Market upmove surprised us as earnings have fallen: Mahantesh Sabarad, SBI Cap Securities

In a chat with ET Now, Mahantesh Sabarad, Deputy HoR, SBI Cap Securities, says capital goods and infrastructure are the sectors he is betting on. Edited excerpts


ET Now: Good to see that the market is back at 8800, a fresh 52-week high. What is your own analysis of the market right now now that we are at the fag end of the earning season, the festive season being the next trigger really? Do you think the tilt of the market is going to continue to be consumption because of the onset of the festive season in September?

Mahantesh Sabarad: Basically, the market has really surprised us by touching 8800. It is something that we need to anticipate quite frankly and this entire move that we have seen in the current result season the market going up is a tad bit uncomfortable. Yes the market is trying to factor in the consumption momentum that is gradually building up. We have had good monsoons. We are going to have this Seventh Pay Commission pay outs coming soon and there is this additional benefit of GST coming in, rolling in the next fiscal year so all this is going to help the consumption driven economy and therefore the consumption sector stocks but then the overall market is tad bit uncomfortable right now in terms of valuations. The earnings momentum is lacking. If we look at the first quarter results so far, then our track of roughly 2500 odd companies tells us that the net profits on a year on year basis have actually underperformed. They have fallen by close to 4.5 odd per cent. Therefore, the markets upmove is something that is surprising us.

ET Now: Consumption clearly has been the leader in market rally which has started off just three trading sessions earlier. Autos that is where growth definitely is and we have seen how strong the sales numbers from auto companies have been and from tomorrow onwards we will see the monthly sales data for August as well trickle in and all expectations or indications are that it is going to be a extremely strong this time too. What is your own sense and how investors should approach autos in specific right now?

Mahantesh Sabarad: We have been positive on the auto sector for the past year or so and we are quite happy in terms of the call that we have taken on the sector. But the problem now is that the automobile stocks are factoring in all the possible positives that you will have going forward so a good festive season, the Seventh Pay Commission report. In terms of commercial vehicles, the pre-buying effect because of the new emission control norms coming in and so on and so forth. All these factors are already in the valuations.

But now there are new worries that are coming in. We have seen that commodity prices are actually rallying not just in India but globally as well. Take steel for example, our market feedback suggests that from March-April (8:14) steel prices are up anywhere between 15% to 20% as I speak to you and then there will be further up post September so that is going to cause a bit of worry for automobile companies so the going ahead is something that we are not comfortable with automobile stocks right now.

ET Now: Which are the sectors that you would recommend people should watch out for? You have already said you are uncomfortable and surprised by where some of the valuations are, so which are the sectors that you are betting on?

Mahantesh Sabarad: I think we talked of the commodity space. I just mentioned to you how steel is up. Commodities is something that we will really look at. So, right from oil marketing companies to steel companies to non-ferrous metal companies, all these companies are something that will generally do well going forward. That is what we are anticipating. Much of the rally has already happened in the metal space already but then more is due to come and we are positive on that particular sector and, of course, we are also positive on the banking space per se.

We had argued some time back in January, February that we are looking at the banking sector really doing well and now if you look at the entire Nifty performance, the Bank Nifty versus the Nifty for the past year. Banks have actually outperformed the underlying Nifty and the pressure of AQR, the resolutions of NPA was something that was (10:04) factored in last year and then banks started rallying. We think now is the year where there will be substantial recoveries coming in for banks. There will be a drastic reduction in NPAs as we go forward into following the next fiscal year and the banking space should therefore do well. So these are some of the sectors that we tend to be positive on right now.

ET Now: Earlier we have also seen the cabinet ease up funding norms for infrastructure, make arbitration proceedings also much easier and we have seen infrastructure stocks impact surge in trade today. Now there is news coming in how there is good news coming in for media carriage services for FDI. How do you read the infrastructure space? How do you read the media space?

Mahantesh Sabarad: So talking of the infrastructure first, that is another sector that we are getting positive about. We are seeing huge build up in terms of road building activities. We are huge build up in terms of ongoing projects. Railway investments are on the uptrend. And we are gradually seeing some form of industrial capex revival although the signs are pretty muted right now. So these are early signs. Therefore, I am going to add both capital goods and infrastructure and say that these are the sectors that will do really well. As far as the media is concerned, I think there are very few stocks that are available for investors on a sustainable basis, otherwise we generally do not look at the media space per se. We have only very selective coverage and selective buys in that particular segment. So it is typically the larg cap names there, Zee, Sun TV for example. The media space per se is not very strong and sustainable business.