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Harish Krishnan on 3 dark horse sectors offering long-term buying opportunities

So, we think that there are three sectors which we classify as dark horse sectors, sectors which have not done really well from a three- to five-year perspective, where ownership levels in the street are very low and where there is a potential chance for a revival over the course of the next three years or so. Topping the list would be cement sector, then you have got the metal sector and the consumer durable sector."While indices have fallen maybe about 10%, there are multiple stocks which have fallen maybe 20-30% and to our mind, I think, there do appear a lot more buying opportunities from a three- to five-year perspective at today's entry valuations in many sectors and many stocks," says Harish Krishnan, Aditya Birla Sun Life AMC. The last one-and-a-half months have been quite volatile. We have seen 3000 points fall in the market, that is the benchmark. From there, we did see one-third of the losses being recovered. So, how are you reading into the market and do you expect the upward momentum that we had seen for the past few days to continue for the market from here on or there could be some more downside or market would remain sideways from here on? How are you reading into the market currently? Harish Krishnan: I think this has been a welcome development, primarily because market had continued to go up from a period from, say, May to September despite poor quarterly numbers, despite an electoral verdict which was not really the best of outcomes from investor perception point of view, as well as capital gains taxes, the changes made there. So, in some sense, this 10% kind of a cool off removed some of those excesses that have happened. And now we are in a far better zone. While indices have fallen maybe about 10%, there are multiple stocks which have fallen maybe 20-30% and to our mind, I think, there do appear a lot more buying opportunities from a three- to five-year perspective at today's entry valuations in many sectors and many stocks. So, if you could specify which are those sectors where stocks have corrected and currently appear as a value buy at this moment? Harish Krishnan: So, we think that there are three sectors which we classify as dark horse sectors, sectors which have not done really well from a three- to five-year perspective, where ownership levels in the street are very low and where there is a potential chance for a revival over the course of the next three years or so. Topping the list would be cement sector, then you have got the metal sector and the consumer durable sector. These are the spaces where we think that any correction we would want to further increase our allocation into these sectors. Sectors which have had reasonably strong business momentum, including sectors like auto, auto ancillaries, capital goods and infrastructure, IT, pharma. These are the sectors which were displaying a reasonable amount of business momentum and therefore a fall of say 10-15-20% we would want to further increase our allocations out here. So, these would be the areas where we would have further bolstered our exposure during the current fall and we would look for additions to these sectors in case we see further falls from here as well. Just wanted to get a sense that at this point in time how should one place the bet within the mid and small end of the market as well as the largecap space because what we are seeing is that yes indeed the broader markets have outperformed on a YTD basis as well, but given the recent correction, do you believe that now is the time to go ahead and bet more on the largecap space versus the broader end of the market? Harish Krishnan: So, if you look at the year till date performances, clearly the broader indices or the broader market segments have done better than say the largecaps. But the extent of outperformance is not very large. The same timeframe last year if you were to think about it, the gaps used to be 15-20-25% between various categories like smallcap and largecap funds. This year we are seeing gaps which are more like the 5-7% or 3-5% from a category point of view. So, the second aspect is yes, largecaps have fallen more primarily because FIIs have been selling and FIIs have traditionally held on to much more of largecaps and therefore they bore the brunt of the selling. But the point really is that we do not see any big material difference in terms of earnings growth, be it a large, mid and smallcap. So, in the absence of any significant difference in earnings growth, we think that one is better off being in largecaps and to a certain extent into midcaps than being into small and micro caps at this point of time. So, in a sense, the extra return that one has made up, possibly for calendar year till date, does not take into account the risk that comes when liquidity dries up quite meaningfully in the micro cap segment, so therefore our preference would be for the large and midcap space. And when it comes to banking names, how are you reading into that given the fact that valuations continue to remain on the cheaper side, both for private and the PSU banks and also earnings are expected to pick up now anytime soon for this sector. So, how are you positioning banking names in your portfolio? Harish Krishnan: So, if we were to circle back say about 18 months back when the banking sector earnings were on the top gear, you had everything going right for banks, we had actually gone on a reasonably large underweight stance as far as banking is concerned. At that point of time, we believe that earnings were possibly getting into the super normal stage, due to which even as banks kept delivering record earnings, their stock prices did not kind of react. Over the course of the last three to six months a lot has changed. The regulator has tightened the screws quite significantly. Credit growth has come off quite meaningfully. You also have net interest margins, which were at very elevated levels, normalising, and you have got credit costs starting to move up. In some sense, what we were saying is that 18 months ago each of these three levers were at the best of health. Today, they are all coming back into normalcy. And therefore, we think that now is a time wherein we have cut our underweights and we have gone close to neutral as far as banks are concerned. And we would actually be welcoming any further cuts in earnings as far as the banking space is concerned. So, therefore, we would want to be increasing exposure into banking space, especially into the private banking space, there would be opportunities coming into the insurance space, etc, where the near-term earnings might be a bit soft, but we think that the franchise value of many of these companies is excellent and therefore provides a very good opportunity to increase our allocations. But if you can also and if you would like to highlight some of the risk factors for the markets and especially the Indian players in the times ahead or do you believe that we are just out of the woods and the flavour of the bulls should be back in the market soon? Harish Krishnan: So, generally, as they say, when everybody's focus is on earnings and micro but I think macro is where things can surprise. And a lot has gone right as far as India macro is concerned over the course of the last three-four years and therefore, all investors' attention kept focusing on the micro and rightfully so. We need to be watchful of macro developments, especially when it comes to the geopolitical side. We have got two large economies, the US and China, post the Trump presidency inauguration, it is very important that we need to see how the tariff regime change kind of pans off. The second thing is, we have seen exceptional dollar strengthening, that is, again something that we need to be watchful of. This is something that I think Indian currency needs to be very watchful of. While today, everything is looking all good, one needs to have this in the back of their mind before aggressively committing capital. So, I would just say that in an environment where most people are not talking about macro, I think that is where the possible risk can come through, especially when it comes to the currency side.

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