Meet the Manager. ‘The learning for us is to hang in there’

There is still some correction left in the markets before recovery kicks in, says Lalit Nambiar, Executive Vice-President and Fund Manager (Equities), Head – Research, UTI Mutual Fund.

Even in the major bull market of 2003-08, there were still significant corrections, which offered great buying opportunities. Excerpts from an interview:

What can spur revenue growth for India Inc?

It would have to begin with capex by the government and public sector units which should eventually ‘crowd in’ private sector investment. This should translate into higher volumes, margins and earnings growth.

Even as these companies begin to see growth pick up, the confidence of the various associated stakeholders, such as vendors, employees and shareholders, will begin to manifest in the form of increased consumption expenditure.

Given that the bulk of the Nifty is made up of commodity companies and PSU banks, what is the scope for earnings growth here?

We are looking at about 10 per cent for FY16, 18-20 per cent for FY17.

How does the consumer theme look now?

From a topline perspective, the rural slowdown is definitely hurting — possibly due to lower growth in MSP, unseasonal winter rains damaging crops and uncertainty on the current monsoon season. Consumer staples are moving steadily and there are hopes of an urban recovery, but it’s nothing to write home about yet.

We are at a lull in the sector and it will probably take a couple of quarters before we see increased consumer confidence translating into accelerated volume growth and profits in the sector.

Valuations have, however, run up sharply as foreign investors find the combination of high growth, relative to developing markets, and high-quality customer franchise, and the longer competitive gap period quite attractive — especially since their investment horizons are much longer than that of average local investors. From a market return viewpoint, we may have to wait for another five-six months before topline acceleration brings interest back to the sector.

Can software and pharma still be seen as good defensive themes?

If you look at the larger economies likely to grow, apart from India, there is really only the US.

Juxtapose that with the fact that we have the possibility of Greece exiting the EU even while the US Fed may begin hiking interest rates, implying a period of volatility akin to the one seen during the ‘taper tantrum’ of 2013, which singed currencies, equities and other asset classes in its wake. Both pharmaceuticals and IT have a healthy exposure to the US market and are therefore good defensives.

Is the market valued too high?

There is no great earnings visibility for the next two quarters. We are possibly undergoing a mix of price and time correction, which may well get worse before it gets better. Our studies indicate that in the major bull market of 2003-08, which was similarly reflective of a cyclical recovery, there were six significant corrections with the earlier ones being great buying opportunities as opposed to being excuses for an exit.

The learning for us, therefore, is to hang in there; for investors it should be that they increase investment to generate wealth.

So, how can one play the mid-cap and small-cap space?

There definitely are some good stories in the space, but not every mid-cap eventually becomes a large-cap.

And that percentage is low enough to be food for deep thought. Some of these stocks may also be subject to market manipulations; so one cannot be too careful. Market corrections can result in precipitous falls in some of these names, severely testing the investment hypotheses. So when the tide goes out, it can leave many a boat stranded high and dry.

What is the exact mandate of the UTI India Lifestyle Fund, since banks and software seem to make the highest sector holding?

The Lifestyle theme essentially plays on the demographic dividend likely to accrue to India in the coming decades. It rides on most sectors other than direct B2B sectors, such as energy and infrastructure. This is because, whatever trends flow from changing demographics, such urbanisation will impact myriad aspects of people’s lifestyles. There is, thus, a very broad span of sectors.

If you look at banks in recent times, they have moved away from commercial and corporate lending and are looking at retail lending in areas like housing finance.

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