With the thrust on infrastructure and pick-up in capex, we will see leadership returning to that sector.
With the markets correcting, identifying sectors and stocks that are likely to lead from here will be rewarding for investors. Business Line spoke to Mr P.V.K. Mohan, Head-Equities, Principal Mutual Fund, to hear his views on the sectors that drove the market and the ones that could be the outperformers from here on.
Excerpts from the interview:
In the Indian market different sectors tend to drive each leg of a stock market rally. What in your view are the promising sectors for the next few years?
I think the traditional sectors will do well. Clearly, this rally was led by financials, and sectors related to the consumer space, such as automobiles. These sectors will probably continue to do well. In terms of leadership, one sector that performed well between 2004 and 2008 was infrastructure, though it completely underperformed in this rally.
Now, if the country has to get back to the growth trajectory of 8-9 per cent, there is an urgent need for infrastructure spending. The capex from the private sector needs to pick up. So we will see leadership coming back to that sector. Consumption is one pillar of the economy and it is on a strong track. We are seeing this in durables and in some of the FMCG space.
Our view over the medium term is more of a bottom-up view and not about sectors as a whole. If you look at the long term, I would bet on agri-based stocks. We have seen fertilisers doing well. Going forward, we will see tractor and seed companies join in too.
Do you anticipate expansion in capital expenditure and how is that going to help capital goods sector?
We had one leg of growth from the revival of the economy and some priming of economy by government expenditure. Given the deficit concerns, I think clearly it's the time for the private sector to take on the capex mantle. Even in infrastructure, the role of the private sector is critical. Currently it not involved in a big way, but we are seeing the green shoots. When the auto industry is running at 100 per cent capacity, and the durables industry is at full capacity, it tells us that clearly there is a need for expansion. We see Tata Steel is going ahead with expansion. We see better times ahead for capital goods and infrastructure.
The developed countries are yet to come out of the recession and the rupee appears to be strong. How will this impact the IT sector?
The currency part is a definite headwind for the IT sector. Having said that, the largest part of business at this point is coming from the US. Demand conditions are pretty good there. Corporates are sitting on huge cash reserves. There is the political expediency of anti-offshoring talk on and off. But this model works well for both the Indian companies and for the country looking to cut costs. Very recently the UK government revalidated a contract with TCS after talking out against offshoring jobs. They have to place the order if they want to cut the deficit and costs.
So, I think the demand side is good but on the costs side, salary, attrition and rupee appreciation are the challenges the industry has to live with. The bigger guys will be able to deal with the challenges, but the smaller players will have volatile performance. The industry has shown the ability to meet challenges on earlier occasions, but the margins are likely to take little bit of hit. This sector will be a market performer.
In a highly inflationary and rising interest rate scenario, what is your call on banking and finance?
I think with rising interest rates, typically in a high growth or in strong economy, the banks were always in a position to pass on the costs to the customer. I think today they are in spot where the cost of CASA is higher; and the lending rate may rise. Financials at this point of time may see some compression in the spreads.
Nevertheless, they will remain healthy, if the economy grows at 8-9 per cent, they will be able to manage the margin. In the NBFCs space, those that are well-capitalised can tide over the problem. So in financials, size is going to play a role.
Auto sales continue to be robust, with a normal monsoon. How is this sector likely to pan out?
We are positive on the sector. Two factors are driving the sector, one is rural demand, helped by NREGA. Two the MSP prices are raising. So farmers with a not-so-great monsoon last year have seen their farm incomes go up because of the realisations. Given that India has structural deficits in agriculture, prices will remain buoyant. So, that is a very important contributor for the demand and it is visible in two- wheelers. Even for companies like Maruti, 15-20 per cent of the sales are now being derived from the rural segment; this was in single digits a few years back. In the urban market, due to the faster replacement cycle, bank funding coming back, better job security, due to wage inflation, the EMI culture is coming back. So, autos will continue to do well. On the commercial side, light trucks will see strong growth because of the last-mile connectivity. Overall, we feel that the growth momentum is positive and will remain so.
Source: http://www.thehindubusinessline.com/iw/2010/11/28/stories/2010112850970800.htm
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