Mutual Funds

Go for good quality large and mid-cap stocks that have corrected sharply: Vinit Sambre

Parvatha Vardhini C BL Research Bureau | Updated on October 16, 2019

Vinit Sambre, Head - Equities, DSP Mutual Fund

"Stocks in these segments are good hunting ground for investors with long term view"

“Good companies with strong historical track record, good long term growth outlook and reasonable valuation are available in sectors such as consumer discretionary (including automobile), banking, healthcare and building products. Stocks in these segments are good hunting ground for investors with long term view” , says Vinit Sambre, Head - Equities, DSP Mutual Fund. Excerpts from an email interview:

What is your earnings expectations from the September 2019 quarter? Is there any silver lining amidst the slowdown?

Optically the earnings are likely to look better due to the corporate tax amendment benefit being accounted for by companies. Excluding this benefit the earnings are likely to continue their subdued trajectory in sync with the poor economic growth.

Some sectors which are likely to report relatively better performance include few private sectors banks, consumer non durables (pace of growth may slow though), consumer discretionary mainly paints, cement -where growth would be supported by higher realisation on a YOY basis despite flat to negative volume growth and domestic focused pharmaceutical companies as the growth there seem to be improving.

Sectors which are facing severe challenge including Automobile, Metals etc are likely to report considerable decline in earnings during the Sep 2019 quarter.

How long will it take before the stimulus measures announced by the government (including corporate tax cuts) shows up on corporate bottomlines?

As we understand the corporates which have gained due to the lower tax structure do have an option to pass on the benefit fully or partially to the consumer to induce demand. Hence depending upon the degree of benefit being passed on it will either get reflected by way of higher demand or better earnings growth in the near term.

Over long term the intention of the government is to promote investment in new capacities. Our belief is that given the low demand environment currently, we seem to be over capacitated and hence large scale investment would take some time as we see improving confidence and economic revival.

In your opinion, have all the pain points in the economy been addressed by the government? Is there anything more that needs to be done for investment/consumption recovery?

We are happy to see government being open to suggestion and has started taking appropriate measures to boost growth. Reduction is corporate tax along with few others are welcome measure announced by the government till now and would have positive long term implication. In terms of the recommendation, we believe measures such as exempting the long term capital gains tax on equities, removal of dividend distribution tax, reducing the overall tax burden would go a long way in improving sentiments and enhancing the disposable income in the hands of individual which could aid in demand revival. Also from the fiscal view point and to support its development spend, government needs to follow their stated path of going for strategic disinvestment of PSU assets to realise optimum value.

How are the market valuations at present compared with historical levels? Is it a good time to buy especially mid and small cap stocks?

There is bit of contradiction when we talk of market valuation. On one hand there has been massive correction in sectors that are not doing well currently like metals, automotive, building materials etc, and on the other hand stocks within the consumer non-durables, retails, few private banks and NBFC are trading at all-time high valuation. This has led to significant polarization where in few stocks have kept the markets afloat and are not allowing the overall valuation to reflect the true fundamental picture.

From the investment perspective it is good time to dive into some of the good quality companies both in the large and mid-cap spaces which have seen decent correction due to current slowdown. Investors looking at such companies would be benefitted by buying them at reasonable price but may have to have longer holding period to see gains.

How would you differentiate contrarian and value strategies and what works when?

By nature, contrarian investing has some similarities with value investing in the sense that a contrarian investor is trying to focus on neglected sectors or sectors which may not be popular at the moment. There is a high chance that since these are neglected sectors they may be trading at below their intrinsic value and hence may get categorised as value stocks. The contrarian or value investing works when the cycle seem to be turning around for such stocks. So for example if an investor who buys metal stocks today given that it is available cheap and not many investors may be focusing on the same is likely to be rewarded handsomely in the next positive metal cycle, currently the visibility for which is poor.

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Published on October 16, 2019
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