Every correction in the equity markets gives an opportunity to long-term investors and they should take advantage of the volatility, says Sailesh Raj Bhan, deputy CIO-equity at Nippon India Mutual Fund. In an interview with Chirag Madia he said that if cities like Mumbai and Delhi could control the virus in the next two-three months, it would give huge boost to the economy. Excerpts:
What is your view on equity markets, can the rally sustain without the earnings?
There are two ways to look at it, first is coming from the fact that in the period of March, markets had gone into an oversold zone. Secondly, I agree with the fact that visibility of earnings is missing, but as we progress towards this financial year, earnings should improve. There is an expectation that for FY22, numbers should be way better than what we are seeing today, and investors are investing with a three-five years time frame. I acknowledge that near- term earnings might not be great, but people with medium-term horizons can continue to have investments with that kind of time frame. I am saying that next year would be better because the base is too low, we have already lost two months of business and in June we got half a month back. As we enter the festive season, we should do better than the first quarter as we move towards the third and fourth quarter of this fiscal, we can be a little more comfortable with the visibility of earnings. Broadly if you look at markets, returns have come from a few stocks only & yes, there has been a pullback which is little faster than people were expecting. However, we are still 15-18% lower than our peak. We also feel that lockdown was created for our own safety and I think as we enter next year, we will have broader visibility on the earnings. Only thing is that markets are not cheap as it was in March.
When can we see a broader rally in Indian equity markets?
It’s a question of change in the risk perception. For example, in pharma sector the risk perception reduced a few months back and we saw a massive rally. Similarly, we have many pockets of the markets which are in that zone today like public sector undertaking (PSUs), stocks in oil refineries. As and when investors starts believing that the sector to be less risky they will start moving to the broad-based areas of the market. Directionally, we believe that over the one-two years period things should get better.
If current crises continue to remain, what implications can it have on Indian economy?
We have quite few challenges today. First in the micro, small and medium enterprises (MSMEs) and another is a broader challenge regarding cash flows and lack of confidence among corporates as well as consumers of this uncertainty. Several corporates have pulled back their new investments and costs. In fact, if we look at the results, profitability of several corporates has increased, and revenues are falling less than people are anticipating. Now, with economic activity coming back at 50-60%, there is some improvement in visibility and confidence that things would be better than what we initially thought. As we go into the festive season, we might come to 70% of economic activity back to normal. Even if big cities like Mumbai and Delhi can control the virus in the next two-three months, it will give huge boost to the economy as they are big drivers of gross domestic product (GDP). Even now the rural economy has seen strong pick-up, oil prices are low which has supported the government finances, interest rates are cheapest in a long-long time. So, I think things can improve in the next few months once confidence is back.
What is your strategy while managing the equity funds?
In the current context, we see three broad sectors in markets today. First being sectors like telecom, pharmaceuticals, consumer staples and utilities where there is minimal shock due to the pandemic. Second is where stocks in hotels, retail and all urban services have been massively impacted by the novel coronavirus. Third is the areas where there has been some impact but sectors such as autos, cement and consumer durables can come back sharply as things normalises.
So, in all the three segments we are participating differently. In first segment, we have near equal weights compared to the benchmark as valuations have been on the higher side. In the third category, the valuations are low, and potential of recovery is high. If we look at the cement sector, volumes were extremely low in the last three-four years. Even if you look at auto, it had worst problem in the July-September period post elections. All these companies are cash generating business and if things normalise, both PE multiple and EPS rerating is possible.
Another theme which we are trying to play is the consolidation theme. Due to this crisis and previous challenges, lot of business is moving towards few players. We are aware about it in telecom, but it is also happening in finance where banks are getting more business than NBFCs, top five banks are getting larger market share. In every category, where there is problem of financing, the market share is shifted to larger players. All these will give us exceptional opportunity in many sectors. And we are segmenting our portfolio this way.
You have been managing Nippon India Pharma Fund and this sector has rallied in the last few months. Do you think the rally can sustain in the time to come?
There were few challenges in the pharma sector in the last three-four years. In the period between 2010-2015, earnings of pharma sector grew by 30%. But since 2015 we started seeing some US Food and Drug Administration (FDA) related challenges which impacted the growth of Indian pharma companies. So, pharma sector was in bull market till 2015 and since then it had three and half years of consolidation. In the last one and half years, it has started to do good in terms of earnings. Few reasons why pharma sector has done well is because improvement in US FDA related issues and larger shares of profits coming from domestic business. Pharma companies had around 30% of their business from India, which has now increased to 50%. I believe that going forward, pharma sector has ability to double its earnings in the next four-five years.
Despite Indian markets going up, equity funds have failed to deliver returns. How would you convince investors to stay invested in equity funds?
In the last two-three years, most of the returns have come only from few stocks. Broadly speaking, it is to do with extreme narrowness in the markets and frankly we cannot predict which segment will move up or down in the next quarter. As I said as risk perspective stabilises, lot more business will see comeback and we might see the broader rally. Once there is broader rally, returns will further improve for equities going forward.
Which category of the markets should investors look at this point of time?
I believe that every correction in markets throws an excellent opportunity to the long-term investors. In fact, investors should take advantage of the volatility. Equity is one of assets class and there is no other financial asset that can give better returns than equity over the long period of time. Having said that, currently, there are opportunity in largecap, midcap and smallcap. Since 2017, midcap and smallcap were not doing well and largecap have suffered in recent times. Typically, 70-75% of the market capitalisation of Indian markets is in largecap and remaining in midcap and smallcap. Investors should use this as a reference point and do their allocation between all these categories.