In next 10 years, multibaggers could come from these 2 sectors: Mahesh Patil, Aditya Birla Sun Life MF

Talking to ET Now, Mahesh Patil, Co-CIO, Aditya Birla Sun Life MF, says bullish on private banks and secular consumption driven sectors for next 10 years. Patil also points out that in next three years, given a combination of stronger earnings growth and some derating, around low teens kind of returns from here is possible.

Edited excerpts:


A few stocks like Eicher, Page Industries, Aurobindo Pharma, where people have invested Rs 10,000, have given multibagger returns in 10 years. If one starts and looks at the market now, for the next five years, should one expect double digit gains or would that be a very tall order?

After seeing good returns and on the back of not too great earnings, it is still possible to see low-double digit, low teens kind of growth. While the valuations are at a high point, there are a lot of factors which are suggesting that this is not the peak of the market and it will continue to scale new highs. It might consolidate in the shorter term but earnings are depressed and there is a sense that you should see earnings growth starting to improve post the December quarter.

In the festive season also the early indications are showing slightly better. This is what we are hearing from the auto companies and that is a trend, then I think you should see a much stronger earnings growth in the next three to five years. Also, interest rates are likely to remain low. We have seen inflation remain pretty benign and as a result I do not see any significant derating in multiples but they would not come back to long-term mean levels.

Long-term average PE multiples will go up if the risk-free interest rate is at least 100 bps lower than the long-term average rate. So given a combination of stronger earnings growth and some derating, around low teens kind of returns from here is possible.

Obviously, you would not get the large multibaggers that we got in the earlier cycle when the PE multiples were depressed. So you got a combination of strong earnings growth and PE rerating. PE rerating is not likely to be there but earnings growth returns are in line with the earnings growth and that is something which one can expect from here on.

You think we cannot get that kind of multiplier effect even in 10 years from now or are you just talking about the next one year?

No I am talking about the next three years’ timeframe is what we are looking at. Because looking at valuations where they are, it is difficult to assume that you would see a PE rerating. There could be a few sectors where earnings multiples are below the long-term average and where you could see PE rerating happen but for the broader market as a whole, it looks difficult to assume any rerating from these levels.

Stacking up the returns of Maruti and Eicher and HDFC Bank made since their listing, we see these are staggering compounding stories and they continue to hold out. If someone asks you today also what should you put your money on, you would say HDFC Bank. In the last one week itself, it has given such great returns. Who do you think are going to be the leaders of the next 10 years, would they continue to come from consumption, banks, what sectors would dominate?

There are a few stocks which continue to compound the earnings. We have seen in some of the stocks over a period of time as markets got visibility of the earnings compounding story to sustain, the multiples have expanded. But you can still see quite a few good quality companies compounding at around 20% CAGR which is a very good CAGR to compound considering where the broader economy is now.
These are companies and sectors where either they are seeing market share gains coming through because the broader market is not growing at that kind of pace where the economy is and so these are companies which can take market share and continue to maintain their margins or even expand their margins to some extent. These are like the private sector banks where while the broader credit growth is in about 9% to 10% or so or even below that, they continue to grow at around 20% because there is a large opportunity in store for them to take in terms of market share gains.

Similarly, in some of the consumer names and consumer discretionaries where the penetration levels are still pretty low and there is lot of market share to be gained from the unorganised sector especially post GST. These are the sectors where you could see better earnings growth and where the compounding stories will emerge. So, private banks would be one space.