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    Expect volatility but remember, earnings are on path of recovery: Sanjay Dongre, UTI Asset Company

    Synopsis

    The capex cycle in the Indian economy has not picked up. The capacity utilisation in the manufacturing sector is hovering at about 70-75% and therefore the private sector is not willing to put higher capex on the ground

    ET Now
    In a chat with ET Now, Sanjay Dongre, Fund Manager, UTI Asset Company, says going forward, one should be looking at those stocks and sectors where the earnings growth is going to be higher than market earnings growth. Edited excerpts


    ET Now: How much should one read into this pause in the market in the last three trading sessions? Would you say that the momentum in the market and the mood is still pretty intact and the new high is just days away?

    Sanjay Dongre:
    When you look at that market from the valuation perspective, what you will find is that after the last six months, today the market is quoting at about 16 times FY18 earnings which is slightly higher than the average multiples at which the market has traded in the last 10 years. Therefore, to that extent, one can expect volatility in the market. After one way rising for the last six months, one can expect 5-8% correction in the market and maybe those are the good levels to get into the market because going forward, earnings -- which is going to drive the market -- is on the path of recovery.

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    ET Now: If I look at the environment there are a lot of things which investors are not taking for granted. They are taking for granted that central banks have got the back of the markets, everyone is of the view that Mrs. Clinton will win the election, the third consensus view is that Fed will not move before December, the fourth consensus view, if I may just stretch that consensus view definition is that oil prices will not go higher they will remain low, so my worry with this consensus view is that all this consensus view currently are priced in?

    Sanjay Dongre:
    Yes, that is why I am saying that there could be volatility in the marketplace going forward if one or the other view goes against the consensus but ultimately even if there is a correction, the earnings recovery is there which has been totally absent for the last four, five years. Going forward, rather than the quality, it is the earnings which are going to drive the sector and the stock performances therefore one should be looking at those stocks and sectors where the earnings growth are going to be higher than the market earnings growth.

    ET Now: How real is the problem for IT?

    Sanjay Dongre:
    When you listen to all the IT companies’ commentary or profit warnings that some of the IT companies have given in the recent past, one thinks that the impact of Brexit is being felt in terms of some of the contracts which are getting cancelled, decision making has become a lot more slower, discretionary spending is getting deferred and obviously the other things like traditional services were getting more commoditised in nature and therefore facing the pricing pressure. In total, what you would find is that in the next 12 months, the revenue growth for IT sector is not going to be more than 8-10% and there are not many margin levers which are present there in their profit and loss account.

    Therefore. earnings growth cannot be in double digits. So in that background when we are expecting earnings of those cyclical sectors to grow in excess of 15-20%, then I would assume that the fund would flow more towards the cyclical or domestic sectors rather than the IT sector and therefore when I look at the IT sector from the next 12 months perspective, I think, it might not be able to deliver returns compared to the market returns.’

    ET Now: What is the view currently on infrastructure because fundamentally we have seen a whole host of people really getting bullish. The stock prices as well have been reflective of that but any intermediate correction in the market would see infra and reality and the likes fall first. So would you be a little circumspect? Is it time to take profits off the table?

    Sanjay Dongre:
    If you look at the capex cycle in the Indian economy, it has not picked up. If you look at the capacity utilisation in the manufacturing sector, it is hovering at about 70-75% and therefore the private sector is not willing to put higher capex on the ground. So the entire burden is being shared by the government which is spending more money on infrastructure and therefore we would have seen more money being spent in the sectors such roads, railways or at power in T&D sector.

    So in this entire spend, we have to look at most of the companies from the bottom up perspective. If you look at some of the engineering companies, they have a very good balance sheet but then the business is on the lower side because the order inflows are not there as the capex cycle is not picking up. On the contrary, some of the contractors are beneficiary of high spend on the infrastructure and therefore their order books are growing and the execution of that order book is reflecting in the higher revenue growth and higher profit growth.

    You have to actually segregate the whole sector and look at where the earnings growth is coming.



    ( Originally published on Sep 09, 2016 )
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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