the last 12 months.
V Srivatsa: If I specifically come to mid and smallcaps, I think as an index they are trading at higher levels and it also implies that probably the top quartile is trading at a far higher levels than the overall market or the index. But given that the universe of mid and smallcap is large, I still am able to find some opportunities within the mid and smallcaps but I do not take a strategy to move from mid to large; but yes, between the three, in terms of valuation, largecaps offer a very decent amount of comfort.

In terms of index, mid and smallcaps do not offer that level but having said that, since the mid and smallcap universe is large, there are opportunities which a fund manager can evaluate within the mid and smallcap index. In terms of PSUs, they have had a very stellar run in the last three years because of the change in the sentiment and there has also been a very good improvement in the overall business environment.

So, say, for example, in defence, there has been a sea change in the overall improvement which has led to a massive amount of earnings growth as well as cash flows and the valuation multiples have also gone up significantly in the last couple of years. If I look at PSUs, it is a bit difficult for me to put it in one basket and say that they are cheap or they are expensive and one has to look on a case-to-case basis.

So still, I would say probably PSU banks still look good and some of the PSU names in the gas space, in the energy space, still look good if I were to classify it sector-wise, but on the capital goods side, on the defence side, and other sectors, the PSU is expensive and far higher than the private sector counterparts.

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