I am happy sitting on some cash for next two-three quarters: Manish Sonthalia, Motilal Oswal Asset Management

In a chat with ET Now, Manish Sonthalia, Motilal Oswal Asset Management, says we are going to end FY17 with a single digit earnings growth. Coming to FY18, because of the very low base, second half should be better than the first half.

Edited excerpts:


The microfinance companies are really hogging the limelight. Are you bullish on this space considering it seems like demonetisation has not really hit or dampened earnings at least going by Bharat Financial’s performance?

Manish Sonthalia: If you look at the numbers on quarter on quarter basis, there has been some moderation in the credit growth. The NPA numbers have also been slightly worse off than the previous quarter. But if you look at it on a YoY basis, things are pretty good because the second quarter numbers in any case were quite high as compared to the previous quarter. It is a wait and watch mode for the entire BFSI space. Some have used the RBI dispensation to take care of the NPA front. Let us see how the entire credit growth picks up in the system. Valuations are not cheap. It is a call between what the earnings growth would be and what the valuation would look like.

Valuations for the market are obviously not as attractive as they were somewhere in November. There is a bit of a pickup. It is a known fact that we have recovered all of the losses since demonetisation. What are you doing right now if you get incremental cash? If you had the choice, would you sit on cash or would you deploy it straight away?

That is a conundrum. There is so much liquidity in the system as of now that fundamentals and valuations are taking a backseat. Let us look at FY1 numbers. In quarter one, there was negative growth of 1.4% on the benchmark Nifty and in quarter two, the earnings growth was 5.4%. We are in the middle of quarter three. I do not think the numbers are going to be anywhere more than 3% to 5% earnings growth. We are going to end FY17 with a single digit earnings growth.
Coming to FY18, because of the very low base, second half should be better than the first half. Then it comes to the valuations and that again is not very cheap but not very expensive either. There are certain pockets which look quite expensive given the growth and certain pockets which are very cheap from the point of view that they represent commodity sectors and inflation in the global system is going to pick up. So some sectors of the economy would do relatively well.

Given that we practice QGLP style of investing, the consumption names, etc, given the growth, given the demonetisation impact and how the outlook for FY18 looks like, it is better to sit on some cash rather than ride this momentum which is due to a plethora of liquidity in the system. Things are just moving up on the back of that. So I would say that there needs to be a bit of caution in these times. I am keeping some cash as of now, taking some profits off the table. Given the lag impact of demonetisation as it was to play out over the next two-three quarters, I am happy sitting on some cash.

Just seven days from now, we would be discussing the Union Budget as well. For a market which is already at 8500 thereabouts, this could be a big market moving event or this could be just another day. Maybe a little budget sensitive move here and there but the market is going to go on and continue to ride on this momentum which it already is?

I see it very difficult for the markets to see a PE multiple expansion from these levels. Gone are those days, in the last two-three years when without earnings growth, just due to PE multiple expansion, we saw the markets and the stocks move up. Now things have changed. Interest rates and the global system are on the up move. Dollar is becoming very strong and whether it is going to become stronger or weaker is the big debate that is going on but whole point is the movement of money from emerging markets to developed markets.

PE multiple expansion is out of the question. We can debate about what sort of an earnings growth we would see in FY17, 18, 19. It is too early to comment about FY19 but FY18 is something which we can debate. There is very little scope for the markets to move up significantly from here. But certain sectors would move in tandem. Coming to the budget, if fiscal consolidation is maintained at 3% instead of 3.5% for this year, it would be taken positively.

If the government does its bit on capex, particularly infra capex and there is some credible number to that, then it should be looked at positively. Capital gains tax, if it is introduced, should be negative. A bit of tweaking here and there but fiscal consolidation and infra capex are the two things which could positively surprise the markets, otherwise it would be the budget.

One pocket is about trying and figuring out what are the budget beneficiaries and what could come in but that is a guessing game. The second part is probably trying to do the obvious, which is that try and map out pockets where the government will come out and give some measures and means. The likes of agri for example. It is a very large pocket. What are you doing?

We must remember that inflation is going to come back in a big way. So anything to do with inflation -- whether it is agri inputs or seeds or fertilisers, though fertilisers are controlled products but consumer companies which have pricing power, can go for a price rise. It is not just about volume growth, it is also about pricing growth when it comes to the topline number.

Last three-four years, consumer names did not have pricing power that much and if inflation is going to come back, consumer companies are the best ones to transfer increased prices to consumers and that will have an impact on the bottom line. So it has to do anything and everything with inflation. Whoever is able to pass on the price hike are going to be beneficiaries in terms of earnings growth. Then, we got to weigh what the valuations are looking like and then whether we see stock price impact from these levels but yes consumer names, agri inputs, infra capex which includes cement, would be some of the obvious beneficiaries from the budget if the pronouncement were to be in that direction.

You used to like the consumer financing names. Bajaj Finance was an example, some of these other companies as well. The reason I bring that up is almost everything that we believed could get hurt because of demonetisation has not been hurt. The quarter has been fairly okay. The only ones which have been casualties, for example Inox Leisure has come out and delivered a very poor quarter but otherwise most companies have fared well. What are you doing in that space? These stocks are no longer at the levels that they were when they got beaten up – Bajaj Finance or Capital First or some of these names like Bharat Financials which you just spoke about earlier.

Risk in the system has increased. When we talk about some of the consumer financing names, we are talking about more about unsecured lending as opposed to secured lending backed by collaterals. So it depends on whether you want to ride on the risk and companies are actually pilling on to risk in terms of loan growth, etc. My answer is that instead of 40% growth, in the case of Bajaj Finance, it will come down to 25-30% growth. Then we got to see how much of that 25-30% growth is already there in the stock price and for what period are you extrapolating that sort of growth and what are ROA?

Under the residual income method if you even extrapolate 3% ROA and 25% growth, I do not think the numbers make sense beyond a particular price level. Just to contain the risk in terms of the BFSI space, I am more happy with collateralised lending names which are trading at reasonable valuations. Nothing wrong in the short term, but how much of that is already there in the price? Demonetisation will have an impact and will get mitigated over a period of time. But in this environment where there is increased uncertainty and risk, it makes better sense to go with some of the collateralised names in the BFSI space as opposed to those who are more exposed to unsecured lending.