Midcap stocks do not look interesting; bet on urban consumption, auto & private banks: Mahesh Patil, Birla Sunlife Mutual Fund

Midcap stocks do not look attractive at this juncture due to high valuations, said Mahesh Patil, co-chief investment officer ( equities) at Birla Sunlife Mutual Fund with assets under management of Rs 1.25 lakh crore.

In a chat with Prashant Mahesh, Patil said earnings will pick up only in the second half of 2016. Excerpts:

ET: Midcap stocks seem to be cracking after the recent rally. What are your thoughts?

Patil: Midcaps have done well due to aPE (price to earnings) rerating. Midcaps stocks are about identifying opportunities, which are few and far as most have been discovered and factored in the price. For longer term, they are good, but due to high valuations from a near term perspective they are not attractive. Investors should not go overboard on midcaps at this juncture.


ET: What does the fall in the yuan mean for India?

Patil: The risk is if China goes for a hard landing and slumps there will be a contagion effect, which in turn will be bad for global growth and global markets. China slowing is good, as that will put pressure on commodities which is good for India. Also relative attractiveness for India will be higher.



ET: Many think valuations are expensive now. Do you expect flows into equities to slow further?

Patil: At these levels, the market is not exactly cheap as valuations are slightly higher than the long-term average. Also stocks have become expensive because investors do not have too many choices. But, alternatives for reasonable returns are diminishing. We believe domestic interest rates will go down and we could see a 50-75 basis points rate cut in the next nine months to one year. With interest rates coming down, money will flow to equities.



ET: Which are the themes that interest you?

Patil: Since demand is likely to pick up, we like sectors like auto, urban consumption themes and private sector banks. PSU banks will continue to struggle, as there are real concerns on asset quality; private sector banks will continue to grow at 20 per cent. Advertising spends last year were higher and with digitising yet to play out; media sector looks set for interesting times.

There are some concerns in the pharma space because of FDA issues, but the sector is a good defensive bet, and companies there which can grow at 15 per cent should be good. We are neutral weight on IT and believe it will grow at 14-15 per cent.



ET: Many believe that an investment revival will happen only after 2017. How could investors position themselves by then?

Patil: For an improvement in earnings, we will have to wait for at least two more quarters. An earnings pick-up is likely in the latter half of 2016. Companies in sectors like consumer discretionary, automobiles, where there is pricing power, are seeing an improvement in gross profit margin due to the falling commodity prices. Last quarter, we have seen a negative topline growth, but marginally positive profit after tax (PAT) growth.

Any pick-up in government spending on roads, railways, some other infrastructure projects should lead to some improvement in demand. Commentary from large FMCG players and car manufacturers is positive.