Corrections will keep happening: Pankaj Murarka, Axis MF

In a chat with ET Now, Pankaj Murarka, Head Equity, Axis MF, shares his views on the market and some sectors. Excerpts:

ET Now: After some volatility and three weeks of FIIs actually easing out, the markets have come back with a bang and have surprised with a fresh high. Did you see that coming?

Pankaj Murarka: Our view on equities has been really constructive. So, corrections like the one we saw over the last few weeks will keep happening and that is more because of some global events. But when you look at India, we are very nicely positioned.

We are very sweetly positioned because on the one hand, we are coming out of low growth of our economic cycle and are getting towards a higher growth trajectory, and at the same time, given the global turmoil and the strength in the dollar, we are seeing weakness in global commodity prices. So this whole global meltdown or correction in commodity prices and nervousness are actually beneficial to India and put India in a very sweet spot.

ET Now: Domestic investors have been putting money into the markets at least over the last three months. I am not getting into your fund specifically, but generally are the buy-sell figures of the DIIs seem to be suggesting that the markets are looking constructive enough from a two-year perspective?

Pankaj Murarka: Absolutely, because while the markets are at an all-time high, you need to put things in context if you see it from where we were in the last bull market. We are just about 20% higher than that and it has been seven years during which our economy has actually doubled. So we have gone from a trillion dollar economy to $2 trillion economy and in the context of that if you look at it, then the markets are not expensive.

Even from a valuation perspective, we are trading somewhere around mean valuations that our markets have traded over the last so many years. So valuations are clearly inexpensive and we have probably strong earnings growth going forward as we see a recovering economy. So, I do think equity is in a very compelling case at this point of time from a medium-term perspective.

ET Now: That is an interesting note. So do enlighten us where are those hidden gems, what are the sectors that you are looking at right now and where do you see those compelling ideas coming in from?

Pankaj Murarka: Well, they are across the sectors. So financials look pretty exciting to us because we think that as the growth recovers, they will be the beneficiary of that and a lot of financials have been impacted because of the slowdown in the economy and asset quality. So we think those issues will get addressed. We see very strong growth there from a medium-term perspective. We remain equally constructive on autos because we think there is a significant amount of latent demand that exists there and probably over the next five to six years, India will emerge as the fifth largest auto market globally.

So there is huge potential there and we remain equally constructive on that. We think the investment cycle in India will recover as the government has started taking action and we have started addressing various issues which plagued the investment cycles. So as that happens, probably a lot of capital goods in engineering companies would be equally exciting.

ET Now: Typically in certain spaces, we do see a trend that if earnings rebound, they rebound with a rush and for the next two or three quarters, the earnings move up so quickly that valuations again start looking reasonable or cheap if they are looking expensive right now. What are the pockets where you see earnings acceleration in the next 12 to 18 months?

Pankaj Murarka: You have made a very valid point. The fact is that we have seen significant deceleration in our overall growth from 9%, which we were doing in 2011-2012, to 5-5.5%, and as a result of such deceleration, we were seeing significant contraction in profitability of companies across sectors.

But the manufacturing sector is the one which has been the most hit because they have been impacted because of higher inflation and rising raw material prices, which they have not been able to pass on and at the same time, they have been impacted because of lower capacity utilisation. So as we see a demand recovery, their capacity utilisation will improve significantly and at the same time a moderating inflation and higher demand will give them a better pricing power. So on the manufacturing side, we will see a significant expansion in profitability and a significant growth in profits.

ET Now: You were just chatting about how you are bullish on financials as a pack right now. Considering the umbrella is so large, you have got PSUs, private banks, NBFCs and of course finance companies as well. What is it that in particular interests you right now?

Pankaj Murarka: We always like private sector banks because we think they have very solid franchises. They have been growing at a very high rate consistently over all these years and at the same time, they have done a very good job in managing the asset quality on their balance sheet in the last downturn. So they remain very solid franchises and compounding machines. Of late, we bought into some of those state-owned banks because we think from a longer-term perspective, there is value on those franchises and probably, they will be a beneficiary of the recovery in the economy as well. But our preferred bet remains private sector financials.

ET Now: Financials notwithstanding, what about the other rate sensitives? Autos, for example, because they are clocking in numbers month after month. The results have been fairly okay as well and some of them are at fresh life highs as well. What do you do within autos? Do you like the CV space more because it has not performed well or you still continue to bet on the two wheelers because stocks have been consistently doing so well?

Pankaj Murarka: Within autos, our preference has been more for commercial vehicles because we have seen almost a 50% decline in commercial vehicle volumes from the peak. So there has been a significant contraction there and as the growth recovers, I am sure we will see a significant rebound in their volumes.

Also, we are equally constructive on passenger vehicles because they have had flattish growth for the last three years and we think there is significant latent demand that exists in the economy as we see some growth recovery and a revival in consumer confidence. We think there will be a significant improvement in passenger vehicle volumes. So we like that as well. Our bias is more towards commercial vehicles and passenger vehicles versus two wheelers.

ET Now: What about policy sensitives because while ONGC may have that FPO overhang, the moves that have happened in terms of diesel deregulation otherwise were long awaited and the market was saying that once that happens, there could be a new wave of growth for these companies over two-three years. Are you constructive on these companies?

Pankaj Murarka: Diesel deregulation is a big reform that has happened because the subsidy has been ailing us both at the macro front from a fiscal perspective and the underlying companies for the last 12 years now. The markets saw it coming and we have seen significant appreciation in stock prices of the companies within the sector over the last one year.

At the same time, there are still some more policy issues that need to be sorted out in terms of how the subsidy will be shared between the government and the upstream companies. Once we get that, I am sure some of these companies will be a beneficiary of that. It is a big reform for the sector as a whole and the view on the sector remains constructive, but there are different companies which get benefited differently or are impacted differently.

ET Now: Now with FDI in construction actually getting opened up, are there any of these spaces that you are liking - be it realty, construction or for that matter some of the experts we have been chatting are liking their ancillary space, cement for instance?

Pankaj Murarka: Our initial view is this FDI at the outset would not have any meaningful impact in the near term. What really is more important is we need to sort out policy issues and probably accelerate our processes and the way we deal with execution.

So those are some of the issues which are more important, but having said that, we do have some ownership in companies and some of the sectors where we see value from a medium term to long-term perspective. Cement definitely looks good because as we see a recovery on the overall economy, cement companies will be beneficiary of that. But at the same time, valuations in the sector look a bit rich. So we have somewhat of a neutral stand on the sector.

ET Now: What looks disruptive over the next 12 months? What I mean to just ask is, is there an event-based or an earnings-based sector that could completely derail or really shoot up sharply over the next 12 to 24 months?

Pankaj Murarka: While the overall economy will grow and all the sectors will be beneficiary of that, but at the same time investors should be cognizant of the fact that there are a lot of companies which are significantly leveraged and their balance sheets might be impaired for a long period of time. So it is important to dissect and be more selective in terms of stock picking. We believe that within sectors you will see very divergent performance amongst good companies and bad companies. That is something which you have already seen over the last three to six months where markets were at all-time highs, but a lot of high beta stocks have corrected and corrected very sharply.

So investors have become more nuanced and the quality bias has increased significantly and that will continue to happen going forward. High quality good businesses will continue to trade at much higher multiples or valuations whereas a lot of those businesses probably would not see a significant recovery or improvement despite very solid growth or recovery in the economy. Investors need to be careful about that.