Bullish on auto, cement and banks: V Srivatsa, UTI MF

In a chat with V Srivatsa, EVP & Fund Manager (Equities), UTI MF, says will move more towards domestic oriented sectors and stocks and these three are the top sectors. Edited excerpts



ET Now: Do you think that enough is being done for banks which are struggling with soaring NPAs and what is it that you would expect or would like to hear from them?

V Srivatsa: I think a lot of action has taken place in that front. It is okay that if you deal with the big NPAs, if you ask the bank to recognise NPAs, you also have to remember that most of the mid-sized public sector banks which are facing the brunt are really starved of capital. So at the other end, the government should actually come out with a plan to ensure that these banks are well capitalised to deal with a huge losses from the NPAs. But overall, this clean-up is a very good initiative on the part of RBI as well as from the government to ensure that we are not bloated with an excess NPAs as far as banking system is concerned. But what I would really want to see is the fact that the government should ensure that these banks are adequately capitalised over a period of time to ensure their longer term viability and survival.

ET Now: Let us talk a little bit about earnings as well. Just a short while ago, you had Maruti which put out a pretty solid set of numbers on all parameters. The revenues came in line with expectations. There was lower other income and higher taxes that may have hurt the bottom line growth. What is it that you have made of the autos, the numbers that have come in so far?

V Srivatsa: Yes, the auto numbers have been pretty impressive. One, the demand has picked up on a year-on-year basis and more importantly there has been very good benefits both on the commodity front as well as on the currency front. On both these counts, the companies have done well. So I guess auto would be one of the star performers as far as this earning season is concerned and would lead the earnings growth as far as the current March quarter is concerned.

ET Now: Let us also chat about the expectations when it comes to the metals pack. You have some shoots of recovery kicking in but it is largely news based because by and large it is only select metals which are doing well. A lot of corporates believe that iron ore prices are looking sustainable. What is your view on the metals counters and what is the expectation by way of earnings and volume growth?

V Srivatsa: Metal prices typically tend to correlate with what is happening in the Chinese economy. So in the last couple of months, we have seen positive data points coming out there as well as some news of closures has had a rub off on metals but even if you look at some of the metals like aluminium or copper, it is nowhere near the highs which we have seen 18 to 24 months back. They have rebounded from the lows but even at the current levels, most of the Indian companies would barely be making enough profits to service their interest.

So overall, I am not very sure whether this price rise that we have seen in the last couple of months, especially on the steel side, is sustainable because they are typically a rub off on what is happening on the Chinese economy. If there is a slowdown or some kind of increase in the capacity or restarts of all those plans, that would put additional pressure on the prices across the spectrum. So there would be a volume growth especially on the steel side because imports would come down from the coming quarters but still my sense is that the margins would nowhere near what we have seen three years or five years back. It will barely be enough to compensate for a high leverage or high interest cost that these companies have taken like in the last couple of years. So overall, I would not be too positive on the metal pack baring a couple of them which might be less leveraged but I would stay away from the metal pack.

ET Now: What else are you bullish on when it comes to markets and considering this earning season has brought about more clarity in terms of where growth actually lies sectorally?

V Srivatsa: In terms of fund house, we are still quite positive on automobiles. The Seventh Pay Commission as well as the strong expectations of monsoon rare expected to give a leg up as far as sales in automobiles are considered next year. There could be some challenges on the commodity front or on the raw material front because the prices have gone up but I would say that is manageable. The key to the auto sector revival is the sales growth of which we see a very strong visibility across two wheelers, four wheelers tractors. So we are quite comfortable with automobile as a sector and while the sector has outperformed in the last couple of months, we still continue to hold on to our overweight positions on the sector.

The second one where we have been structurally bullish over the last many years is cement and that has also done well in the last couple of quarters. There we see a very strong acceleration in the earnings because a lot of initiatives on the infrastructure front by the government will pick up. So the cement growth will definitely pick up in the next couple of years. The costs have been well managed. The prices have stayed firm. So we expect cement to be a very big beneficiary of the various infrastructure reforms which the government is pursuing. So these two are the sectors that we would focus on.

The third is private sector banking. I think that has kind of underperformed in the last six to nine months especially the corporate oriented banks. We expect a strong revival in the profitability next year of private sector banks and they are very well capitalised to take care of the growth in the overall credit system. So our philosophy right now or direction is to move more towards domestic oriented sectors and stocks and these three are the top sectors that would fit our bill.