In a chat with ET Now, S Krishna Kumar, Head-Equity, Sundaram Mutual Fund, says IT, pharma, telecom and metal are four sectors that the fund remains cautious about. Edited excerpts
In specialty chemical and agrochemical space, there is a huge amount of demand growth from the MNCs who are willing to outsource from India. China has been one of the major areas where the MNCs used to look towards outsourcing commodity chemicals and the speciality segment was very close to their competence.
They used to manufacture them in their developed countries but of late, I think, given India’s chemistry skills that we have seen very well in the pharma space, the MNCs have been able to identify potential sourcing basis in India with good quality companies who have also been able to invest steadily in the business to create huge capacities.
This contract manufacturing opportunities in the speciality chemical has taken off in a significant manner and that basically gives a lot of confidence about the growth visibility. Many of these companies still are not as expensive as they can be. So, it is not only the growth but also the potential re-rating that can happen in the speciality chemical segment that is still driving these companies.
The auto ancillaries have been big underperformers for the last many years. The auto cycle has definitely turned up for the good. Last 12 months, we have seen CV demand getting better. Demand for tractors are improving, that for .two wheelers are getting better. The passenger car, UV segment has also picked up steam. Auto ancillaries will be the beneficiaries of the auto boom that we are going through and with per capita income levels going up in India, that is a very strong expectation for the next five years. The low rate of financing would also be a catalyst to the auto growth be it two wheeler or four wheeler or SUVs. However, one may not be very sure of which of the auto majors to bet on because many of them are unlisted.
The auto ancillaries are a very nice way of playing the good volume growth in the auto sector across the board. So with the working capital cycle getting better, the commodity prices being fairly under control, the operating leverage is starting to play out for these companies and we are seeing fair bit of margin expansion that is coming through in these companies and pushing up their return ratios to historically high levels,
We
have discussed this endlessly – midcap is where the growth is but
midcap is where the froth is. Largecap is where the value is, but
largecap is also where the growth is not visible.
A bit of discounting has been done in a lot of
high growth midcap companies, Maybe the earnings could continue for
four-five years, but in a lot of these companies -- auto components,
speciality chemicals, to an extent even the sugar space – the
discounting is already over. From here on, what pockets do you believe
could do well? You still continue to be bullish on auto components,
agrochemical companies and speciality chemicals in a big way. Where do
you think the discounting is still not over?
In specialty chemical and agrochemical space, there is a huge amount of demand growth from the MNCs who are willing to outsource from India. China has been one of the major areas where the MNCs used to look towards outsourcing commodity chemicals and the speciality segment was very close to their competence.
They used to manufacture them in their developed countries but of late, I think, given India’s chemistry skills that we have seen very well in the pharma space, the MNCs have been able to identify potential sourcing basis in India with good quality companies who have also been able to invest steadily in the business to create huge capacities.
This contract manufacturing opportunities in the speciality chemical has taken off in a significant manner and that basically gives a lot of confidence about the growth visibility. Many of these companies still are not as expensive as they can be. So, it is not only the growth but also the potential re-rating that can happen in the speciality chemical segment that is still driving these companies.
The auto ancillaries have been big underperformers for the last many years. The auto cycle has definitely turned up for the good. Last 12 months, we have seen CV demand getting better. Demand for tractors are improving, that for .two wheelers are getting better. The passenger car, UV segment has also picked up steam. Auto ancillaries will be the beneficiaries of the auto boom that we are going through and with per capita income levels going up in India, that is a very strong expectation for the next five years. The low rate of financing would also be a catalyst to the auto growth be it two wheeler or four wheeler or SUVs. However, one may not be very sure of which of the auto majors to bet on because many of them are unlisted.
The auto ancillaries are a very nice way of playing the good volume growth in the auto sector across the board. So with the working capital cycle getting better, the commodity prices being fairly under control, the operating leverage is starting to play out for these companies and we are seeing fair bit of margin expansion that is coming through in these companies and pushing up their return ratios to historically high levels,
What
are the spaces that you are staring clear off and would IT be that one
pocket given the commentary from the big boys -- TCS and Infy?
By and large, we have been neutral to underweight IT for quite some time and that is again driven by valuations earlier and the falling growth outlook in the last two quarters. Also, pharmaceuticals has been space where we have been uncomfortable with valuations and that has also been sectors which have been hit by growth from various US FDA issues.
The third area that we have been uncomfortable with is the telecom space. The impending Jio launch that has happened now is going to create a lot of uncertainty for existing incumbents and increase capex and opex for many of these players. We believe that is a space that we need to be wary of.
So these are the areas where we have been kind of staying away and metals has been more of a trade for us. It has not been a segment we are very happy about. I think we believe that global growth is yet to take off and metal space is oversupplied and you are just seeing certain trading rallies given certain consolidation efforts that are happening across the globe. So these are the three-four areas where we probably remain pretty cautious about at this point in time.
By and large, we have been neutral to underweight IT for quite some time and that is again driven by valuations earlier and the falling growth outlook in the last two quarters. Also, pharmaceuticals has been space where we have been uncomfortable with valuations and that has also been sectors which have been hit by growth from various US FDA issues.
The third area that we have been uncomfortable with is the telecom space. The impending Jio launch that has happened now is going to create a lot of uncertainty for existing incumbents and increase capex and opex for many of these players. We believe that is a space that we need to be wary of.
So these are the areas where we have been kind of staying away and metals has been more of a trade for us. It has not been a segment we are very happy about. I think we believe that global growth is yet to take off and metal space is oversupplied and you are just seeing certain trading rallies given certain consolidation efforts that are happening across the globe. So these are the three-four areas where we probably remain pretty cautious about at this point in time.
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