ET Now
In a chat with ET Now, Lalit Nambiar, Senior Vice President and Fund Manager (Equities), Head–Research, UTI Mutual Fund, shares his views on the market as well as some sectors and stocks. Excerpts:
ET Now: It is a sharp correction. Do you think in the short term we have hit a roof or would you think that this decline in the market is a good buying opportunity for those who have missed out?
Lalit Nambiar: It depends on which part of the market you are talking about. There are some small caps and midcaps who definitely didn’t need to run up as much as they did. At the same time, there are pockets of opportunity in others. So, one needs to be very careful. We are looking at a rally which would be led eventually by earnings. We have seen the bull markets since 1980s and we have looked at how the numbers panned out. We found only two of those bull markets were led by earnings and we think this is a similar one. We are yet to see the earnings come through. We have seen the PE re-rating, which is largely a sentiment issue. We will be focussing on earnings and we think this bull market has legs. But one has to be sure and certain that we go into areas where the earnings will drive the stock movement rather than the PE.
ET Now: So this could be a good time to revisit all that you have missed out on. If you have to recommend some midcap pockets or for that matter large caps as well, what is it that you would recommend at buying even at the current levels?
Lalit Nambiar: There are definitely themes there were you see income traction, top line traction. There is traction in auto and auto ancillaries.
ET Now: Do you think there is some degree of misplaced optimism in auto ancillary because with the exception of, let us say, Motherson Sumi or Bosch, none of the auto ancillary companies really enjoy pricing power. They are still dependent on auto companies and auto companies just want to crunch them out in difficult times.
Lalit Nambiar: That is a fair point, but the bigger factor there is that people are trying to play a cycle and there are companies which you need to look at from a longer-term, five-year, 10-year basis and look at what their average multiples have been, what their peak multiples have been, what their average return on capital employed has been over a cycle and look at where they are today. Then probably try and come up with a reasoning as to what could be the best scenario for this company, may be one-and-a-half or two years down the line.
The fact is that the recovery is not going to be an immediate thing, like the markets seem to display. It is going to take its time, but the equity markets tend to play ahead of the actual numbers.
ET Now: So, to your mind there is no misplaced optimism in auto or auto ancillaries?
Lalit Nambiar: One cannot give a broad answer for all of the stocks there. There would be some pockets, but in general there would be a lot of opportunities in some of the auto ancillaries and even some auto names from a two-year perspective.
ET Now: Is auto ancillaries a space that interests you because most of the stocks have run up a fair bit and continue to do so?
Lalit Nambiar: Equity markets tend to zigzag. They do not go in a linear fashion. So there will always be a situation where you have a sharp run up and then it pauses for breadth. You wait for some fundamental information or news to flow through, data to flow through in terms of new orders, new geographies and possibly benefits on the currency side. All of that put together is what probably drives the stock. So, it is not going to be a linear movement and there would be pauses. Depending on your view on the stock in terms of fundamentals, you can decide to buy or hold on or may be sell.
ET Now: There is a very sharp fall in some of the small cap high flies and stocks are really caving in. Just look at something like Marksans Pharma, Atul Auto, Unitech, Amtek, Eicher Motors. So, stocks are falling really very hard and the reversal from the day’s high will make the magnitude of fall even more scary. What could be a good entry point to buy into pharma stocks because that has been the source of energy for this market? Do you think a 10% or a 5% decline will qualify as a good decline to buy into some A grade pharma names?
Lalit Nambiar: If you are looking at a two-year or three-year window, even these price levels are good enough. But you need to focus on quality companies. Some of the names you have mentioned would not qualify in our investment philosophy. Depends on the corporate governance standards they have had in the past, depends on the kind of management track record they have had. Some of them have got the fancy of the market and it is difficult for fund houses such as ours to look at those stocks. If there are decent managements and decent track record, it is worth buying pharma companies for the next two to three years even at these price levels.
ET Now: It is a sharp correction. Do you think in the short term we have hit a roof or would you think that this decline in the market is a good buying opportunity for those who have missed out?
Lalit Nambiar: It depends on which part of the market you are talking about. There are some small caps and midcaps who definitely didn’t need to run up as much as they did. At the same time, there are pockets of opportunity in others. So, one needs to be very careful. We are looking at a rally which would be led eventually by earnings. We have seen the bull markets since 1980s and we have looked at how the numbers panned out. We found only two of those bull markets were led by earnings and we think this is a similar one. We are yet to see the earnings come through. We have seen the PE re-rating, which is largely a sentiment issue. We will be focussing on earnings and we think this bull market has legs. But one has to be sure and certain that we go into areas where the earnings will drive the stock movement rather than the PE.
ET Now: So this could be a good time to revisit all that you have missed out on. If you have to recommend some midcap pockets or for that matter large caps as well, what is it that you would recommend at buying even at the current levels?
Lalit Nambiar: There are definitely themes there were you see income traction, top line traction. There is traction in auto and auto ancillaries.
ET Now: Do you think there is some degree of misplaced optimism in auto ancillary because with the exception of, let us say, Motherson Sumi or Bosch, none of the auto ancillary companies really enjoy pricing power. They are still dependent on auto companies and auto companies just want to crunch them out in difficult times.
Lalit Nambiar: That is a fair point, but the bigger factor there is that people are trying to play a cycle and there are companies which you need to look at from a longer-term, five-year, 10-year basis and look at what their average multiples have been, what their peak multiples have been, what their average return on capital employed has been over a cycle and look at where they are today. Then probably try and come up with a reasoning as to what could be the best scenario for this company, may be one-and-a-half or two years down the line.
The fact is that the recovery is not going to be an immediate thing, like the markets seem to display. It is going to take its time, but the equity markets tend to play ahead of the actual numbers.
Lalit Nambiar: One cannot give a broad answer for all of the stocks there. There would be some pockets, but in general there would be a lot of opportunities in some of the auto ancillaries and even some auto names from a two-year perspective.
ET Now: Is auto ancillaries a space that interests you because most of the stocks have run up a fair bit and continue to do so?
Lalit Nambiar: Equity markets tend to zigzag. They do not go in a linear fashion. So there will always be a situation where you have a sharp run up and then it pauses for breadth. You wait for some fundamental information or news to flow through, data to flow through in terms of new orders, new geographies and possibly benefits on the currency side. All of that put together is what probably drives the stock. So, it is not going to be a linear movement and there would be pauses. Depending on your view on the stock in terms of fundamentals, you can decide to buy or hold on or may be sell.
ET Now: There is a very sharp fall in some of the small cap high flies and stocks are really caving in. Just look at something like Marksans Pharma, Atul Auto, Unitech, Amtek, Eicher Motors. So, stocks are falling really very hard and the reversal from the day’s high will make the magnitude of fall even more scary. What could be a good entry point to buy into pharma stocks because that has been the source of energy for this market? Do you think a 10% or a 5% decline will qualify as a good decline to buy into some A grade pharma names?
Lalit Nambiar: If you are looking at a two-year or three-year window, even these price levels are good enough. But you need to focus on quality companies. Some of the names you have mentioned would not qualify in our investment philosophy. Depends on the corporate governance standards they have had in the past, depends on the kind of management track record they have had. Some of them have got the fancy of the market and it is difficult for fund houses such as ours to look at those stocks. If there are decent managements and decent track record, it is worth buying pharma companies for the next two to three years even at these price levels.
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