Bhupinder Sethi,head of equities at Tata Mutual Fund, believes that the stock market rally still has legs. His picks are rate-sensitive sectors and the midcap segment. The recent uptrend can be a good opportunity to sell the duds and buy into strong businesses, he tells Nitin Shrivastava in an interview.
What’s your view on the fundamental market valuations post this sharp run-up? Are the valuations justified?
The Sensex has jumped by around 20% from end-December 2011 and is valued around 14 times one year forward earnings. Post the run-up, the extent of undervaluation has definitely reduced, but the market is still quoting below the long-term averages by around 10-12%. Also, over the last four years, while our nominal GDP has grown by around 80%, the BSE Sensex is down by around 15% from the peak level of around 21000 it touched in Jan 2008. This gives a sense of the value that has crept into stock prices as businesses have scaled up over this period of time.
What’s your outlook for the Indian equity markets for the whole year? How should retail investors approach the same?
Given the backdrop of sustained headwinds in 2011, we expect 2012 to be more benign. While there are risks, the equity markets should have a better year hopefully on the back of falling inflation and supportive valuations.
Markets have seen a good uptrend in the last month or so, and generally an uptrend is always a good time to reduce holdings in companies with deteriorating economic fundamentals, poor business models and questionable governance practices.
Systematic investment in good quality companies and investing through mutual funds is what should help retail investors create long-term wealth. That’s what the volatility in the market should be used for, to buy strong businesses on dips during market turmoil, and to treat a rising market as a cleansing opportunity.
There have been domestic headwinds for corporates over the last one year or so. Do you see some of the macro-economic concerns easing?
The Reserve Bank of India has already indicated a change in policy stance towards addressing growth risks from the earlier stance of predominantly managing inflation risks. We believe the RBI could start cutting rates in the next few months. Strong surge in FII inflows in 2012 so far has helped boost the equity markets as well as helped the Indian rupee to strengthen. The surge in the equity market and a better sentiment would also allow some of the leveraged companies to raise equity money to repair their balance sheets. As we speak, two companies have already announced fund-raising plans sensing a better mood in the equity market and a penchant for “risk-on” trade.
What do you make of the Sensex/Nifty earnings this quarter? In which direction do you see them going into fiscal 2013?
The earnings for the quarter ended December 2011, have been largely in line with the beaten down expectations with a marginal positive surprise. One of the key aspects of the results was the continuing robust sales growth at over 20% despite the slowing economy. The operating margins showed signs of stabilisation on a sequential basis, though they were down on a year-on-year basis. Profit growth continued to lag the sales growth by a big margin because of continuing high interest costs.The key takeaway of the earnings season is that the earnings downgrade cycle seems to be bottoming out, whereas in the previous three quarters, the downgrades were prominent.
The sequential stabilisation of operating margins is a key positive going into FY13. Interest costs continue to remain high but are expected to decline in FY13. For FY13, our earnings growth expectations are around 15%.
Which are the sectors you are betting on in the short to medium term and why?
Our core bias remains towards sectors like consumer staples, discretionary, software and pharmaceuticals as also private sector banks and upstream oil and gas. Incrementally though, given the improving macroeconomic conditions and possibility of rate easing, we are also looking at stock-specific opportunities in beaten down interest rate-sensitive sectors. The actual recovery in business may take time for some of these sectors, but the fact is that the stock market is a discounting mechanism; the stock prices are moving up ahead of the event.
Also, we are looking to into buying some better managed midcap companies across sectors, as midcaps tend to outperform large-caps in an uptrending equity market.
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