'Auto, pharma, and industrials have delivered well in the recent quarter, while businesses like quick-service restaurants, consumer staples, and durables have underperformed in volume growth.'
The second-quarter (Q2) earnings mark a positive shift in trend after a lacklustre 12- to 18-month period, says Sailesh Raj Bhan, chief investment officer-equity investments, Nippon India Mutual Fund.
In an interview with Abhishek Kumar/Business Standard, Bhan mentions that sectors such as automotive, pharmaceutical and industrials have performed particularly well in the ongoing result season.
Valuation-wise, the money manager sees opportunities in financials, consumer staples, and utilities.
Going by the indices, smallcaps and midcaps have shown better resilience during the downturn phase (in October) vis-a-vis largecaps. What's supporting these segments despite valuation concerns?
The resilience in the smallcap and midcap space is a function of improvements in flows in these categories after a sharp fall until March 2023.
The improvement in margins, driven by a fall in commodity prices, is also an important factor.
Strong domestic retail participation in the non-largecap space is primarily driven by recency bias, mainly the higher returns over the past few months.
These phases happen once every two to three years, creating pockets of opportunity in other spaces, such as largecaps, as mean reversion leads to returns.
Also, largecaps have borne the brunt of selling by overseas funds, creating a performance gap.
Due to these factors, valuations in the largecap space appear to be relatively attractive.
You were significantly underweight on the banking and auto sectors compared to peers at the end of September, while running overweight positions in consumer and capital goods. What's the rationale, and has it changed since then?
We have been positive on large banks, and recent corrections have created attractive opportunities in the space, especially in the top names, given the strong asset quality and pick-up in credit growth.
Overall, we remain optimistic about domestic capital expenditure and the consumption (discretionary and services) space and maintain higher allocations.
However, we have partially reduced our overweight positions, given the elevated valuations in capital goods, and added a few secular themes that appear better positioned to manage the likely near-term volatility.
Most recent initial public offerings (IPOs) have attracted investments from MFs, even those that were said to be highly valued. What is your general perception of recent IPOs, and what do you look out for in these companies before investing?
There has been a flurry of IPOs in the past few months across the spectrum.
Our focus in these is to look at the ability of the companies to deliver long-term profitable growth, the size of the opportunity, and the 'right to win' capability of the company.
Are you seeing any reversals in trend for any sector in Q2 results? Has it triggered any changes in sectoral allocation?
The Q2 earnings results have been good, supported by margin gains on lower raw material costs or input prices.
Auto, pharma, and industrials have delivered well in the recent quarter, while businesses like quick-service restaurants, consumer staples, and durables have underperformed in volume growth.
Overall, it's an improving trend in earnings after a lacklustre 12- to 18-month period.
In addition to near-term growth rates, valuations also determine portfolio allocation changes.
Financials, consumer staples, and utilities continue to offer relative attractiveness among sectors.
Pharma stocks have surged since March after remaining subdued for almost two years. Since you manage a pharma fund, do you see room for a further run-up from a fundamentals and valuation point of view?
The Indian pharma market is attractively valued, given the scale of opportunity, business economics, and favourable market structure.
Multiple drivers support sector growth like strong domestic demand, increasing awareness and penetration, the emergence of health care services across hospitals and diagnostics, and stable exports.
The relatively better valuations versus other similar sectors like consumer and fundamental long-term possibilities were reflected by higher investor participation over the past couple of quarters.
Feature Presentation: Rajesh Alva/Rediff.com
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