Buy on dips, maintain balance in portfolio: Mahesh Patil

In a bullish market everything looks good. But some of these stocks are long-term growth compounders. Looking at the valuations one should exercise caution. One should do it in a limited way and not take excessive exposure. Take what you can digest and hold on for a long term and withstand any volatility in the markets, Mahesh Patil, Co-Head, Equity, Aditya Birla Sun Life AMC


This earning season, on one side surprise has come from IT, but on the other side, there is cost and volume pressure in FMCG, consumer and perhaps food companies. What is the right way of analysing this earning season?
One has to look at the recovery in the top line growth because after a long time, we are getting a normal quarter. There was a fear about the third wave coming but it is not such a big impact here. So the key thing to watch is how things are normalising, how the top line growth is coming in and there was always a concern on the margins because of a sharp increase in the commodity prices that we have seen in the last six months or so.

Last year, top line was an issue but margins were better because a lot of companies were cutting down costs and the operating level was much better. This time around, companies have shown some impact on margins especially those which have not been able to pass on the cost increase and that is to some extent expected.

More importantly, one has to look at how the recovery has happened in the various segments and that is a mixed bag. On the consumption side, we have seen the recovery is not up to the mark compared to pre-Covid levels. If one looks at a similar quarter in 2019 and this year, one could be looking at two year CAGR. One has to see the growth in each of these sectors and each of these companies and whether they have normalised. Up till now, results are a mixed bag but I do not see any major change in the earnings growth numbers for this fiscal year which is still likely to be very strong around the mid 30s or so.

But again, it will be driven to a large extent by a couple of sectors and primary of that would be the metal sector where there is a sharp increase and to some extent the banking and financial services sector.

So one side of the economy is doing very well which is metals, materials. If you are essentially a resource company this is like a fairy tale time for you. But for the consumer companies, the pain is visible. It started with the autos last quarter and consumer durables are feeling the heat. Where do you think the market will find its balance?
You are right about the commodity sector, the resources companies, because of shortages and supply side challenges, there has been a significant increase in their realisations and strong growth in profit. The consumer side, especially the large ticket discretionary consumption, is still slow to pick up.

But we are getting a decent size ticket this festive season and consumer durable companies are making a comeback. Initially in the early part of this calendar year, we have seen a strong global recovery and the view was that the global cyclicals will do well and they have played out fairly well. As we move forward from here, the domestic cyclical would gain momentum as the Indian economy recovers into next quarter and the quarters beyond that.

India’s growth is lagging behind the global growth by a couple of quarters because we had late second wave and to that extent, our growth in the next few quarters or even next fiscal year should be fairly good. A lot of the recovery plays which we are looking at -- be it in the retail sector or the entertainment sector or auto sector -- should see a revival. One has to wait and see how strong the recovery is because there has been some Covid impact.

We will have to wait probably for another one or two quarters to see how the underlying growth is. Currently, we are slightly disappointed in terms of the recovery. But it is too early to comment on that. I would say a balance between domestic cyclicals or incrementally more bias towards domestic cyclicals going forward should work.

Worried about the price points at which some of the stocks like IEX, IRCTC, D-Mart are trading at. Do you fear that the kind of casualty we have seen some of these stocks earlier this week could sap the market momentum? It could have a far reaching effect on markets.
There has been some exuberance in the last few weeks or months, especially in some of these stocks which are typically high growth sectors and there the valuation expansion has been huge. I do not think there has been too much institutional buying because institutional investors are more conservative and it is probably retail investors that have buoyed them up.

There is some bit of caution over here because when the tide turns, one would see that some of the retail investors who are probably leveraged, had bought into the stocks and there could be an unwinding of that position. That is what we saw in the last couple of days. But again, if I look at the broader market or the Nifty companies, I do not see that kind of a exuberance.

There is no doubt that the market valuations are expensive compared to historical levels but there is still comfort in these names based on their fundamentals in terms of their growth. There could be some correction in the side market some of these smallcaps, midcaps and some of the largecaps also, where we have seen excessive valuations. But the larger frontline names would not see a very large correction.

If there is a correction globally and we are seeing some size of nervousness over at these levels, our markets could fall to that but that should not be such a large correction for investors to be worried or panicky about. But one has to be careful about individual stocks which have rallied without strong fundamentals in the last couple of months.

You are saying the fundamentals were not strong in the stocks that have run up. What are the lessons to be learnt because investors are also thinking that this company can be a platform company with network effect and only later realise that the terminal value is not what was envisaged?
There are some fundamentally strong companies but the question is what is the right price to pay for that? We are in a bull market and people tend to build scenarios and outlooks which go beyond what we can see in the next two-three years. Taking the longer term view, where lots of assumptions can go into it and depending on the assumptions in terms of your growth discount rate can change the value too much.

The current value of a stock comprises two components -- terminal value and the explicit discounting of cash flows it is able to do for the next five or 10 years. As more and more value comes in from terminal value -- 60-70-80% -- there is a worry because any change in the growth outlook or any change in the assumptions can lead to significant change in the valuation and that is why I think one needs to be careful in some of these names that are trying to build those assumptions.

In a bullish market everything looks good. But some of these stocks are long-term growth compounders. Looking at the valuations one should exercise caution, if at all one has to participate in some of these growth stocks. One should do it in a limited way and not take excessive exposure. Take what you can digest and hold on for long term and withstand any volatility in the markets.

What is the word out for investors? Buy into declines into the high beta pockets which may arrive because these are good growth companies and whatever may be the concern around valuations, Also see how long the correction persists because today we are seeing a dead cat bounce?
From investors' perspective, it is very difficult to time the correction. We would have thought that a couple of months back there would be some correction in the market but the market has belied that. At this point in time, do not be aggressive in the market, do not try to chase high beta because whenever there is volatility you see a larger correction over there.

This is a market to invest into declines and I do not know what the level of correction could be but any declines here around 10% should be a very good correction to really buy into this market. We are in a kind of expansionary cycle. This phase could last for a longer period of time. That gives a lot of comfort that this recovery in corporate earnings and growth will continue for a few years and one would want to really benefit out of that. So a buy on dips. This is the time to remain more on the well established large cap names because that is where I think there will be much more stability at this point in time and selectively I think one can look at the midcap and smallcap space because if you take a three-year view as the domestic economy expands there could still be decent returns in that segment but this is the time to take out some risk from one’s portfolio and that is what we have also made in our funds.

Ata time when there is so much uncertainty, are you safer with largecaps or would you say stay put with mid and small caps this correction if it deepens from here. These stocks will resurrect at some point?
I would say that maintain the right balance in your portfolio, do not go aggressive in particular sector. There could be some bias towards large caps or multicap kind of a portfolio if you invest in the mutual fund side at this point in time. But as long as you have the right balance and the right mix of midcaps, small caps in your overall portfolio, I think that should be fine. One cannot keep on changing the portfolio because structurally we are still in an uptrend and so there is no reason to make any big change in your portfolio as long as you have the right allocation based on your risk profile. I would suggest that the large cap names is where the larger allocation should be.