Don't expect markets to retest December lows: Sunil Singhania, Reliance Mutual Fund

In an interview with ET Now, Sunil Singhania, Head Equities, Reliance Mutual Fund, says the composition of the market movement is definitely going to change, but the downside to the market looks limited. Excerpts:

ET Now: Can the market retest December lows?

Sunil Singhania: We definitely do not expect that. At the same time, the whole composition of the market movement is changing. The earlier bellwether stocks are no longer the same. Therefore, the composition of the market movement is definitely going to change, but we definitely believe the downside is going to be limited.

ET Now: Your exposure to pharma has worked for you like a charm. You have 18% exposure to pharma, and out of your top 5 holdings, 3 are pharma names that are at an all-time high. That is an aggressive bet which has worked for you. Are you still bullish on it?

Sunil Singhania: I will give you a perspective of what we did. The consumption story in India has been played out significantly. We felt it was a good story and a good theme, but it was slightly pricy in terms of stock valuations. We felt that pharma had the benefit of the consumption theme domestically, because domestic pharma has been growing at upwards of 15-18% for the last 2-3 years. Also, there was an export story in terms of a massive opening up of the generic markets in the US, Europe and in other countries. The Indian companies were now mature enough to take benefit of that. Further, the currency also helped.

So it has been a combination of being underweight on some sectors, which are similar but which looked a little pricy, and being overweight on pharma, which had similar characteristics, ROE, neat and clean balance sheets and also the added opportunity of the export front. And we are lucky to some extent. We hope the performance continues and at this point of time, we continue to be positive on the pharma sector.

ET Now: So you are in no hurry to reduce your exposure to pharma stocks?

Sunil Singhania: Reduction and addition is a day to day...

ET Now: 1% here, 1% there, that is fair enough, but what about...?

Sunil Singhania: At this point of time, we continue to be positive. Obviously there are some segments of the pharma sector which might face some headwinds because of the government policy of generalisation even on the domestic market. But by and large, the companies are growing significantly well, and the ROEs and the managements are good and even quite comfortable.

ET Now: But your bias is clearly more towards the Indian pharma companies?

Sunil Singhania: Again, it is a mix. In some funds, we have exposure to multinational pharma companies, but at this point in time, the company is obviously in the portfolio, and there are others we have big positive bias on.

ET Now: If I look at the portfolio of Reliance Growth Fund, the only consumption space you are bullish on is liquor. What makes you bullish on liquor stocks?

Sunil Singhania: I do not want to mention particular companies, but if you analyse the cigarette market and the liquor market, both are vices. Cigarettes are actually very injurious to health. Liquor, to some extent, is a social vice, but it is not as harmful to human health, but you see the market cap of the cigarette industry in India and the market cap of the liquor industry in India -- obviously one industry has done well because of one company which is supposed to be a very clean company and rightly so. In the liquor industry, however, the dominant player has been plagued by other non-fundamental problems.

So our call is that the liquor industry has got huge potential in India. It has probably the best consumption theme as far as India is concerned. It is becoming more and more socially acceptable in India. We have a young population who is more prone to accepting social drinking, who drinks socially and responsibly, and the valuations are in favour. So we use this opportunity of non-fundamental problems to build positions there.

ET Now: Your current declared portfolio shows you are bullish on banks, but within the banking space, you pretty much like all the banking businesses. You have exposure to SBI, ICICI Bank and Federal Bank in the PSU, private and small private banks space, respectively. So you are pretty much bullish on the entire banking spectrum?

Sunil Singhania: No. Obviously we understand NPLs and restructured assets are a big problem. Our call has been to move towards larger banks, away from the smaller banks for some time. So the biggest banks in our portfolio are the largest banks and among the smaller banks, we have stuck to banks where we feel that the perceived asset quality is better than the street.

So across funds we have more or less moved towards larger banks vis-a-vis the smaller banks. And at an opportune time, once the environment on the economy clears, we will take a call on whether we need to rejig the portfolio as far as the banking space is concerned.

ET Now: In our previous conversation, you made a case for buying PSU banks. Are you now making a case not to buy PSU banks?

Sunil Singhania: No, we are taking a PSU banking versus private banking stand. Obviously private banks are slightly less prone to NPL problems for the simple reason because they do not have the kind of social obligation as some of the PSU banks have.

But the call is that in this kind of an environment, smaller banks might get hit more if one or two big accounts turn NPLs or turn into restructured assets. So the call is more towards larger banks.

We are not taking a PSU versus private stand because while private banks are good, they are also priced accordingly. PSU banks have some issues, but their valuations have also come down accordingly. But the call from our side is to be in larger banks, which might be able to withstand near-term NPL or restructuring issues slightly more strongly than the smaller banks.

ET Now: Why are you so negative on autos?

Sunil Singhania: I do not think we are negative on autos.

ET Now: You have got 1 or 2 exposure there, no exposure...

Sunil Singhania: No. In fact, in some of our funds, we have a huge exposure to auto. In India, auto is a great story structurally. But auto is also slightly negatively correlated with interest rates. With the interest rate scenario improving now, there is near-term headwinds in terms of auto sales, because of the way the economy is progressing and also because of the perception that monsoon might not be as good.

So the purchase is being shifted, but we will continue to track it closely. In fact, we feel that in future the support auto sector companies, i.e. engineering and auto ancillary companies, would be very interesting to look at.

So we are not negative, but in the near term, there might be months when you have some disappointing sales.

ET Now: Looking at Infosys and TCS, do you think IT or largecap IT stocks could go through a process of de-rating?

Sunil Singhania: TCS is almost at an all-time high barring the past few days, but it clearly reflects that even within this sector, all companies are not going to move together. So there is a huge diversion of performance within the IT segment. So one company is down significantly like 20% year to date, but some of the other companies are up 15-17-20% year to date.

Some of the smaller IT companies have been doing very well, and many of these IT companies are trading at 5 to 7 year highs. The sector is superb. As a country with a huge working population, we have an advantage. The cost pressures are slowly coming under control. All it will take is some revival in the global economy before investors start to look at this sector again.

So we will closely watch this sector, and we do believe that stock specifics even within the sector will be more important.

Source: http://articles.economictimes.indiatimes.com/2012-07-20/news/32748646_1_pharma-sector-pharma-stocks-domestic-pharma/2