I am afraid it is not a very Happy New Year for Indian market watchers. The year 2011 is off to a shaky start?
If you look at the last one week, you are right. But we are more optimistic. We were viewing India from a much longer-term perspective and headwinds always keep on coming. Over the past, Indian economy and the Indian markets have proven time and again that they are much more resilient and the optimism from a longer-term perspective, at least from our perspective, continues. So not denying the fact that we definitely have some headwinds in the near term, we remain as optimistic as we ever were.
In simple terms, how are you using the current volatility or decline to your advantage? Are you buying and if you are buying what kind of themes, sectors or even names you are buying?
If you see the figures, most of the domestic institutions have been on the buying side of the last 4-5 days, specifically in stocks and sectors where the fall has been very pronounced. These kind of opportunities keep on coming. We will know whether we were right or wrong only in the future, but for long-term investors like us or any other domestic institution, this definitely presents an opportunity to buy stocks from a longer-term perspective and that is what the attempt has been over the last one week or 15 days.
What has been your approach to the banking space? Aside of yourself, there are a lot of sector oriented banking funds in the market. You also have one fund which is having assets under management of about Rs 1600 crore. Given the volatility, given the interest rate scenario, how are you approaching the fund, have you seen fund outflows out of your banking fund?
Coming first to the funds specific to us, banking has been one fund where we have been continuously seeing inflows. A lot of investors have seen the super returns, which the sector has given, and also the fact that our funds have also done well. Over the last 2-3 months, that is one fund where we have been getting the maximum inflows and which continues.
As far as the sector is concerned, obviously 2009-2010 belong to the banking sector despite the fact that we are coming out of a very difficult 2008 and early 2009 where almost globally all financials continued to see a lot of stress and from that background, investors made a lot of money.
There was definitely some optimism which was overbuilt into the price towards the last quarter of last year and once we got into a headwind, which was higher inflation than what people expected, short term liquidity tightness, which is even now pronounced, the sector just got sold off. At this point of time we do believe that there are near term challenges, but whether the prices have already reacted to that our view would be that they have already reacted to it.
Now in banking fund, we had around 12%-13% cash 10-15 days back and over the last 3-4 days we have cut down that cash to nearly half of what it was. So we are again using this opportunity specifically in the second tier banks where the fall has been much more pronounced and specifically on the public sector side and hopefully the stock should start to do well as the headwinds recede.
What about taking a contra call in this market because it is looking a bit vulnerable and when it does the strategy is really to cherry pick stocks which perhaps have more relative strength to withstanding a market fall. In that light do you think IT and pharma still hold ground?
I would just like to comment here that the market is down 5%-6% and we are all starting to get so much worried. I think that itself is a thesis which we feel is going to restrict the downside. Investors, whether they are retail investors or HNIs or institutional investors, have become so cautious that at the slightest fall everyone either wants to just cut their positions or move into the defensive.
Coming to your questions on IT and pharma, these two sectors have seen phenomenal growth over the last 2-3 years. That sector is more linked to the global economy and also benefits from stable or a weakening rupee. That has been the case over the last couple of years. In case of IT, the fact that US economy is now slated to grow much faster than what most people were expecting, is giving a lot of support to the sector and we feel that it continues to be a sector which cannot be ignored.
Pharma over the last 5-7 years has evolved. Domestic pharma has been growing at 15% to 20%, probably faster than any other FMCG product. On the export front, the efforts which the Indian pharma companies have been doing over the last 10 years, have started to bear fruits. Whether it is exclusive selling rights for a few products, which some Indian pharma companies have bagged, or also the fact that a lot of multinational pharma companies are looking to tie up with Indian pharma companies for cheaper sources of manufacturing. All point to the fact that the sector is going to continue to be quite good even in the future. So from our perspective, we would definitely be overweight on pharma, and on IT we will definitely not be underweight.
If I look at the portfolios you manage in which you oversee auto stocks selectively have popped out and some construction names selectively have popped in. So are you negative on autos and bullish on construction stocks?
This is a portfolio strategy which we have to do time and again. That is our job. Frankly as far as the construction names are concerned, we have been wrong over the last 1-1.5 years. We did feel that India needed infrastructure. The government has obviously stated its intention of investing nearly a trillion dollars over the next 5 years. But I think we were little early in the sense that the execution has actually got delayed in a lot of these construction and infrastructure names. However, we do feel that unless this spending happens, India’s dream of growing at 8%-8.5% over the next 5 to 10 years is not going to fructify. So we continue to be quite bullish on the infra names.
As far as auto is concerned, I think auto had a dream run in 2010. At this point of time there are definitely near term headwinds. Headwinds in terms of rising interest rates as well as rising commodity prices. So as a strategy or trading call, these kind of small buying in or selling out continues to happen at every fund house and so is the case even with us.
So to your mind, where do you think markets are mispricing growth on the lower side and where stocks or sectors have corrected and the potential earning damage is not going to be all that incremental as markets are expecting or anticipating?
One thing is very clear that India is a market which is not completely-completely underpriced. We are at fair value. Also, India is not a value play, India is a growth play. The moment growth starts to happen in India, there will be a lot of sectors which will start to trade at a significant premium.
Probably the consumption story still holds true in India. We are a country with more than 100 crore people. We are a country with growing income levels. We are a country where a majority of the people have been benefiting from the growth in the rural economy as well as the growth in the overall economy. So I think the consumption story holds true. For pharma and the IT story, as we mentioned earlier, they hold true.
Also, we would be quite keenly watching the capex as well as the construction space because ultimately I think even to contain inflation what India needs is good infrastructure and supply basically being focused on rather than trying to curb the demand. These would be a few growth sectors which you would be keenly observing and as soon as the India growth story again pans out, probably these would be few sectors which would start to see a lot of interest.
Not to mention the fact that financials will continue to be a very, very important part not only of the Indian economy but also of the market, 25% of the market cap is basically financials. Even for the economy to grow, banks and financial institutions become very, very important. So that will continue to be a very significant growth sector to watch out for.
Pharma was the big bet for Reliance Mutual Fund in the year 2009, which worked like a charm for you. PSU banking again was a big bet for you in 2010, which initially worked for you. For 2011, will it be construction or will it be financials?
I think construction should do well, but the fact is that the companies there are quite small. So you cannot have a 20%-25% exposure to construction companies in large diversified funds, but we continue to be hopeful. Though there is a lot to be done on the execution space in almost all the segments, whether we build roads or any other infrastructure part. So that is something where we would watch for execution to happen.
I think financials and pharma will continue to be again interesting bets and depending on the price points are overweight and underweight, but we continue to be quite positive on that space. There are other segments. Probably at some point in time telecom might become interesting.
What is your own sense about the kind of appetite there would be for fresh PSU paper? I mean there is ONGC the FPO is lined up, SAIL, Shipping Corp. There has been decent response to such paper in the past, but given where the market is right now, and I know that you are saying that it is what we have seen right so far is really not an indication of how things will be down the line, but do you still think that these PSU papers in the market would bring back perhaps retail interest or right now people would still be a little skittish?
If you actually see the trend all fresh offerings, whether they have been from the private sector or the public sector, if they have been priced properly, have met with very, very good demand. There is nothing to basically lead us to believe that, that would not be the case going forward. Few of the issues from the government stable are good, large, stable companies and if they are priced attractively, we do believe that not only from the domestic retail and HNI investors, but also from global investors, you will see good demand.
So there is nothing from our side to believe that things have changed. Also memory is very short. Till Diwali day last year we were all talking about a very good year and how Indian growth story was panning out and suddenly things changed over the last 2 months. Again our belief is that once inflation fear start to come under control and government spending happens or starts, both the liquidity issue as well as the inflation worries would be behind us and would be forgotten.
What we would be basically looking for is execution from the government on a lot of promises it has made and we are sure that the government is also looking at what is happening and they would also be more concerned than we are as investors. So once that is in place, the markets will definitely stabilise. Probably it would assume their stable upward journey and everything will be forgotten. As far as the challenges are concerned, to reiterate if the issues are priced rightly, we do definitely see good appetite.
Which are the sectors that you would completely avoid in this market? I would reckon that real estate would be one of them?
From our perspective, the price points become very important. A bad sector can be a good pick depending on how much is discounted in the price and vice-versa. So, again to put a sector in perspective, which we will avoid would be out of context. I think what we are trying to avoid is companies which are usually over leveraged because in a situation where liquidity can remain tight for longer than we estimate, probably those companies might see a lot of short-term pain.
The quality of balance sheet and the quality of the company would be more pronounced now rather than a sector which we are basically talking about. Real estate also is one sector which we divide in parts. There are one set of companies which have true cash low based models, which have lower debt levels, we like those companies. There is other side where it is only about land bank and huge leverage. I think that is a set which we tend to avoid. But going forward, it's going to be the price which is going to determine, from our perspective, which are going to be the interesting sectors and not.
Before we wrap the inflation fears, you think markets have are overdoing the impact assessment there or it’s a very valid fear and it really could have a really nightmarish situation for Indian companies going forward?
It is definitely a very, very valid fear and it is not only about companies, it's also going to be about the general retail janta of India. Food inflation hits everyone. Food inflation impacts everyone and to believe that India can grow with vast majority of the people facing a lot of problems in meeting their day-to-day needs, is a far-fetched dream. So inflation is definitely a valid concern.
What we would like to see is that the government tackles the supply side rather than trying to curb the demand side and supply side will come from better farm sort of legislation, openness, encouraging more hybrid seeds. You see the example of BT cotton where the output has really, really doubled. India needs that probably if we can focus more on the supply side whether it be on the agri side or even on the commodities, we have our own resources of coal, we have our own resources of iron ore, almost every other ore.
Now what we need is good mining policy which can bring that over and produce goods which can sort of meet the needs and curb inflation. That is basically what the focus has to be and it’s a very valid concern. Hopefully the government is also surely going to act on it and we would see the back of it soon.
For the next 6 months, for the next 10 months, what kind of nifty range are we steering at upward bias, downward bias or we actually could scale up to a new high this year?
See, we have already seen a sharp reaction and our personal take would be that we would definitely see a challenging year, but our bias would definitely be on the upside. I do not want to give you a range or anything, but one thing which we are confident is that long-term investors who view India from a 3 to 5-year perspective will surely make decent returns in India.
The hypothesis of India growing 4 times in the next 10-12 years is surely there and we definitely believe that Indian economy will be 4 times as large, that is in the next 10-12 years. So I think if that is the hypothesis which investor share with us, there is definitely going to be good returns to be made in the Indian stock market.