The market price-to-earnings (P/E) expansion could take place if there are more corporate earnings cuts, said Sachin Trivedi, senior vice president and head of research of equity at UTI Asset Management Company. He further added that investors should focus on the market for a longer period of time rather than just a quarter. In an interview with CNBCTV18.com, Trivedi talks about opportunities in equities and his outlook on the Indian stock market. Here are the edited excerpts:
What are the reasons behind the tight liquidity issues despite the corporate tax cut?
The entire financial space has gone tight on some sectors especially the SMEs or self-employed category, where there has been enhanced scrutiny or enhanced value/limits put into place. The SMEs are clearly facing an income challenge again and these challenges will keep changing quickly. In terms of corporate tax, the companies will get some amount of tax benefit, which they can either choose to retain or can also choose to pass on to the consumers to stimulate the demand. So, it is a net debt positive in my view.
On the MSME sector front, the finance minister announced last month that all the stressed assets from the MSME space will not be recognised as non-performing assets (NPAs). Don’t you think that the banks’ asset quality will worsen if they absorb all the stressed assets from the MSME sector?
Though I am not the right person to comment on this, I do have to tell you that there are two parts to it: the government’s approach and the uncertainty on the peak NPA cycle. As far as the gross NPA cycle is concerned, we are close to the peak. However, if the economic activity picks up then some of the concerns should be behind.
The second part is the government attitude, which is clearly trying to address industry as well as investor concerns. I think these government steps should go a long way in terms of creating or improving the government’s image as far as the attitude towards industry in the market is concerned, which is very positive in my view.
What do you think the market would expect in terms of corporate earnings after the whole series of government announcements?
Very hard to guess but again what we have to keep in mind is that when we look at earnings going forward, the Nifty could still be trading at 16 and a half times of Nifty earnings. So, if there are more earning cuts then PE expansion could take place. Now, pockets of opportunities should also start to arise in midcaps and smallcaps because if midcaps were trading at a premium to largecaps then they have come back to large discounts to the largecaps. So again that is one area where we should clearly see good amount of opportunities for us. This is a stock-specific story there because you cannot take large calls and buy every midcap.
Do you see Nifty50 surpassing the 12,000 or 12,500 levels?
I will not comment on what would be the target but if the economy picks up then there could be some improvement because FPI investment is still remaining which leaves a big enough room. The government has done its part by bringing in the fresh set of reforms, now we should all wait for how the economic activity picks up. The first effect will start to reflect on corporate earnings. Herein, we all as an investor should look longer-term rather than focus ourselves on next one-two quarters.
Do you see global cues such as the trade war impacting markets?
The market is a slave to earnings and a trajectory for earnings. If we have good earnings growth trajectory driven by the economic activity, we should start performing well in the long-term. But at this point in time, there are uncertainties globally which could impact exports and FPI flows. Not just India, other countries also have seen some amount of foreign outflows. So yes, if there are more and more uncertain times, we can continue to face some outflows in the near-term. However, investors search for tax-efficient longer-term outlook at the end of the day, so I think they will reconsider coming back to India.
Which are the sectors that you are betting on currently?
After the corporate tax announcement, we are betting on financials, auto and all domestic-oriented service providers, except maybe life insurance companies.
We are quite positive on the private sector banks. Again within the private sector banks, well capitalised private sector banks are the ones which we are betting on. In our view, they will continue to gain market share from PSU banks and because of adequate capital, they should again be well placed as far as this area is concerned.
Our belief is that some of these banks’ NPA cycle is behind so the provisioning cost should no longer be as high as it was in past. That is one area we clearly are positive about.
In the auto space, the correction in the valuation as well as earnings expectations leaves us some room because our study indicates that this is one sector which is to an extent being cyclical in nature, so every 4-5 years there is some amount of challenges as far earnings is concerned which has already in our view has played out. So that is again comfortable valuation, long term growth story continues to remain because we are clearly low on penetration, so that is another area that we would be positive about.
Then, of course, we are also positive on pharma and IT.
Any investment tip for the investors like novice investors that are in the market right now?
We are the mutual fund participants so my advice to investors would always be forming an asset allocation plan, sticking that plan and keep it for a long time. Also, it is better to stick to a multicap because once we take the equity-related asset allocation it is best left to the fund manager to again decide on that so maybe that is my recommendation for the investors.
First Published: IST