Bullish on 2-wheelers, tractors and riral lending companies: Sanjay Dongre, UTI Asset Company

In a chat with ET Now, Sanjay Dongre, Fund Manager, UTI Asset Company, says he is less positive on pharma and IT sectors

ET Now: We have been discussing the strength in the auto universe today with the predictions of Skymet talking about a strong monsoon this time around. It seems like the rural play is very much going to be in focus. Would that make you bullish on any of the two-wheeler stocks?

Sanjay Dongre: Poor monsoons in the last two years, impacted our two wheeler and other sectors which are dependent on the rural economy. These sectors got impacted. Most of the agencies now are predicting normal monsoons and therefore we could expect good earnings tractions in these sectors. So other than the two-wheelers, I would be bullish on the tractor segments or the lending into the rural economy or the consumption of rural economy. These are the segments of the rural economy I would expect to do well.

ET Now: Just going through some of the reports as to what the earning season is likely to be, it seems that the view is that Q4 will be subdued for some of the commodity related sectors as well as some of the banks. What is your view?

Sanjay Dongre: If you leave out the banks because of the higher amount of stress recognitions and high provisions for bad debts, the other sectors should show or should be able to show much better earning traction. We have seen in last five-six quarters the earnings growth has been pretty subdued but we could see some sign of recovery in this quarter but FY17 we could see the earnings recovery.

ET Now: You also have cement on the radar as one of your preferred sectors. What is the view at UTI? Is it going to be some of the frontline cement companies that are likely to do well or is there a lot of potential in the midcap names as well?

Sanjay Dongre: Overall, the sector should be able to do well. One should understand that the cement sector has a very high operating leverage and if you look at the capacity additions which has been happening over the last two years or which are likely to happen over next two years, these capacity additions have been pretty small and therefore going forward we could expect the demand supply gap to narrow down further. This augurs pretty well for the pricing environment in that sector and as the cement sector has a very high operating leverage, we could see the disproportionate increase in the earnings growth in the cement sector.

ET Now: The other interesting pocket would be IT. Considering Infy is just about to come out with its earnings on a trading holiday, what are your expectations from what IT as a sector could deliver this quarter?

Sanjay Dongre: If you look at the IT sector, it always act as a defensive sector in the volatile market conditions but if you look at it from the operations point of view, we have clearly seen the pricing pressures in the last four-five quarters. Also if you look at the revenue growth, most probably most of the companies are likely to indicate the earnings growth will be closer to 8-10 per cent rather than 12-14 per cent. Again most of the incremental IT budgets are going towards the digitalisation of the businesses and therefore incremental spend, if it is going towards the digital that is where most of the Indian IT companies would be lacking. If you look at the digital segment like SMAC, that is the area where the MNC IT companies have been in the forefront in acquiring the skill set. While the Indian companies have been lagging, I would expect the revenue growth to be somewhere in the range of 8-10 per cent rather than 12-14 per cent and even if you assume that the margins are going to remain constant, even the earnings growth will be about 8-10 per cent. So with that earnings growth I would be less positive on the IT sector.

ET Now: Given the fact that pharma has been grabbing the headlines everyday and UTI Asset seems to suggest that the regulatory woes are delaying some of the approvals for pharma companies, earnings may be impacted. Let us have an outlook as to what it is that you expect for the pharma companies exactly. Is there anything that you may perhaps selectively place the bet on?

Sanjay Dongre: If you look at the pharma sector again, more than 50 per cent of their turnover is coming from the overseas market and again within the overseas market, a large part is coming from the US market. In the last 12 to 15 months, most of the bigger to medium size pharma companies have received the form 483 with a number of observations and till these companies take these remedial measures to remove those observations, we could see the delay in the approvals for the future products. Therefore it should impact the earnings growth in the next one or two years and when you combine it with the valuations of five year high investors, are likely to make less money from this sector. To that extent, I will be less positive on the pharma sector.