Midcap rally to sustain only if corporate earnings pick-up, says Marcellus Investment Managers

Pramod Gubbi, co-founder of Marcellus Investment Managers shared his views and outlook on markets as well as his expectations from union budget 2020.

Talking about the rally witnessed in the midcaps, he said, “There has been some expectations from this budget and hence in the run-up to the budget there has been participation beyond the frontline names, which have carried the market for the last two years."

"However, for this rally to sustain, you would need on the ground improvement both in terms of the macroeconomic indicators and more importantly, the corporate profitability to pick up. Unless and until earnings pick up, this sort of a rally can be stymied. From our perspective there are quality companies across marketcap spectrum. So, we have seen good quality names in largecap, midcap, smallcap – we have seen largecap companies disappoint repeatedly in earnings as well. We should step away from the smallcap, midcap, largecap sort of categorisation of the market,” he said in an interview with CNBC-TV18.

“We remain bottom-up pickers. We will buy quality companies irrespective of the state of the economic cycle and those quality companies exist across marketcap spectrum, across sectors, so we continue to do what we are doing,” Gubbi stated.

When asked about Kotak Mahindra Bank news, he said, “The good thing is that a long-pending issue has been resolved. The market doesn’t like uncertainty. So people can take a look at Kotak from a bottom-up fundamental perspective, which continues to play into the bigger theme of the bigger banks. This is the theme we are seeing across sectors but particularly in the financial services where the handful of lenders are consolidating market share.”

In terms of earnings, Gubbi said, “It is early days yet. We have seen stress coming up in some of the banks, we have seen a slowdown in terms of loan growth. So, if the best of companies are seeing a sort of reversal of fortunes, the rest of the earning season is not going to come up with any better positive surprises. The extent of the slowdown might have bottomed out but will the recovery happen next quarter or two quarters away? It is anybody’s guess. It also depends on what sort of near-term stimulus measures we can expect from the government but a little bit of stimulus would certainly help.”

On telecom sector, he stated, “It is beyond just a duopoly, as we are behind perhaps the worst in terms of comparative intensity but it is capital intensive sector. As far as we are concerned from an investment into the sector perspective, we don’t see any sort of differentiation of pricing power from these companies to be able to justify the high capex that lies ahead of them and generate any sort of meaningful return on capital in the coming few years. So, we generally tend to stay away from sectors where return on capital remains below cost of capital for long periods of time.”

With regards to the budget, he said “We do need a broader recovery in the economy. There is a need for an investment cycle to pick up but I cannot see any clear signs that it is around the corner perhaps some of the stronger measures that could come out of this budget – we have got some beginnings - we have got labour reforms coming through, we have got very strong incentive in terms of the 15 percent tax rate from manufacturing set up, there are ingredients in place. If we can sort out land acquisition, we could trigger a longer-term investment cycle recovery.”