'Market rally more broad-based; remains positive on IT, auto and pharma space'

Interview / Sachin Trivedi, UTI Asset Management Company

Sachin Trivedi Sachin Trivedi

Equity markets have touched record highs in the last few days. On Thursday, the BSE Sensex touched a life high of 44,230, before a sell-off in afternoon trading saw it close 580 points or 1.3 per cent lower than Wednesday at 43,599.96. Sachin Trivedi, senior vice-president and head of research at UTI Asset Management Company says news around COVID-19 vaccines and strong corporate earnings, apart from low bond yields lifted the market mood in recent weeks. In an interview with THE WEEK, Trivedi shares his views on the sectors the fund house is positive on, the impact of the US elections and outflows in equity mutual funds among other things. Excerpts:  

What has driven the record rally in stocks, even as the coronavirus pandemic rages around the world and the economic revival is still uncertain?

Markets generally tend to be forward looking and discount near term news, unless there are surprise events. Therefore, post deep correction in March 2020, it started to focus on economic recovery path, which was aided by stimulus packages. Further, possibility of COVID-19 vaccines in near future, low domestic and global bond yield and better than expected profit performance of corporates have also supported this move.  Broader market indices looks expensive when we look at it from an earnings perspective, but these earnings are depressed due to the pandemic. On price to book matrix, markets are in fair value range.

Only a handful of stocks were seen driving the equity market rebound since the lows hit in March. Is the rally now more broad-based?

When we look at Nifty 50 or BSE 200 constituents’ performance over last one year, we observe that little over 50 per cent of the stocks are still underperforming benchmarks. Which means larger set of stocks have not participated in this performance. However, this performance skewness was lot higher a few months back and participation by mid and small cap companies has increased in recent months. Even mid and small cap indices, which were under performing larger cap index (Nifty 50) in March 2020, on one year basis, are now outperforming it on one year basis.

With Joe Biden-led Democrats winning US elections, what kind of impact could it have on Indian equity markets and the wider economic / trade relations between the two? 

Under the new administration, it is expected that there may not be any major economic policy change, given that the Congress would be split. Therefore, on areas like immigration and trade there may not be any radical change. However, key forces of de-globalisation and diversification of supply chains will remain intact and provide India opportunities in domestic manufacturing.

Post the second quarter corporate earnings, which sectors are looking stronger to recover from the pandemic?

Corporate earnings performance for the second quarter of FY21 has been generally ahead of the expectations. For example, for Nifty 50 index, net profit growth in Q2 was more than 16 per cent year-on-year. Many sectors have participated in this positive surprise. This performance has come on the back of better sales and volume performance and tighter cost controls exercised by the companies. Some of this cost rationalisation could be structural, to which investors can start ascribing higher value. Post pandemic, shift of business from unorganised (small players) to organised (listed/ larger) players may have just got accelerated. We like companies benefiting from this trend. Further, we remain constructive on private sector financial space which are adequately capitalised and enjoy benefit of low cost of deposit. We also remain positive on companies in IT services, Automobile and Pharma space.

Auto companies reported strong sales numbers in October. Is this sector, which has been through a multi-year slowdown, now ready to accelerate?

Last financial year was a challenging period for the auto industry where two-wheelers, four-wheelers and medium and heavy commercial vehicles saw sharpest decline in volumes in last four decades. Bunching up of factors like slowing income growth, increase in costs (led by changing emission norms and safety standards), hardening of lending norms by financial institutions, uncertainty regarding validity of registration of BS-IV vehicles and expectations of lower GST rates led to decline in volume in the industry. This decline in volume, along with operating deleverage has put further pressure on profitability of companies, resulting in pressure on stock prices of underlying companies. 

However, India remains an under penetrated market, where vehicle penetration is far less than developed and some of  the developing counties and we have long way to go. Our sense is that long term demand drivers remain intact and volume growth should trend back to averages some time in future, which will not only improve revenue of the companies but also improve profitability.

There has been an expectation that banking sector NPAs will rise this year. The NBFC segment has been hit hard last two years. How do you look at this space?

Start of this financial year, there was uncertainty about customer behaviour and ability of them to service the loans, which raised scepticism for many financial players’ ability to absorb losses. Also in some of the cases, there was fear of run down in deposit book. However, with sector specific measures undertaken during the year by RBI/government and active steps taken by the players, actual outcomes are likely to be better than what was initially feared. Post this period, we believe players who are adequately capitalised, have distinct advantage of low cost deposit and are judiciously persuing growth opportunities leveraging technology would be the preferred investment for us.  

Equity mutual funds have seen outflows for the last few months, even as new investors’ registrations continue. Is this just a case of profit booking by investors who have held on for a long time or there is a shift away from equity funds to direct equity investing?

It may be premature to conclude that recent outflow from equity MFs would be the trend going forward. In tougher economic environment, it is natural for investors to temporarily alter cashflow allocation. However, even in current times, SIP flows have been largely stable, suggesting investors are not panicking. Longer term data clearly suggests that equity, as an asset class has not just beaten inflation but has outperformed other asset classes. For investors to engage in direct investing is not just time consuming, but outcomes could be more risky compared to mutual funds. For selecting funds (Active /Passive), investors may consult an advisor or may do more research, and depending on the investment horizon they may allocate money.    

Passively managed, index funds and exchange traded funds seem to be gaining traction in India. Are we slowly shifting to how things have played out in developed markets like the US, where index funds are huge? Does UTI have plans to expand its existing basket of passive funds?

In India, performance outcome of diversified funds has been mixed. In the longer term, many actively managed diversified funds have beaten the respective benchmark, but in the last five years, it has been a struggle.  There has been increased traction towards passively managed funds in India. However, as of now such passive product offering in Indian market are limited to fewer categories. At UTI Mutual Fund, we have passive products in Nifty, Nifty Next 50, Sensex and Banking Index. With increasing preference for passive funds, markets may see more offerings in passive categories. 

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