Anup Maheshwari, head - equities and corporate strategy at DSP Merrill Lynch believes that the overall trend is to be externally driven based on the EM flows. He also feels that the market is seeing a betting on earnings growth to drive individual stocks.
DSP Merill Lynch is gradually investing money but still sitting on some cash. It is looking at cement, mid & smallcap IT as well as private sector banks. Maheshwari believes that the midcap IT stocks' valuations are much cheaper than large caps.
The metal sector could be the dark horse of 2007 opines Maheshwari and he also states that both the large and madcap pharma looks good.
Excerpts of CNBC-TV18's exclusive interview with Anup Maheshwari:
How are you feeling about 2007 after all that has transpired in the current calendar?
With every passing year of great returns, obviously the next year looks a lot tougher. I think 2007 for us, also is pretty much the same story where you have to ground your heels and look for good ideas. We are not playing this market for re-rating upside, we are just looking for good bottom up stock ideas and some good sectors where there is pricing power available and trying to pick and choose amongst that. So I think incrementally, we are looking at most of the returns coming through from earnings growth rather than re-rating.
Do you think it will finally get focussed on to stocks in 2007 because the last leg of 2006 has been pretty much the Index beating most funds because small caps and midcaps have not performed to the extent that was expected? Do you think that will change around or has to change around in 2007?
Yes, there is always a certain extra return that you can get out of decent stock selection. I think hopefully we will see that coming through next year. I think the overall directional trend of the market is going to be largely externally driven based on emerging market flows in general. This is going to be the most crucial variable in terms of how our market does. Within that, clearly as fund managers, we have to try and build the best possible portfolio suited to market conditions. I still think there is a fair amount of value involved in bottom up stock picking and we may see that coming through next year.
What have you been doing with the Rs 1500 crore that you raised in your small and midcap fund; are you largely invested or still lot of money to come in from there?
We are gradually investing that. We have told investors right at the start, a few months ago that we had invested over the course of the quarter or so. So within that process, we are going pretty much in that order. So there is some element of cash still sitting in that fund. But that's more a longer-term product; it was not really focused on how the market does in the very near-term.
What have you been buying in that space? Could you aggregate some of the stocks that you have picked into clusters? Which sectors have you basically trend your guns on in the small and midcap funds?
It is very stock specific, not even sector oriented. We are still reasonably positive on some of the companies in the cement sector and IT. We have gone down the market cap chain there, to some extent private sector banks, which is another area that we have been trying to identify ideas. These are some of the key areas, some of the sectors that we are looking at.
What have you been buying in that space? Could you aggregate some of the stocks that you have picked into clusters? Which sectors have you basically trend your guns on in the small and midcap funds?
It is very stock specific, not even sector oriented. We are still reasonably positive on some of the companies in the cement sector and IT. We have gone down the market cap chain there, to some extent private sector banks, which is another area that we have been trying to identify ideas. These are some of the key areas, some of the sectors that we are looking at.
You mentioned small caps and midcaps because that's been the buzzing sector for the last couple of weeks, especially after the Tech Mahindra deal. Do you see a lot of re-rating potential in some of those companies there?
What attracts us to that sector essentially is the fact that we still see some fairly decent earnings visibility and you are buying it relatively cheap. I think there is a big disconnect between the market cap or the valuations that the large caps are getting versus some of the small and midcaps. From a pure valuation standpoint, it seems to make some sense. We are looking at midcaps, which we think are scalable. Their business models are strong enough to take them forward over the next three years or so, make them much bigger companies than they are today. As long as we are buying them reasonably cheap, we are quite happy with that.
Are you looking at the private sector banking space as pure growth stories or consolidation plays?
It's a combination. I think clearly the banking space has to grow over the next 3-4 years, especially given the way our economy is growing and demand for credit. Clearly, a few years down the road, you will have some element of consolidation taking place once the rules are relaxed as well. This is a sector that is not very richly valued. At the same time, if we go by regional valuations or global valuations for some of these banks, clearly it's a combination where we have growth as well as some consolidation value sitting at the end of that period.
Do you hold any contrarian bets as a fund manager for 2007? Are there any underperforming sector as such, which you think can comeback in a big way in 2007?
One sector, I can always bring a rabbit out of the hat, is the metal sector. We are no experts in that but time to time, certain key metals do show some very strong performances and companies have a lot of leverage on their earnings based on metal prices. We are looking at that sector closely to try and see if there is anything worth looking at. But I think that is one sector that could throw a bit of a surprise next year, some parts of it at least.
Over and above that, there is nothing much; we are still underweight on oil and gas, for instance. There is still not enough clarity as far as pricing is concerned for us to be very confident on that sector yet. So we have been bullish on most of the other sectors like cement, engineering and IT and will remain to stay so.
What about sectors like FMCG or even pharmaceuticals, which have been underperforming for the last few months?
Pharmaceuticals is one sector that we are looking at a lot more positively now, both in the large as well as the midcaps; that's where we are looking at fairly strong incremental earnings growth over next year, which the market will take note of at some point. On FMCG, we are not as optimistic yet because valuations are still not in a zone we are as comfortable relative to pharma for instance.
What's your overall feeling about the market? Looking at what the global connection that you spoke about upfront, do you think the market has run the risk of a deep correction from these valuation levels or do you think the upward trend is generally intact and you will probably see sharp compress corrections likes of which we saw few weeks back?
I think the latter, which is basically in an upward trend with some sharp correction intermittently is probably going to be the order of the day next year as well. So we would expect some element of volatility over the course of next year. But by the end of the year, if earnings growth continues the way we are looking at it right now, the market should be better than it is at the start of the year at least.
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