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    Domestic cyclical sectors to drive earnings growth, not defensives: Sanjay Dongre, UTI AMC

    Synopsis

    In terms of balancing risk, go for large-caps rather than midcaps, says the UTI AMC fund manager.

    ET Now
    Talking to ET Now, Sanjay Dongre, Fund Manager, UTI AMC, says it is the financial sector, cement, construction, engineering -- the typical domestic oriented sectors -- which will show you earnings growth going forward.

    Edited excerpts
    :

    ET Now: In the last two-three trading sessions, large caps and mid-caps have been performing on a different scale. In the last few years, midcaps have outperformed significantly to large-caps but over 10-12 years, it is the large-caps which are in line with mid-caps. Returns are more or less same. So, is it not a better time to invest in large caps instead of mid-caps?

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    Sanjay Dongre: To a large extent, I would agree with you. Just three or four years back, the midcaps were quoting at a significant discount to the large-caps. The mid-cap index was actually quoting at a discount in terms of valuation parameters to the Nifty or the Sensex. At that point, the risk reward ratio was much more favourable for the mid-caps. In the last three, three-and- a-half years, we have seen big outperformance from the midcaps. Today, if you look at the valuation on various parameters, you will find that the midcaps are quoting at a significant premium to the Nifty.

    For example, just to give you one parameter based on say trailing 12 months earnings, today the Nifty is quoting at about 23 times at trailing 12 months earnings while the midcaps index is in excess of 30 times trailing 12 months earnings. there is no doubt that today the midcaps are quoting at a significant premium to the large-caps and therefore the risk reward ratio is a lot more unfavourable towards the midcap. Therefore, in terms of balancing the risk, obviously the investors should be looking more favourably towards large-caps compared to the midcaps.

    ET Now: If that is the case then which are the sectors you are optimistic on? Probably we can figure it out that which stocks you might be bullish on.

    Sanjay Dongre: Today, the market is quoting at about almost 19 times one year forward multiple compared to 17 times at which has quoted in the last 10 years. So clearly today the market is in overvaluation zone compared to the average levels therefore the recovery of earnings growth is very important for sustaining the market valuation at these levels. Therefore, you should be looking at sectors or stocks where going forward, the earnings recovery is going to be there.

    When you analyse the earnings growth in the next two to three years, you will find that the domestic cyclical sectors are going to drive the earnings growth compared to your defensive sectors. Therefore, I would be looking much more positively towards the domestic cyclical oriented sectors rather than the defensive sectors purely from earnings point of view.

    ET Now: Can you point out some of these cyclical defensive sectors for us?

    Sanjay Dongre: If you look at the delta in the earnings, it is the financial sector, cement, construction, engineering -- the typical domestic oriented sectors which will show you earnings growth going forward.

    ET Now: You said you do not want to be into defensives at this point of time and more towards cyclical stocks where earnings would be much faster than defensives. What is your opinion on what is happening in the telecom space? There are some changes which would affect some of the bigger names in a negative way and probably would benefit one single large player who is a new entrant. How would you look at the story and what is your opinion on this space?

    Sanjay Dongre: The disruptions in the telecom sector that we have witnessed in the last 12-15 months, will continue for another two-three quarters. The recent reduction in the interconnect charges obviouslyit is just the reallocation of the funds among the players. Basically, it is the incumbents who are going to lose out and it is the new entrant who is going to gain. And therefore, what worries is that because the newcomer is going to get benefitted, his ability to remain much more competitive in the marketplace, goes up significantly.

    Therefore, in the next two three quarter, the intensity of competition what we have witnessed in the telecom sector will continue. It is only when the new entrant gets a reasonable market share in terms of revenue or subscribers, then only we could be witnessing some sanity prevailing in this sector.

    In the next two-three quarters, if we could witness that kind of rise in the competitive intensity leading to a further decline in the stock prices of the incumbents, then maybe you look to build those positions.

    ET Now: I am just going through the top holdings of some of the schemes like Master Equity Plan. You have Ramco Cement with a 3.7% weightage. Then your infra funds highest weightage in Shree Cement, UltraTech Cement you are positive on. That also is among top 10 in your top holdings in infra fund. Without getting into names, what is making you so bullish in the cement space?

    Sanjay Dongre: As I was saying, delta in the earnings growth in the cement sector is likely to be pretty high. What makes me positive is that look at the supply additions which is happening in this sector. I think in the next three years the supply additions will be not more than 30 million tons so therefore what you will find is that as the economic recovery picks up you could see the pent up demand in the cement which was languishing in the last three-four years at low single digit. Maybe we could witness somewhere high single digit cement demand growth going forward.

    As the demand picks up, you could see the demand supply gap narrowing and that augurs pretty well for the pricing environment in the sector. In the cement sector, the profitability is a lot more sensitive to the pricing rather than to the volumes and therefore as the pricing goes up in the sector, you could see a more significant increase in the earnings in the cement sector and that is what makes me positive on the cement sector.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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