The Indian equity market is likely to remain volatile in the short term, but after a bit of correction it will create a very attractive base for two-three years, believes Mayur Patel, fund manager - listed equity at IIFL AMC.
“The most concerning factor is the Indian interest rate differential with the US that has fallen to multi-year low, if you look at last 17-20 years of data. So, either our currency will depreciate sharply or RBI will have to sound slightly more hawkish than what it is currently,” said Patel in an interview with Moneycontrol.
The 20-year median price-to-book valuation of the Sensex is around 3x and the index is currently slightly higher than that. “So, some bit of correction from here on is possible, but then it will create a very attractive base for a two-three-year medium-term outlook,” he added.
Patel manages the IIFL Focused Equity Fund, which has assets under management (AUM) of about Rs 3,400 crore. Edited excerpts:
Which sectors do you believe will emerge as the leaders over the next two-three years?
Barring certain pockets of consumption, credit demand and industrial demand are panning out well. Quite a few domestic cyclicals could drive good double-digit growth in corporate earnings, which is more tangible, and not just driven by commodity price hikes. The investment cycle is also set to pick up. Financials, industrials and autos are the three sectors linked to the investment cycle in the country, which is at the early stage of recovery.
In financials, do you prefer private banks or public sector banks?
Some of the larger public sector banks are in good shape currently. Credit cost is under control, asset quality is good, and balance sheets strong. But, it is very difficult to take a long-term call on public sector banks. So, my pecking order would be private sector banks followed by very selective, large public sector banks.
There is a concern that banks have reached their peak margins, and there will be some compression. Do you see any challenges?
Margins are at peak for sure. They may normalise a bit but are unlikely to decline sharply. Because clearly, the headline rates are not going to correct in a hurry. We'll see some more rate hikes from here and thus, margins will hold up.
Meanwhile, good double-digit credit growth will continue. It may not be 17-18 percent, like we saw over the past few quarters, but still a healthy, double-digit growth for the next few years is easily achievable.
The Street is of the view that the auto sector will see moderation in volumes due to strong base effect. Why do you like the sector?
We have now been looking very keenly at the exposure of OEMs (original equipment manufacturers) and auto ancillaries to electric vehicles (EVs). Only those companies that manage to make EVs a sizeable part of their product mix over the next three-five years will emerge as winners. An auto component player may have a much larger opportunity in an EV as compared to an ICE vehicle. So, when EV penetration rises, that company’s opportunity per vehicle goes up significantly.
Is the fund overweight on autos currently?
Yes, it is overweight on autos. EV is the core thought behind selecting bottom-up stocks in the auto sector. We believe the theme will play out in India like it has in developed countries.
Demand headwinds are definitely there, with pressure in the entry-level segment. But over the last 10 years, the auto segment has been under consolidation. So, the natural replacement demand is coming back now and there will be decent growth in the segment over the next few years.
How are you positioned when it comes to consumer companies, both staples and discretionary, amid talk of El Nino disruption?
We are significantly underweight on FMCG and non-auto consumer discretionary companies. FMCG companies are of great quality, but their growth is modest. In fact, we don't have any mainstream FMCG exposure in our portfolio.
Very few consumer pockets are witnessing strong demand, while others are still struggling. We are seeing robust trends in travel and wedding-related segments, while base-level FMCG consumption is stressed. On top of that, valuations are still expensive across the board.
Any advice to investors?
As much as possible, investors should get a ‘touch and feel’ of the businesses they are investing in. Be it the product or the company’s manufacturing facility – that’s the real source of RoE (Return on Equity). I would say, it is very difficult to catch the bottom of the market, so investors should use this volatility to gradually invest in India. Investors should increase their time horizon from one year to five-six years, and the overall risk-reward will improve significantly. The volatility as measured by the standard deviation of returns will also decline significantly.