Essel MF CIO Berawala likes FMCG, insurance; underweight on healthcare sector

Stock volatility is here to stay and domestic macroeconomic indicators coupled with global developments will have a big say in future movement of the market, said Viral Berawala, Chief Investment Officer, Essel Mutual Fund.

In an interview with Moneycontrol, Berawala said corporate earnings could be around 15 percent but returns can be better if certain companies in auto sector or corporate banks start being profitable.

The fund house is betting big on fast moving consumer goods, and information technology sectors. Berawala also envisages companies in the capital goods and infrastructure spaces to perform well in this financial year given the government spending.

Berawala said the fund house is running an underweight position in telecom and healthcare sectors.

Excerpts:

Q: FY19 started on a strong note but there have been fears of trade war resurfacing, do you see a volatile FY19?

A: FY19 will be very volatile. If you look at calendar 2017, it was a walk in the park and it was the best year ever in terms of volatility. This year we already have seen a 9-10 percent of top to bottom correction on Nifty mid and small caps. Also, 15-18 percent top to bottom corrections on indices and stock and much more. So this financial year will be volatile for a lot of domestic reasons like elections and some others. Secondly, crude prices are also hitting the roof. The trade deficit is highest. So that would lead to an impact on the currency and then we do not know how the FDIs, FIIs react. So it would be a very volatile year.

Q: What are your expectations on the corporate earnings front? Most of the fund managers are expecting 15-16 percent kind of returns. Do you think it is possible?

A: We believe 12-13 percent kind of returns are possible and if things pan out then FY19 can achieve 17-18 percent growth. A good part of the market will give you 12-13 percent returns or even 15 percent.  Returns can be better if certain companies in auto sector or corporate banks that had reported losses last year report profits then corporate earnings growth could be higher.

Q: How are you placing defensive stocks in your portfolio?

A: We own FMCG and consumption quite a lot. But at 40-45 PE they do not remain defensive. So IT (information technology) and IT services we have added in calendar 2018, as we believe that deceleration in growth has probably stopped.  It went from PE of 14-15 to 10-12 to 7-9. So deceleration in growth has stopped. The second reason is all through the deceleration these companies held on to very high margins. So margin defense is very good for the industry and that gives us confidence.

We believe calendar 2018 again would be one of the best years in global growth. So when global growth does well, we may get positive supplies. The last point is that the return ratios are improving because they are returning cash to the shareholders. Of the total Rs 55,000 crores buybacks in the country, Rs 43,000 crore came from the top four IT companies. According to the SEBI guidelines, after 12 months, companies can have another round of buybacks and they are sitting on enough cash. So the returns will come on few accounts. One is of course growth will drive earnings. Secondly, there will be a reasonable dividend and if you add that to your return and buybacks, will again drive up the EPS slightly. So, we have augmented stake in the last 2-3 years.

Q: Which are the other sectors that will remain in the limelight in FY19?

A: Capital goods and engineering should do well after a very long time. The central government, state government and all sort of PSU entities are all spending heavily. That is leading to a lot of capex in the system. We also see a revival in infrastructure companies. There also revival on the infrastructure side. So we believe some of the infrastructure companies can do well. We also like insurance. Insurance companies do not make too much money for the first 8-10-12 years, but once you have achieved scale if the business talks they start making money.

Q: How are you looking at the financial services pack like PSU banks, private banks, NBFCs?

A: We are heavy in private banks and particularly retail-focused private banks. We have one corporate focus private bank where we are underrated and one PSU bank. We are hopeful of NCLT resolutions of some banks and when that happens at least we want some part of the fund to be invested in that. Otherwise big part of the portfolio is in retail-focused and private banks. On NBFC side, we like CVs as that segment is doing well. They have seen almost 35-40 percent growth last year.

Q: Which are sectors you are underweight on or avoiding?

A: We are underweight on telecom. We feel the consolidation will continue and generating cash might take some time. We are also underweight on the healthcare sector. Since valuations are attractive in the healthcare we may take some tactical call. Otherwise, what has happened because of competition there is pricing pressure in the US. They will have to get some huge approvals or the pricing pressure has to ease for the industry to change.

Q: What are the cash levels in your funds?