Tuesday, February 21, 2012

Market may touch new highs over the next 12 months: Vijai Mantri

In an Interview with ET Now, Vijai Mantri, MD & CEO, Pramerica Mutual Fund, gives his views on Indian markets. Excerpts:

ET Now: After the recent run up that India has seen, we have become the most expensive in the region, and Sensex is at a valuation of 15 times FY12 earnings, is it time to exercise caution?
Vijai Mantri : I do not think it is a time to log out because if you look at Indian market from valuation perspective, it is still discounted to last 5 to 10 years average PE multiple or price to book value.

If you look at the earnings growth of Indian equity market, the top line continues to grow at close to 20%, even December quarter numbers growth on top line was close to 20%. If you look at the bottom line, we have seen perhaps the worst quarterly result in December 2011 and the results are bottomed out. and there are significant upsides.

The visibility on the corporate bottom line will start emerging over next six month period. So we have not seen yet the full cycle of when the unleveraging will happen, when the interest rate go down, when the one-time adjustment is being taken care of.

So if you look from a valuation perspective, if you look from an earning perspective, we clearly see there is a lot of leg left in this rally and it is not the time to cash out.

Compared to 2009, where the market went up significantly and suddenly investor did not have the opportunity to participate in the equity market, 2012 may allow multiple entry points for the retail investor. So if you are investor and you are investing for three to five year period, whenever you see correction in Indian equity markets you should put money rather than taking money out.

ET Now: Which are some of the key sectors you are bullish on where you have overweight positions and which are the key sectors on your avoid list?
Vijai Mantri : We are buying more in the banking space because we believe the banks will be in a sweetest spot over a 6 to 12 month period for very simple reason that most of the bad news about the banking sector has already been priced in.

The most important news is on the NPA side and if we look at the balance sheet of the bank and if we look at what price they are available, many of these banks are available in the historical low valuation and it means that significant amount of NPAs has already been discounted in and, we do not see NPA going to be that much in the banking space.

The second thing is, the interest rate is going to come down over the next 12 to 18 month period, it would help banking sector significantly.

The third thing, one needs to look at the interest rate curb, if you look at three months bank CD or six month bank CD or 12 month bank CD, they are available around 10% and, if you look at 10-year GSec it is around 820 to 825, so the yield curve is clearly inverted, suggesting interest rate is going to come down.

When the interest rate is going to come down, lot of NPAs would see recovery, so I believe, banking sector would be an interesting space to be in. It is also a direct play of India GDP.

The second space we are turning bullish is the capital goods because we believe this sector will see some activities because the government will come out of the reform post budget and post UP election and, the market would see the visibility of these things at least 6 to 12 month now but the visibility as far as the profits and the activities of the investment side will take 6 to 12 months.

But the market will start discounting these things much ahead of a visibility on these areas. So I believe capital goods, banking would be the interesting space and added to that is industrial space. We are overweight on these three sectors. We are underweight on real estate, we are underweight on IT.

ET Now: So what do you like from the cap good space?
Vijai Mantri : If you look at the capital goods, we like BHEL, L&T, Crompton & Greaves, Thermax.
If you look at the cycle of these companies over the last 10 to 15 year period, you get out what should have been your entry point and when you could make money in these stocks. These companies have gone through the challenges where the order book position was not looking very good.

The policy paralysis we have seen in past, interest rate going up, the competition from international market, so these companies have seen all these things over the last 15 to 20 year period and the best time to own these stocks has always been around the same time, so we are looking at these companies.

ET Now: Indian markets are up 20% this year and that is largely on account of liquidity but the fundamental turf is not looking exceptionally strong, factors which got us down in November and December were high crude prices, high inflation and a ballooning subsidy burden, can we brush aside all the macro concerns?
Vijai Mantri : I do not think we can brush aside. These problems would continue to remain there. I think inflation would come down. If you look at the fiscal deficit the government has said there is 4.6% fiscal deficit.

Market has already anticipated even in last year that these numbers do not add up, so market was already discounting all these factors. If you look at this year, market is anticipating that as far as fiscal deficit is concerned, it may hit 5% plus kind of number so market has priced in all these things.

If positive news flow happens then you will see the market going to the new level and the positive news flow may not necessarily has to come from the international market. If you look at the rupee-dollar play, part of the inflation is because rupee has depreciated against the US dollar and, now rupee is in appreciation course and if that stays there, again inflation would come down.

So we know that the inflation would remain there, it may come down to 6% but still above RBIs comfort level to 4% to 5%, but 6% is pretty okay. It may have a chance to coming down further. About fiscal deficit, we know the ground reality will remain around 5% but in spite of those things, we believe that the India is in a good shape and it will continue to be in good shape post budget and UP elections.

ET Now: On a scale of 1 to 10 what to your mind are the chances that Indian markets will touch or will cross the previous high of 21000?
Vijai Mantri : My sense is that over the next 12-month, the market may touch new high and I will put 70% chance on that.

Source: http://articles.economictimes.indiatimes.com/2012-02-17/news/31071532_1_banking-sector-banking-space-interest-rate/2

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