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Green Shoots

Navneet Munot, CIO, SBI MF expects Nifty earnings momentum to improve. FMCG and Pharma valuations can be justified considering consistency of earnings


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Value in the popular sense of the term may not work in an inflationary economy like India, says Navneet Munot, CIO, SBI MF.

Green Shoots

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Nifty earnings clocked 1% growth on an annual basis in March 2016 quarter, the first positive growth after five quarters of profit decline. Top fund-house SBI MF's chief investment officer Navneet Munot expects the earnings momentum to gather steam. In an interview with Kumar Shankar Roy, Munot, who oversees over R1 trillion in assets, warns that 'growth' has definitely become expensive and that value stocks could out-perform going forward. But he has a caveat: value in the popular sense of the term may not work in an inflationary economy like India.

SBI Bluechip Fund is the top performer in large cap fund category in 1 and 3-yr. How difficult is to find potential large cap stocks given that the universe hasn't increased much in 10 years?
The 'top 100 stocks by market capitalization' is the large cap universe for SBI Bluechip fund. We lay emphasis on bottom up stock selection within each sector to generate excess returns over the benchmark. At any point of time, the endeavour is to select stocks that have better growth visibility and whose valuations are reasonable. In addition, there is a limited mid cap exposure (up to a maximum of 20% of the total) that the fund can take to enhance returns. It has been an interesting journey up to now and we expect to carry it forward.

While your infra fund has improved performance in last one year, the IT fund is still lagging most peers in 1 and 3-yr period. What has gone wrong with the IT fund?
The team has indeed done a wonderful job, incrementally, on the Infra fund. This has been a sector undergoing challenges but possibly with the worst behind it. The IT sector fund has had some challenges in the last one year but from a 3-year fund perspective, it has been satisfactory and better than the benchmark. The last one year was particularly hit by negative surprises in a couple of stocks we owned. We've made subsequent corrections and expect the fund to resume its long-term trajectory.

FMCG and pharma stocks continue to attract premium valuations. Your own sector specific funds have average P/E of 32-33 times. Isn't it too much to pay?
The valuation of the FMCG fund is less expensive than what meets the eye if we factor in growth and the consistency of growth. Valuations for the Pharma Fund would be higher than what it has commanded in the past as the sector has evolved with growth kicking in from various sub-segments like India, US, the Rest of World, healthcare services as well as contract manufacturing businesses. Currently, it looks even higher optically as most Indian companies are facing regulatory challenges in the US inflating the expense line temporarily. Currency fluctuations have also contributed towards translation losses. From a longer term perspective, while returns in these sectors will be lower than what they have been in the past, it is pertinent to note that these are sectors that are relatively stable with greater visibility.

Growth has beaten value stocks for six (calendar) years in a row. Will 'value' now out-perform or 'growth' will edge ahead?
That's a tough question to answer. Growth has definitely become expensive and it does seem that value will out-perform, going forward. However, value in the popular sense of the term may not work in an inflationary economy like India. What one needs to look at is value adjusted for returns on capital if not growth.

At the end of last year, you had said the worst may be over for earnings and earnings are expected to grow by 15% in 2016-17. Banks keep on churning out bad numbers. Do you still stand by that prediction and why?
Corporate earnings for the quarter ending March 2016 have been better than expected. NIFTY earnings clocked 1% growth on an annual basis, the first positive growth after five quarters of profit decline. Businesses have seen strengthening of demand in few sectors, mostly domestic oriented. Stability in global commodity prices has also helped global cyclical sectors like Metals. The pace of FY17 EPS downgrades have eased and earnings momentum could gather steam given normal monsoons, monetary easing, the government push towards capital spending and consumption stimulus from the Pay Commission.

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