We see a lot of value in small-and mid-caps: Viraj Mehta, Equirus PMS

Indian enterprises do well in spite of the government and not because of the government. I think, markets will do reasonably well, irrespective of which party comes to power, Viraj says.

Stocks might look volatile currently but if someone's investment horizon is of two-three years, equities should return five - six per cent above inflation, says Viraj Mehta, managing director and fund manager at Equirus PMS, in an interaction with Swati Verma. Edited excerpts:

Stock markets across the globe, except India, have given decent returns this year. Why is the euphoria missing in Indian stocks?

It is a function of time frame. If you only look at the calendar year 2019 (CY2019), then it can be said India has underperformed global markets such as the US. However, if you take a six-month horizon, then the performance has mostly been in line with the global peers. Hence, I feel it would be wrong to say we have dramatically underperformed the global markets.

How much impact will general elections have on the stocks? Do you think market is going to take a substantial hit if BJP fails to come to power?

Two things. Historically, markets have always got elections wrong. Markets always fear elections because there could be regime change and policy changes but there will be winners and losers emerging out of that. Secondly, overall, markets have done well in India, irrespective of which party is in power. Indian enterprises do well in spite of the government and not because of the government. I think, markets will do reasonably well, irrespective of which party comes to power.

Where do you see Sensex and Nifty at the end of CY19? What are the major factors/cues that will guide the market from here on?

It would be difficult to give target for the S&P Sensex and Nifty for such a short period but we feel equity as an asset class has the capability to beat inflation with a reasonably large margin. If someone's investment horizon is of two-three years, equities should return 5-6 per cent above inflation.

Among factors, we feel liquidity is still tight in the system, which is delaying a lot of discretionary spending and consumption-led growth. However, government has initiated a lot of measures such as farm package of Rs 75,000 crore and increase in income tax exemption limit which will put more money into the hands of the consumers.

Secondly, we expect inflation to remain benign and another 50-100 basis points (bps) rate cut over the next year and a half, which means monetary stimulus will also be part of the system. So, on one side fiscal stimulus and the other side monetary stimulus, will help bring in liquidity, and thus drive growth. 

Do you think sops announced by the government will take a toll on fiscal math?

I think it will have a certain impact on the fiscal deficit. Our glide path to 3 per cent fiscal deficit remain extremely uncertain. If you look at the FRBM (Fiscal Responsibility and Budget Management) Act, we were supposed to reach this 3 per cent fiscal deficit in 2008-09. It's been ten years, we haven't been able to reach that and I don't think we are on the path to reach there even over the next three-four years. So, fiscal numbers remain a bit shaky. But, it is not out of hand... it's not that bad.

How do you see the Q3FY19 earnings numbers? What will help bring revival in the corporate earnings?

I think Q3 earnings has brilliant topline growth of 16-17 per cent. The only reason why we saw erosion in margin and flattish bottom line growth as all the commodities led to inventory losses across the value chain. But, I am happy with the commentary and volume growth that companies have delivered. Bottom-line growth has not been that encouraging but signs are extremely encouraging as far as volume growth is concerned. So, reasonably happy, what India Inc has delivered.

I think the government spending will come to a halt during elections and some part of the system, especially, capital good segments, will see a complete stoppage of revival in the couple of quarters. But, spending in consumer-oriented and consumer discretionary space will continue to happen. So, in the divided market, IT sector will keep churning out 8-9 per cent of growth.

Hence, overall I don't see any blockbuster numbers to begin the next fiscal year but as we move into the year and as the money starts flowing into the system, irrespective of which party comes to power, we will see super second half of the fiscal year. 

Auto stocks have underperformed benchmarks in the last one year. What's your view on it? Do you expect recovery in the space in the near-term?

I feel we should look at a slightly longer term. Auto companies had a dream run in the last five years -  from 2012-2017. All of them had solid bottomline, topline and margin expansion growth. The market cap of the companies grew manifold during the period.  If these companies have a breather for a couple of years, I don't think it is such a bad thing.

In commercial vehicle (CV) segment, we can see a lot of pre-buying because of BSVI, will come into force next year, but I don't see any quick recovery, either in two-wheelers or in passenger vehicles (PVs).

Are you facing any redemption pressures in any of your schemes? Do you foresee such pressure anytime over coming days?

No, fortunately we have a very good set of clients who understand that market will be volatile but the only way to make money over a longer period of time is to stay invested in equity markets.

So, we have not seen any redemption pressures, though, the inflows have slowed down considerably.

Is that a concern?

I think It is a cycle. I feel once the elections are over, we will see pick-up in the inflow.  

How do you see the trend in mutual funds… slowdown in inflows in systematic investment plans (SIPs)?

We have a PMS; we don’t really run a mutual fund. But, if you look at the SIP closure number, they are one of the highest over the last two years. Industry, as whole, seems to have taken some slowdown number, for sure but I don’t think it is a concern because it is always going to be a cycle. Money can’t come in and keep coming in and vice versa. Any cyclical industry has to live with it. As an industry, asset management is at a cusp of growing assets for next 10-20 years, but it is going to be in cycle and I think it’s one of those periods when the cycle will be slow.  

What is your investment strategy in the current market scenario? Top bets?

I would suggest to be a slightly contrarian and see where the value is. We don't believe in buying growth at any price. We only invest where we see the value. Currently, we see a lot of value in small and mid-caps, select PSU stocks, select PSU engineering stocks, gold financing, capital goods and agro-chemicals.