‘Now’s the time to buy cheaper growth stories’

Markets will take a price correction over the next one year, before the actual execution of the Government's plans sparks the next jump, according to Anand Shah, CIO, BNP Paribas Mutual Fund. He believes that now is the right time to buy cheaper growth stories than pay too much premium for a safer bet.

What do you make of market valuations and earnings now?

Today, even after such a sharp run-up, the one-year forward price-earnings multiple is much lower. The market is just coming back to its mean multiple; it has not run up beyond its normal zone.

Still, this surge has come much before the actual earnings growth. Either there may be a price correction for the next one year or consolidation around these levels.

We believe economic recovery will be slow and gradual. Over the next two years, we’ll move to a 5.6 to 6 per cent growth in GDP. Along with that, inflation will slow down a little and we will see the start of the interest rate cycle cut. Then, in the next 12 to 18 months, there will be some visibility of earnings growth going back to where it historically used to be.

There can be sectors where, along with the volume growth that can give margin expansion, utilisation will improve and there will be a lot of operating leverage. For these sectors, over the next few years, even if the topline growth is 14-15 per cent, earnings growth can actually be around 18 per cent.

Isn’t the market already factoring all this in?

The big driver of the market a year-and-a-half later would be the actual execution of the new Government. That will lead to visibility of GDP growth, investment cycle revival, in turn leading to quicker earnings growth. I agree that for the market to rerate further, we need earnings growth visibility. And that hinges on the execution — that is, if expectation of government policies is pushing the market now, the actual execution will be the trigger, going ahead.

And this is coming out of the stagnation we’ve seen in the past five years. Assuming, of course, that execution happens.

What is the future of beleaguered sectors such as mining?

Frankly, it’s a tough call. You have to be very select in these sectors. Not all companies will be able to come out of the trouble they are in. Only a select few which have worthwhile operational assets and capex stuck only because of regulations will see some recovery. In fact, it’s not a sector call at all, but very stock-specific.

So which are the sector calls?

The simplest story is private sector banks. In the last 15 years or so, they have grown faster than the banking industry. And banking itself grows faster than the nominal GDP.

Another sector where the worst is really behind is telecom. Over the last six quarters, there has been a lot of sanity in pricing, lower discounts, improvement in realisations, expansion in margins and a reduction in competitive intensity.

The third sector which we believe will look good, but with a lag of maybe a quarter or two, is cement. Here, with demand picking up, there will be utilisation increase and operating leverage to play on, especially after so many years when the supply growth was higher than demand.

A large part of cement demand comes from rural housing, as there is a shift to pucca houses. For FMCG, IT and pharma sectors, earnings growth will be along their long-term averages. So they are good long-term bets.

However, if growth is higher in other components of the market and available cheaper, then there may be a phase for a year or two when they underperform.

Right now, people are paying a premium for stability and surety of earnings growth. But we believe that now, it is the right time to buy cheaper growth stories than pay too much premium for a safer bet.

What is the strategy of your mid-cap and large-cap funds? They have been consistent, even with the extreme volatility in markets.

In both BNP Paribas Mid-cap and Equity, the key objective is to identify companies which will grow earnings at a rate superior to the index earnings growth rate and which is sustainable at the same time. Both have equal weight.

In our Mid-cap fund, we look at three factors.

One, the leaders in an emerging sector, where the sector is so nascent that the leader can grow much faster. The second is the challengers in a developed industry — companies which can challenge the leader and so grow much faster than the sector.

The third are consolidators. This is where an industry is very fragmented and because of that, there is no large player.

So, as and when the industry consolidates and the number of players reduces, the bigger ones benefit.

However, there are not many opportunities like this. Cement is one example. In BNP Paribas Equity, we have 75-80 per cent in large-caps.

COMMENT NOW