In an interview with CNBC-TV18, Varun Goel of Motilal Oswal AMC said that there is some nervousness due to the condition in Europe and outcome of the US Presidential election.
These factors will play out time and again, but the important thing is to focus on domestic earnings recovery, he said.
Goel said that the housing finance space continues to be attractive and low interest rate will be a positive for the sector.
He expects housing finance companies to grow more than 20 percent in this fiscal.
Below is the transcript of Varun Goel’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.
Prashant: Could you tell us as a fund manager, you are seeing different signals coming in from different markets around the world and are things getting a little disconcerting? We have had a little bit of a correction recently about 200 odd points or so from the recent high. US markets have seen a bit of a see-saw. I Europe you have got the entire Deutsche Bank simmering. What is your view in terms of direction in the near-term?
A: We live in a very globalised world and all across the world, we are going to see different kind of things happening across different points of time. So, we are definitely seeing some nervousness about the situation in Europe especially in some of the banking names.
There is also the concern about the outcomes about the US election and of course these things will continue to play out in some part of the other at various points of time. The important thing is to keep an eye on how the earnings recovery plays out in India.
We are very confident that this year earnings growth is going to recover and we are looking at 10-15 kind of a growth.
And come Diwali, the markets will start looking at FY18 earnings which we believe should be of the order of 15-20 percent. So, as the markets have taught us, the 20-year average earnings growth has been equal to the market returns and we believe that whatever returns we expect in the markets in the next 2-3 years are directly going to be proportional to the kind of earnings growth that we are going to have. So, we would stay focused completely no getting the hang of the kind of earnings that we can have about the companies in the portfolio and stay focused there and avoid the noise which of course continues to play out in various points of time.
Ekta: One section or segment of the market that you seem to still like are the housing finance companies, but if you look at them, all of them have run up in terms of valuations at least on an average of around three and even going up to around five times price to book value. Do you see further expansion in terms of valuations or which are the specific stocks which you would like?
A: The housing finance space continues to be extremely unattractive. While the overall credit growth in the economy has been around 10 percent, but we have seen housing finance space grow at 20 percent plus.
And this trend will only get better in the times to come. We are seeing the interest rates in the economy getting lower and we believe that the demand for the housing space remains quite robust. Only thing one needs to take into account is what is the kind of asset quality that housing finance companies have.
So, we have a preference to companies where gross and net NPAs are low, where there is scope for expansion into near geographies and where there is a focus on underlying end user demand. So, we have a preference to companies which are giving loan to salaried employees which are giving loans to end users rather than those companies which are doing builder loans and lab and all those kind of things. So, we believe that several companies which will continue to grow at 25 percent plus with a good handle on asset quality and these companies should deliver good shareholder returns also in the times to come.
Prashant: Talking about the same segment, the market will expand, but if you leave that aside for a while and just look at the addressable market right now, what are penetration levels at? We have seen new players enter every other week.
A: So, definitely competitive intensity is going to get higher in the sector. There is no denying this fact. And therefore, at what cost you are able to provide the finance is going to be a very important differentiating factor. So, those companies which have good credit rating and for instance, some of the public sector undertakings (PSU) banks and companies enjoy AAA rating by virtue of their parentage and those companies are definitely able to borrow at attractive interest rates.
Similarly, some of the top Tier-I private sector names are able to borrow at cheap rates in the market. So, these are definitely going to be differentiating factors and I would agree with you that the competitive intensity is getting higher. But the pie is still large enough for people to make profitable investments in this space.
Ekta: How are you approaching IT companies going into this quarter’s numbers? Maybe there will be more of an impact in terms of what is happening with the Brexit outcome, etc?
A: Definitely, there has been a volatility in the IT space, the business models are revolving. The old maintenance and EDM driven model is undergoing a transformation and this trend will probably continue for some more time. So, we believe that the quarterly results at least for the next couple of quarters might still be muted. But if you look at the valuations, the overall Tier-I IT space is trading at a very attractive valuation, 15-16 times one year forward earnings and the kind of return on equity and the clean balance sheet that these companies have, they would make good long-term equity investments.