Listed companies may see recovery, clock 17-18% growth in FY19

The Indian economy is on a revival path, which requires companies to tap the market seeking growth capital mostly through institutional placements. The correction of the kind we are seeing now also presents an opportunity to deploy capital, said Mahesh Patil, Co-CIO, Aditya Birla Sun Life Asset Management Company, in an interview with Ravi Ranjan Prasad. Excerpts:
What’s your investment strategy given that equities are looking vulnerable with rupee and crude oil dampening sentiments?

The developments during the past 3-4 months have redefined the view of the market. The trade row between the US and its trading partners, especially China, rate hikes from the US Federal Reserve, political uncertainty in Europe, especially in Italy, and the increase in oil prices. On the other hand, we have seen data pointing to moderate yet strong, and visibility of improving corporate earnings.

Our overweight positions in sectors like private banking, rural consumption and infrastructure remain across our funds. We have cut down risk in the portfolios by moving towards largecap stocks, sizing positions avoiding excessive concentration and constantly re-evaluating stocks for their earnings quality.

Both rupee depreciation and rise in crude oil price have huge ramifications on Indian economy. What’s your outlook on rupee and crude oil?

The rupee depreciated for four months in a row on fears of rising crude prices, leading to widening of trade deficit. While it’s difficult to predict both oil price and currency, the recent events could lead to lowering of crude rates. It would be low probability for oil to sustain above $80 per barrel for a long time. The US has asked Opec and Russia to lower production restrictions by a million barrels a day. Opec will, likely, decide on it at June 22 meeting.

A reprieve on oil price would be a reprieve on the rupee. The $410 billion of forex reserves and limited hot money invested by foreigners could help tide over the volatility in the currency. The recent rate hike by RBI would protect the rupee from further (sudden) slide.

The Indian market is becoming more domestic equity mutual fund driven. Thus deployment of funds for the fund managers must be a challenge…

It’s true that flows into mutual funds have been unprecedented in FY18. Due to introduction of long-term capital gains tax and dividend distribution tax on equity-oriented funds, we are seeing some slowdown. This could settle at Rs 15,000 crore a month, which is a manageable number.

On the deployment side, we have a fairly large number of stocks in our investment universe that makes us ready to invest when there is an opportunity. The economy is on a revival path, which requires companies to tap the market seeking growth capital mostly through institutional placements in which we participate. The correction of the kind we are seeing now also presents an opportunity to deploy capital.

Recent correction in the midcap and smallcap stocks must have opened new investment opportunities...

There has been a reasonable correction in the mid- and smallcap space, which is presenting with some opportunities. Among the 500 of the BSE500 stocks, half of them lost over 25 per cent of which 90 per cent belongs to the small- and mid-cap segment. Of these, there are companies that have good earnings visibility and are available at reasonable valuation after the correction.

Will the largecap, midcap and smallcap stock definitions coin­ed by Sebi and equity fund real­ignment propel the mutual fund industry in the right direction?

The categorisation exercise for our fund house is done. This step is in the right direction for the industry. The investors and distributors may have some confusion for the next few months. Beyond th­at period the categorisation he­lps them to understand the funds and their management better. Their investment would be true to label across funds and fund ho­u­ses. It is useful for the fund ma­nagers also because the investment set is well defined for themselves and for their competitors.

How has been corporate performance in FY18?

FY18 earnings season has ended with the Nifty index clocking single-digit growth. It is disappointing that yet another year ended with lower growth. The public sector banks, corporate banks, pharma, telecom and selective auto companies have led to such low numbers.

The growth in private banks and selective auto companies was good. The metal companies have also performed well. We also saw fairly good commentary coming from consumer staples and consumer discretionary companies and their growth outlook looks better than what it was in the past couple of years. Signs of recovery are seen in FY19 with companies clocking 17-18 per cent growth.

Monsoon seems to be arriving on time. Will it lift sentiments in the equity market?

Monsoon has arrived, which is a good start. The normal monsoon is a necessity for the farming community. The uncertainty of price has hurt farmers in the past. The issue of price realisation is understood and is being resolved. In the recent budget, the government announced a formula for minimum support prices (MSP). The market and farmers are eagerly waiting for MSP prices to be announced, which should bring relief to farmers. Implementation of the same is important.

H2 of 2018 will be marked by RBI’s interest rate calls, monso­on and political events like state elections. How are you positioning yourself ahead of these eve­nts, and how equity market will be impacted by these events?

Something or the other at any point impacts the market in time – politics, policies, rates, rains and trade. All of them impact in a positive or negative manner and we as market participants have to evaluate the durability of it.

Investors have to note that the data points in the global economy have been above trend (though they have moderated recently) indicating good growth. Domest­ically also, the growth is coming back. Earnings growth is coming back, which should help the companies perform well.

There is a lot of talk about elections in 2019. One year is a long time in politics to be judging the outcome leave alone portfolio positioning. In the last four elections, the returns from the market six months before & after have been significantly positive despite surprises. This shows that the impact could be in the short-term but not on the medium-term if the economic agenda continues.

Even in the midst of so many developments and expectations, a lower double-digit return expectation for the market over the next one-year seems to be a reasonable one.

Ravi Ranjan Prasad