Auto has good earnings potential in H2 of FY20 and FY21: Sachin Trivedi, UTI AMC

We have to be stock selective but there will be an improvement in earnings in the broader market, says Sachin Trivedi, SVP and Head of Research & Fund Manager, Equity UTI AMC. Excerpts from an interview with ETNOW.

The market is appearing very interesting because the Nifty is gaining. The valuations are at about 17 to 18 times earnings, but it is concentrated in just a couple of stocks. Do you expect a broader participation or will it continue to be more of the same?
You are right in pointing out that there are only a couple of stocks which are rising and the indices are at all-time highs. The underlying theme is that in the last couple of years, the earnings have not gone anywhere. In fact, in the case of Nifty midcap, the earnings would have collapsed. So, the market has kept on rewarding the companies which have done well and these are the stocks where multiple rerating has happened.

But if we look forward, we are optimistic as far as earnings growth is concerned. From the index perspective, earnings should start to improve and we expect a broader participation. We have to be stock selective but there should be a broader participation as far as the market is concerned.

It should not be restricted only to limited stocks, but yes, the underlying theme will be that the stocks which deliver, will again do well.

Where do you see the earnings potential because at the end of the day, the market wants to look at fundamentals. Companies that are not performing well, will not do well. Where do you see good earning potential in the second half of FY20 and FY21?
Definitely auto is one name one sector where we are clearly positive on. We have to see the previous high volumes that the companies would have achieved. As a country, we are under penetrated as far as auto is concerned. At some point, we will start to see sharp recovery in volumes and that is the time when companies will start to get operating leverage.

What we have seen in this season is that the banks have become a lot more liberal as far as lending is concerned. We have seen a good revival in demand as far as the last festive season is concerned. That is one of the constraints that the auto sector has faced. Once the banks move on to risk-taking mode, we will see volume recovery in some of the sectors including auto. The stocks will also participate in the earnings momentum.

Of course, along with that, the corporate sector banks would do well as also banks with good liability franchise. If you see easing of liquidity in the system, some amount of activity will be back. Cement should be favourably placed as far as the earnings are concerned.

To what extent do you expect the government stimulus to help the markets? There is not much room in the fisc to increase government spending. Even on the private side, there is not much spending. Would there be room for Finance Minister Nirmala Sitharaman to manoeuvre in the Budget which in turn may cause the markets to react?
When I say I am a bit optimistic, I am not actually looking for a government stimulus. If it comes, that would be a sweet spot but looking at the current fiscal situation, it would be quite tough for them to offer any stimulus. But the forex inflow which has happened in the country in the last couple of months -- $50 plus billion forex reserve accretion -- means there is a good amount of liquidity in the system.

Now this liquidity is lying around because in the past, banks found it easier to park the entire money. We have $3 billion plus sitting with the RBI, having been parked by the banks as they have been risk averse so long. Banks will start to take risks when reverse repo rates are lower and the cost of deposits are higher.

I would like to draw your attention to the fact that in a couple of banks, the capital adequacy ratio has increased and at some point in time, the banks would start to lend. When the lending starts, the money multipliers will increase and that is when you will find activity coming back.

The other area where I would want to point attention to is that the government continues to spend on rural areas. So, there will be a wealth effect in rural areas and gold appreciation. A couple of agri commodities have actually done well. All these factors put together should start to create some level of stimulus in demand. It is a multiplier which should start to play as far as overall demand is concerned. That is what I am optimistic about.