Consumer discretionary, retail finance and cement will pay off now
Akash Singhania, Head-Equities at DHFL Pramerica Asset Managers, shares his views on the economy and markets. Excerpts from the interview:
Signals that come from the economy are mixed. Inflation is rearing its head again. How do you see growth, going forward?
Among developed countries, growth has been a challenge. The World Bank has revised global growth projections for 2016 to 2.4 per cent now, from 2.9 per cent forecast earlier. On the other hand, emerging markets have grown and India stands out as one of the fastest-growing economies. Macro-economic factors such as lower inflation, monetary easing by the RBI, reduced current account deficit and fiscal deficit have helped.
What has not really worked for India is the fact that the investment cycle or capex cycle is yet to pick up, though consumption is strong. Initially, this was stalled because of problems with regulatory approvals, environmental clearances, etc. But even after overcoming these hurdles, there are challenges of over-leverage and low utilisation, and hence, a lack of incentive to add capacity. Going forward, with lower interest rates and higher demand, utilisation is expected to pick up. And as we see balance sheets getting repaired, it will lead to a recovery in the investment cycle in the next one to three years. It has started in segments such as housing and cement, where consumer is the end user.
Do the March 2016 quarter results show promise?
The March quarter has definitely brought optimism. After five quarters, the negative topline growth seen earlier gave way to positive growth. EBITDA margins were also at a 20-quarter high. For the Sensex companies, profit growth was at 7.5 per cent. We are seeing that after five quarters, the earnings trajectory has clearly bottomed out and is going up. From here, even if commodity prices go up, topline growth will help earnings.
Despite volatility and corrections, mid-cap stocks and funds have done well in the last two-three years. How long do you expect this to continue?
At this point in time, large-cap indices are trading at around 16.5 times one-year forward earnings, whereas the mid-cap index is trading at 17 times. Empirically, we have seen that mid-cap indices generally trade at a discount because of the size, liquidity and stability of large-caps. Considering the premium valuation, one needs to be careful now. But mid-caps continue to be attractive on a stock-specific basis. So, there are a lot of bottom-up stock-picking options in this space. However, from a valuation or a safety vs risk perspective, large-caps look more attractive now.
Which themes do you think will pay off now?
The theme we are playing on is consumption or consumer discretionaries, in particular. Apart from expected normal monsoon, the possibility of the GST Bill being passed and Seventh Pay Commission benefits are expected to favour stocks in this space. One can also play this theme indirectly through financials or NBFCs, which are more geared towards retail financing. Urban/rural finance, home and vehicle finance players will be beneficiaries. Cement, again, is a combination of investment and consumption, as it includes housing, construction and roads, too.
What is likely to be the trigger for the next rally?
We are not making a case for a rally as of now. On a near-term basis, there are headwinds from Brexit, possibility of the US Fed hiking rates during the course of the year and a slowdown in global growth, including China. However, over the long term, returns will be attractive. In the last 10, 15 and 25 years, markets have returned a compounded annual growth of 12-15 per cent. In the last 15 years (since financial year 2000-01), earnings have grown at around 12 per cent. Going forward, too, earnings growth of 12-14 per cent is expected in the medium to long term.
Why have foreign mutual funds been moving out of India? What will keep you going?
While several foreign mutual funds have been selling out, many of them, such as Schroder, Invesco or Pramerica, have invested in India as well. What I have noticed is foreign banks, because of their stringent capital requirements, are reluctant to carry on businesses across the globe which will guzzle more capital. On the other hand, pure asset managers or investment managers have increased their commitment.
For us, the acquisition of Deutsche MF has strengthened our team, product range and investment expertise, besides bringing about an increase in assets. In DHFL, we have a local partner who has a good understanding of the local market and a wide network, which provides support on sales and distribution.
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