The recent market correction, led by the NBFC crisis has rattled investors. Vetri Subramaniam, Group President & Head of Equity at UTI AMC, shares his views on what this means on corporate earnings and market valuations in an exclusive interaction with BusinessLine .

Consumption is the major growth area for our economy, private final consumption accounts for 58 per cent of the GDP. Already there is talk of GDP growth getting pegged back due to the ongoing NBFC crisis. Is it a cause for worry as far as corporate earnings are concerned?

There are two parts to this. NBFCs have been a significant part of aggregate credit availability in the economy. If you look at the growth rate of NBFC advances, it is 2 to 3 times the growth rate in bank advances. What clearly happens on the funding side after this issue is that growth in advances from NBFCs has either slowed or come to a grinding halt, depending on which NBFC you are speaking to.

There will clearly be impact of that reduced credit availability on growth as well. It might show up in the December GDP numbers. The question is, is it temporary or permanent. As long as it is a liquidity issue and not a solvency issue, it will settle down. Many of the NBFCs are already regaining access to the market. Hopefully this phase will blow over.

If you look at the GDP numbers alone, you have to note that the oil prices have collapsed and there will be positive impact of that on growth; there are many moving parts. If your question is if the sectors that were dependent on retail credit will get impacted, the answer is yes. This is due to two reasons. One, the quantum of credit will come down and companies that are still disbursing credit will increase their rates. This will naturally have a crimping impact on demand.

Many research outfits are revising the earnings estimate for FY19 lower following the crisis? Are you also in the camp?

The consensus estimate has been falling even before this issue happened. If you look at Nifty 2019 consensus estimate of Bloomberg, between April and September it had been cut by about 4 per cent and between October 1 and mid-November, it had been cut by another 4 per cent.

The cuts in estimates are therefore not necessarily due to the events that we discussed. By the time we get to late-December, there could be more cuts, but it could be more localized, in companies on which credit availability or higher cost of credit will have a negative impact.

Are there any value buys emerging with the price correction that has happened in the markets?

If you look at aggregate market valuations, we have fallen from rich valuations near the peak to fair valuation zone, when market hit the recent lows. But valuation did not really go to the cheap zone. Even mid-cap indices did not drop in to what by historical measures, we will call cheap.

That said if you look at the BSE 500, quarter of the stocks have dropped more than 50 per cent from their 52-week high when the recent lows were hit. About half had dropped between 25 and 50 per cent from their 52-week high. As stock-pickers, we are seeing some value amidst this rubble. There could be some value emerging in select stocks but we cannot say that the market itself has declined to cheap levels.

Some of the high growth stocks that were trading at higher PE multiples have not seen their PEs decline but not too much. Do you think valuations of these stocks will continue to remain elevated, due to higher demand compared to supply of quality stocks in Indian markets?

Twenty-five years of data in Indian markets and 100-years of data in US markets tells me that valuations fluctuate, and they do mean revert. But when, why or how, no one knows. What is more important is not to predict but to be prepared.

We know valuations fluctuate, it goes up to levels of extreme bullishness or extreme bearishness, but no one has any idea on why this happens. What we do know is that as an investor or as a fund manager, you should have a process that guides your asset allocation. When valuation gets expensive, you should reduce your allocation to equity and vice versa when valuations are cheap.

But it does not mean that if you reduce equity exposure, prices will drop immediately – it may not drop for a long time, prices may even go higher before eventually falling.

As far as demand and supply is concerned, this is an esoteric topic. If you see FY18, while 2 to 2.5 lakh crore came in to mutual funds by way of subscriptions, but keep in mind that there were also equal amount of issuances by companies. At the end of the day, flows follow the market trend. The good thing is that a portion of flows is now coming in through SIPs and that ensures that investors’ portfolio value will be the averaged across the market cycle.

So what are you doing now? If you think some stocks are fairly valued, are you increasing your exposure or are you increasing cash holding?

That’s a good question. We are fund managers, we manage equity funds. People who come to us have already decided to allocate a certain sum in equity. So we do not take asset allocation calls in our funds. At any given point in time, we are 95 to 98 per cent invested in equities.

Essentially we tell investors to talk to their advisors regarding asset allocation. We run only one fund — multi-asset fund — that takes such calls. It invests in equity, fixed income and gold. Our in-house proprietary model, decides what the allocation to equity can be in this fund and this can be anywhere between 40 to 80 per cent. That fund had 40 per cent equity allocation towards the end of September; this rose to 46 or 47 per cent by end-October.

Are there any contrarian buys at this point at sector level?

There is value emerging in utilities. There is also some value emerging in auto stocks, if you have medium to long-term perspective. In financial space, some of the large banks, with strong CASA franchises are looking attractive. But at this point in time, more than focusing on a theme, it is better to take a bottom-up approach to select stocks that have corrected more than what is justified.

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