Consumption-sector is very robust in terms of underlying growth and attractiveness of the business. However, its valuations have gone haywire. If prices become stagnant or even fall and earnings catch up, that would make the sector attractive, said Rajeev Thakkar, Chief Investment officer (CIO) at PPFAS Mutual Fund, in an exclusive interaction with Puneet Wadhwa and Swati Verma. Edited excerpts -What’s your view on the markets and what has been your investing strategy in the last one year?
Since the last 12 - 18 months, equity returns haven't been that great and flows into the equity markets have also slowed down. But, given that our base is low and our flows are not typically representative of the industry and also we have been cautious in small and mid-cap space, NBFCs and some of the overvalued consumption names, we haven’t been impacted significantly. Also, some recognition to the international diversification strategies is coming to fore in people's mind, which in turn, is helping us.
How convinced investors are about the purchase of Amazon's shares? Are you looking for more such purchases?
Investors have been comfortable with this purchase. We already had foreign companies such as Google, Alphabet and IBM in our portfolio. Amazon has mature profitable lines of business. At the same time, they have some loss-making businesses too. So, to an extent, they offset each other. Overall, we found there is value opportunity in the business. However, we will wait for the thesis to play out before ramping up the allocation.
Do you see more investment options in India like we have Netflix, Alphabet and Amazon overseas? Do you see investors lapping them up?
What has happened, not just in India but in other countries as well, is that a sizeable pool of money has got created in the private equity (PE) / venture capital segments. For example, Softbank and cab aggregators such as Uber, Ola and Lyft are not listed players. Similarly, in India Flipkart grew to be a unicorn and then got out sold to Walmart. But, people here are not able to invest in that. Then the online travel players like Make My Trip and Yatra are listed overseas and not in India. So, this problem will remain till the time such an ecosystem prevails in India. Even if a listing happens, it may be post the growth story has already played out. Therefore, the valuations will be steep.
How comfortable are you with the current valuations of Indian stocks?
Overall, valuations are somewhere in-between – that is neither excessive nor down and out where everything can be bought across-the-board. We have been cautious on segments such as small-and mid-caps, NBFCs and consumption-related names. Small and mid-caps have witnessed significant correction in the 12 – 18 months. NBFCs, too, also corrected; but consumption-related stocks are still very expensive. There could be time or price corrections where earnings have to catch up with the stock prices or valuations. With the exception of these segments, the market valuation is in a comfortable zone.
What about banks and NBFCs?
Any financial business should have advantages on both sides – deposits and lending. A company strong only on an either side does not make for a great investment. That came to the fore recently, where people who had indiscriminately just lent money, suddenly realised they are not able to rollover the commercial papers (CPs) and non-convertible debentures (NCDs) that they have issued. The Reserve Bank of India (RBI) for a long time has been closely monitoring the banking balance sheet and problems were reported after which banks were forced to address those. NBFCs, to an extent, have been out of sight kind of area where people are left to their own (self-regulating) mechanisms. Given that scenario, banks relatively are well-positioned.
What will make you look at the sectors that you are cautious on currently?
Consumption basket is very robust in terms of underlying growth and attractiveness of the business. It's just that valuations have gone haywire. If prices become stagnant or even fall and earnings catch up, that would make the sector attractive. Rather than painting the whole sector with the same brush, individual opportunities may exist.
What's your view on corporate earnings?
One segment which was lagging in a big way was the banking sector. Normal interest spreads exist, but bad loan provisioning was so bad that a lot of banks were reporting losses. Now, we are probably at the fag-end of the NPA recognition cycle.
Another sector that was depressed was oil and gas companies because of high crude oil prices. I think that is more or less normalised now. Telecom is still in the price war. Once price wars ease out, profitability should come in over the longer run. In airlines, if one of the player exits or restructures then capacity goes out of the system, after which prices will come back.
We expect as much as 10 per cent fall and 20 per cent growth at the higher end in the companies where we actively invest. On average, 15 per cent growth in earnings is what we expect. That said, instead of waiting for a specific multiple on the Nifty50 index, one should scout for individual investment-worthy stocks.
A lot of experts have been trimming GDP growth forecasts and expect higher fiscal deficit. How do you see that impacting markets and then mutual fund investors?
Directly, there is not so much of a co-relation. GDP growth, over a longer term, should translate higher top-line and bottom-line growth for the companies. Sometimes factors such as pricing power and cyclicality play a much bigger role instead of GDP numbers, which varies few decimal points here and there.
Flows to SIP have seen a considerable slowdown. Your take on that.
In the entire discussion over the lump sum flows, one fundamental change which we tend to ignore is the new player in the space, i.e. retirement corpuses – the EPFO money which comes to ETF every month, the NPS money which comes to equity every month. Given that, the kind of flow is coming in passive funds, it's not surprising that Nifty and Sensex have held up so well when overall market is lagging. This, I believe, will continue. Fall in SIPs will continue. But, broadly, at our end we have seen bulk of SIPs coming. Lump sums, for sure, have dried up for the industry, but this is the nature of the sector.
Do you expect pick-up after the elections?
People who have been waiting for any event to conclude, they will come back, irrespective of the result.