Indian markets have appreciated by about 11% plus in the year 2012. If I look at the fundamental turf, the fundamental turf has not changed at all but still markets are rallying. Why is that?
We have also not been very optimistic, frankly, but one thing was very clear that we were discounting a lot of negatives at the same time. So, whether it was global negatives in terms of defaults by European nations, or Indian macro negatives, everything was already sort of getting built into the price and on the technical side, there were hardly any bulls on the street.
There was lot of despondency, there were some short positions. This rally has got amplified by small positives which have started to trickle in because of technical factors. Definitely, it is a very welcome rally from the market. It has led to a lot of building of confidence and people have started at least talking about equity markets.
It is a welcome and a relief rally but is this still a classic bear market rally and do you think we are still in a bear market?
It is a very difficult question to answer very upfront but one thing is very clear, we do feel that the downside in the market is limited and we do not see the market hitting new lows very soon despite all the worries which are there in the system.
Obviously, whether the rally has more legs or whether it can sprint, jog or go the whole marathon, will depend on a lot of factors. And the factors largely, apart from the global factors which look like more in control, are going to be more on the domestic side.
Even the RBI governor has clearly mentioned that the government needs to do a lot of things. We cannot afford a fiscal deficit so high. We cannot afford to split, not meet our fiscal deficit targets or other measures. That is going to be the crux which will depend on how strong the legs are to the rally.
2 clear bets, one is banking and the second is pharma. Banking is cheap but pharma is expensive.
Pharma as a sector, one might find it expensive but our belief is that there are enough stocks which are growing much faster than the markets and those are the stocks where disproportionate returns are going to be made. If you go through our portfolio, you will see a lot of non-consensus kind of bets in our portfolio.
Our focus, specifically in the growth fund, has been in identifying non-consensus bets sticking with it from a 3-5 years perspective. Obviously, in the last 1-1.5 years, the market has discounted more with the larger companies and favoured the larger companies... the off-consensus bets have not worked. But our belief is that once the market starts to become a little bit normal, these are the off-consensus bets which would give the alpha to the portfolio.
But your portfolio has seen a lot of churn. Financial Technologies has made their comeback, there is a Tata Motors there, GSFC is making a comeback, HCL Technologies, one of your large holdings... This reminds me of the 'old Sunil Singhania portfolio' of 2005.
One thing is that there are times when you need to be aggressive and there are times when you need to just sit quite.
So, you are aggressive right now?
We invest to make money, not to lose less money. If you see the trajectory of profit growth of the stocks that you mentioned, that would be far superior to the markets. We have done a study... we took Reliance Growth Fund as a key portfolio where we did the study.
Even for the 6 months ended September, for the key stocks in the portfolio, the profits have grown by nearly 20-25% vis-a-vis the -8% for the BSE 100. Even if you remove the oil stocks, BSE 100 grew only at 8%. What we are trying to do is, there is value in the market but we have to marry value with stocks which also have growth potential.
Some of the stocks which you mentioned are deep value, at the same time they have decent growth going forward. You mentioned churn... actually these stocks have done so well that they have started coming higher in the portfolio because of the price performance.
Obviously, there is some churn which we do but the focus is going to be in investing in stocks which can be with disproportionate returns from a 3-4 years perspective.
We had the chat before and this is one painful position for you, which is infrastructure space... How do you plan to approach that sector, that business, that group, that cluster?
Infrastructure, if you see, has been a phenomenal sector from an investors' perspective from 2003-2008. Obviously in last 2-3 years everything which could go wrong in the infrastructure space has gone wrong and we have spoken about it earlier also, so whether it was policy actions, interest rate scenario, balance sheet, or the news flow because by nature this sector, you have to have some connect with the government because it is a sector, which is driven by government policies and government actions.
Unfortunately, it has not worked. As we speak, there are lot of companies which have stretched balance sheets. There is going to be a bounce in the prices of those stocks because of the fact that they have fallen so much. But our call would be that invest in companies in the infrastructure space which have better balance sheets than others because we do believe that this is a space without which India cannot grow.
And it is an interesting space, it is an exciting space, it is a volatile space. So, you will have to manage your risk within the portfolio quite well. If you have 2%-3% investment in an infra stock in a diversified fund you can take that risk.
As far as infrastructure fund is concerned, the investor is very clear that we are investing in the infrastructure space. We do believe that the space has not done well over the last one and a half years, but the potential is huge and we are very sure that once action starts these are the stocks which can multiply because they have fallen disproportionately.
If you see year to date, you mentioned, index has gone up by 10% or 11%. If you just break it up, the defensives have not done anything. Whether it is FMCG, to some extent even technology, and even some of the pharma company, or on the other hand the high beta names have done phenomenally well. It is because the impact of an interest rate cut or government action on these sectors is going to be much more positive than on the other sectors.
My follow up question is: do you think this trend will persist which is underperformers will make a come back, laggards will make a comeback and performers will take it easy may be because of global risk appetite, may be because of valuations but is it time now to go easy on FMCG and pharma, selectively?
We have taken the fundamentals and variety of fundamentals, some 22 factors, and analysed them over the last 9-10 years. And across, FMCG stocks are trading at the highest PE they are ever traded over the last 8-9 years. Now they are good, there is huge population in India, there is rural demand, but the conditions are not so vibrant that all of them should trade it multi or high PEs.
So, our belief is that yes these are good quality companies. They have lot of potential, overall they will continue to grow but it is possible that for the next one-two years either they do not move or there is some reactions. From our perspective, we are interested in buying good companies but those good companies should also be good stocks and there is a lot of difference.
Mutual Fund firm always say that past performance and past track record there is no guarantee of future?
That is exactly what we are trying to tell you that what has happened in the last one-one and half year might not continue in the future.
So you are confident of outperforming now?
I would say that we have everything perfectly right and our thought process or our philosophy or our portfolio construction is perfect. There are obviously many a slip between the cup and the lip but we are confident that we are stuck to the philosophy, this philosophy has worked for us in the past and we are very sure that it will definitely work going forward.
There is a old maxim in the market which is good news and good bargains they never come together. Right now the news is bad and bargains are good. So where to your mind there is deep value in this market beaten down metals, thrashed out infra stocks or completely ignored PSU banking stocks?
Markets over the last 15 years, these cycles come, SOTP value and a value of your resources, value of your factory, land, these are all bull market things and in the bear market, even your own capacities and all are just discounted. People just want to see cash flows, that is a trend in the market. From our perspective, we have seen both. In our team we have 300 years of experience tracking Indian companies, so we have seen a lot of this thing.
In this case we have to be patient. We have to just see that where the value can erupt. There are some sectors like, say for example, metals. Things are going not too good for them because in a lot of cases there has been a ban in mining. There are some concerns over raw material. In some cases you do not get raw material. In some cases there is some land acquisition problem. Our expansions are not working out well.
There are some global issues but that can be a good sector to watch out for if you are fully integrated. Luckily in India we have some really large, well managed companies, which are fully integrated, so that can be one good theme to look out.
So metals is one big contra bet?
It can be. I am not saying that it is today but it needs a lot of attention and focus and continuous watch because suddenly things can change. The operating leverage is very high. The other thing, which I mentioned, I mentioned about the nine-year thing and how FMCG companies are trading at an all-time high.
There are so many capex companies who have zero financial leverage because they are debt free but you have huge operating leverage, so the moment their capacity utilisation on the sales grows by 30-40-50%, which is a possibility because last two years, there has hardly been any capex. The translation to bottom line can be disproportionate.
You mean to say something from the machinery space, something from the capital goods space?
Yeah, engineering space basically. Even you are mentioning about auto ancillaries. Some of these auto ancillary companies are now sizable. Earlier auto ancillary companies in India were very small or they were linked to one big automaker who used to squeeze them not giving them margins. Now there are 15-20 automakers in India, very large sized, so the choice for the auto ancillary has also widened.
Additionally, because a local ancillary of the global automaker is dealing with the domestic ancillary, there is more comfort in importing also for their global requirement, so that also can be a big theme. We have to also remember that the competition for India in this is with China and Thailand.
China has become a little bit less competitive because vis-a-vis the Chinese currency, rupee is down by more than 50% and in Thailand you have had issues relating to floods and all. So the global companies are thinking that they need two sources for everything they want to import, that again can be a big theme.
Then, there are traditional Indian strengths. We mentioned about pharma. It is a big opportunity. Pharma companies in India are now making 1000 crores, 2000 crores in profit, which gives them the leeway to fight the biggest of big companies anywhere in the world and that is turning out to be a big opportunity.
So pharma looks okay even though PE multiples are 20+, 25+?
You have to bet on stocks there. Overall if you see at the pack, you will have 20 or some of the larger companies but individually there are a lot of companies. US has already seen the benefit of generalisation scene or one drug Lipitor is going to save the government $5 billion.
Japan... they have a very clear thought process of taking generalisation from 18% to 50% over the next 3-4 years, that again can be a big opportunity because we have to remember that these savings go directly into savings for the government and reduce their fiscal deficit. All these countries have huge fiscal deficits.
Then there are other traditional companies in the chemicals, that's a big export opportunity, so the good thing about India is that we are very diverse. We have everything across sectors. We have a lot of entrepreneurs, so if five entrepreneurs lose hope on India, there are 500 who want to expand.
What we need is just a little bit of support on the policy front, a little bit of support on the financial front because if equity and debt both are not going to be available, then there is not much that an entrepreneur can do. Once that falls in place, the good thing is that we are a diverse country, the opportunities can be really huge.
What happens if we do not get a policy support?
We are optimist. When we meet distributors and investors, this is exactly what they ask. For the past one and half years they have been asking these negative questions: what if Italy defaults, what if Spain defaults, what if inflation becomes 10%, what if oil becomes $140...
Now I ask them to be a bit positive. So, the theme is the same 'what if' but with a positive bias. So what if, instead of red, should be in blue. Now the questions are: what if inflation falls to 5%, what if interest rates fall to 8%, what if oil falls to $80 or what if rupee again becomes 47-48, what if policy action start to happen... and all these things are happening.
Once you start getting into that positive mind frame, the investors will start putting money in the equity markets. The equity markets will be buoyant that will allow the entrepreneurs to get a little bit more positive.
And one thing we have to remember, we see the same media, the same TV channels and the same newspapers... it is time they start talking positively because ultimately it has an impact on the overall sentiment as far as the country growth is concerned and that is what the Prime Minister has also said in his meetings.
So, 'what if' in a positive way also should be the question which each investors, each entrepreneur, each industrialist should start asking.
For any market to thrive you need two things number one is liquidity which is a function of global macro then you need valuations and third you need sentiment. Do you think valuation wise we may correct 10% but in terms of sentiment we are in absolute rogue bottom and we are indeed at a bear market look?
There are some data points. We had a detailed note which we sent to our investors in August and September. If you actually compare vis-a-vis with the last time so between January 2006 to January 2008, which was a peak, and the last peak we had Rs 85,000 crore coming from retail investors either into mutual funds or into equity markets directly.
In the last two years, you can say January 2010 to January 2012, we had Rs 50,000 crore go out of the equity markets from retail investors either by way of redemptions in mutual funds or direct sales. The scenario is completely different and in the last two years household savings have cumulatively been $600 billion.
You imagine $40 billion worth of gold being bought every year and the total mutual fund equity assets under management are $40 billion. Money is there, NHAI bond in a single day can collect Rs 20,000-Rs 25,000-Rs 30,000 crore. Money is there with the people, it is all about sentiments. Once that improves you will see lot of these thing and coming and a lot of these questions will start to get factored in.
The valuations are a function of sentiment. PE is a perception... it is not price earning, it is perception. If India can trade at 25 PE, who are we to say that 13 is a right PE or 14 is a right PE. It is about perception. If the perception is good, the PEs can trade significantly higher. If the perception is bad then you will paint a very gloomy forecast of PPS and your PE will, even at a lower level, will look expensive.
So, can I read in between lines and correct me if my interpretation is wrong. Last time when we interacted with you on this forum just after Diwali, you are cautiously bullish. Are you now bullish?
I would not say bullish. As I said we had our doubts, and we still have our doubts which is very clear. This rally has been very welcome. It has, actually as I said, made more people think on the 'what if' on a positive side. But we need to have more action for this rally to have legs and that is going to be dependent more on the macro policy.
That is playing an important role in everything. Because of the macro policy interest rates get impacted, interest rates impact the corporate and the consumer sentiment, and it is a vicious circle.
In terms of importance of UP elections and budget, how important are they?
I am not a political analyst but whatever we hear there is a possibility that if the UP elections might become a little bit positive in the sense that the government and the centre gets a little bit strength then there is an expectation that the policy decisions might be little bit more aggressive. And that would be something which is positive for the markets.
Like last year, do you think budget this time around will be a no event or markets or fund managers like you. Are you really looking up to the government to announce something big bang in this year's budget?
Frankly, I am not a macro economist...
Just in terms of direction, in terms of a policy call?
This budget is going to be very tough because there were lot of promises which were made in last budget. And most of them were not kept... whether it is fiscal deficit or revenue targets or spending targets. This time whatever Finance Minister says is going to be taken a with a pinch of salt.
At the same time, there are certain steps which might not be completely financial steps but directional steps on policy front which might enthuse or disappoint the market. That is what the market is looking at. So whether it is again the same old subsidy things... whether it is fuel, fertilizer, food or it is a direction on whether we are looking at FDI in few sectors or not... These small things are going to be more closely watch than ever before.
I am not asking you for a commitment but in terms of an indication, do you expect equities or benchmark indices this year to appreciate by 10% to 15%?
It is very difficult call. We do expect positive returns from the equity markets this year. The other thing we have to remember is that in the last three-four years we have not made any returns in equity markets. Our belief is that there is a possibility that in the next three, four, five years we will make up for no-returns in this four years also.
That should mean that we should do slightly more than what we have been doing or we have been expecting the equity markets to do. Other thing is alternatives. Whether it is gold or real estate, they are slowing down... the appetite from investors is slowing down. Right now, interest rates are very high which is a very good option for investors.
Our belief is that interest rate, structurally, should come off. Then, it is possible that after three-six months, this option would also reduce. When the redemption from all these investments come in, there is going to be an increasing appetite for equity markets which should not only help the equity markets but will also provide the capital for companies to grow. That can lead to a cycle on the positive side which will mean more capacity additions and more earnings upgrades and so on and so forth. So, we are very positive from a longer term perspective.
For those invested in gold, is it time now to sell gold and buy equities a broader asset allocation?
Again, I am not an expert in gold but I continue to be positive on gold. The returns which gold has given over the last eight-nine years might not be possible year after year but as an asset class, it has started getting accepted in countries outside India.
China has become a big consumer of gold and it is not only the Chinese Reserve Bank but also the individual Chinese. In US, one single gold fund is at $70-$80 billion. There also people have started appreciating the fact that it is an asset which is a hedge to your other assets which will include equity and fixed real estate.
So, the lure is always going to be there and as long as you are doing an SIP or a systematic investment in gold you should not worry.
Final question, no tricks here, frank honest answer from you. What is Sunil Singhania the Fund Manager's big bet for 2012?
The big bet is going to be India. But as I mentioned to you, the big bets are going to be stock specifics because that is where the beaten down names are there for you to be able to invest. These are going to be the companies, the stock specific companies, you have to bet on a promoter, you have to bet on companies which are unique... and if you see our portfolio at least find names which we feel have a lot of potential.
But we do believe that the differential in valuations 40 to 4 or 40 to 8 is definitely going to narrow. Either the 40 PE stocks have to come off or they have to be something the very extraordinary or these companies have to start moving ahead. One good thing is that the balance sheet of even smaller companies is much better than what it was earlier.
By and large there are definitely few sectors where there is a lot of stress like real estate and infra but by and large the balance sheets are very good so the big bets are going to be in stock specifics rather than sectors.
There is a SEBI issue there, I know you have compulsion, you cannot tell me names but there is no SEBI compulsion on the name of the promoters. You can tell the names of the promoters you are betting?
It is same whether you catch the nose this way or that way. I do not want to name because there are so many names which are interesting. We will have to do a separate programme where we just read out names. The good thing is that we are still focused on that segment.
90-95% of the new assets which are coming, are going in large cap companies. We believe that the smart investors are ones who are going to start diversifying their portfolio and renewing their faith in the stock specifics.
India is a country of growth, India is a country of entrepreneurship, India is a country of opportunity and opportunities, while being therein some large, very well managed companies, are going to be there in a lot of these smaller companies.
Source: http://articles.economictimes.indiatimes.com/2012-01-28/news/30673709_1_indian-markets-fundamental-turf-sunil-singhania/5
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'I made my money by selling too soon.'
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