Replying to Sarika Kodag and Yash Ved of IIFL, Rajiv Shastri says, “Our economy is in a situation where CPI is on a downward trajectory, hovering below 5.5%, i.e., within RBI’s comfort zone.”
Where do you see the markets heading by March 2016?
We do not have any target per se, as we follow a completely bottom-up approach. We believe the current challenging economic environment will persist for some time. We endeavor is to invest in companies, whose business stands to benefit from such an environment.
From the bond market’s perspective, we expect a prolonged pause in US rate hardening cycle and given our inflation trajectory being in RBI’s comfort zone, we see RBI cutting rates by 25bps before the fiscal year ends. In this context, we remain positive for domestic bond markets in the last quarter of the current fiscal year.
In your opinion what is the current health of the Indian economy?
Our economy is in a situation where CPI is on a downward curve, hovering below 5.5% , i.e., within RBI’s comfort zone. Real GDP growth seems to be picking up; nominal GDP is not growing as fast though. There aren’t many instances in the past when the GDP deflator (which represents the weighted average inflation of the entire GDP) indicates an economy-wide fall in prices. This phenomenon has an enormous impact on nominal GDP, which is growing at a much slower pace than the reported real GDP growth. For example, even though real GDP grew at 7.43% in the quarter ended Sep 2015, because the GDP deflator was -1.39% (indicating a price fall), nominal GDP grew only by 6.04%.
This is significant because all corporate earnings and earnings growth numbers are nominal in nature and respond more to nominal compared with real growth. Corporate sales grow at a slower pace in the above scenario compared with the one in which real GDP grows at 7.43% and prices rise, say at 5%, which results in nominal growth of more than 12%. It is apparent that in such an environment, sales growth is increasingly difficult to achieve.
However, we believe that the Chinese slowdown and a gradual US recovery shall assist Indian exports. We also believe that domestic consumption and public capex may improve, reinforcing our belief that economy is recovering albeit at a slow pace and in a manner that may not result in high corporate sales growth.
Which are the top sectors you are currently bullish on, and what's the rationale behind your call?
We are sector-agnostic as we pick up stocks based on our internal scoring methodology and follow a complete bottom-up approach.
What is your AUM?
Our monthly average AUM was Rs. 1,064.78 cr. for November 2015.
Any plans to increase equity AUM?
Our primary focus is on developing our retail reach. We will always focus on increasing the AUM of our retail products, including equity.
What is your view on the current debt market scenario?
As mentioned previously, we expect a prolonged pause in US rate hardening cycle and given that our inflation trajectory seems to well within RBI’s comfort zone, we see RBI cutting rates by 25bps before the fiscal year ends. We also envisage prolonged softness in international commodities, including crude oil. We retain our positive outlook for Indian bond markets. We do have concerns though relating to agricultural inflation, global geo-political issues, and pace of crucial legislative reforms.
How are your funds positioned in the current market conditions?
Equity: As explained previously, in the current macroeconomic situation, where nominal GDP is lower than real GDP, the corporate sector will suffer in terms of sales growth (nominal in nature). Companies that use their resources inefficiently and run on relatively higher fixed cost structures will have lower ability to absorb sales losses. Primary suspect among these would be companies having high levels of leverage or borrowings. For such companies, the impact is twofold. Firstly, since their interest burden remains the same even as sales fall, their profits are under pressure. Secondly, if cash flows generated by such companies aren’t enough to service their already high levels of debt, they need to borrow afresh to service their existing debt, which increases their burden. This sets up a vicious cycle for such companies, which is extremely difficult to break.
We invest in those companies, which use their resources efficiently and use their capital efficiently. We look for companies whose RoCE is consistently higher than the cost of capital, with free cash flows. For financial companies, we look for RoE and RoA. Based on these inputs, we select companies as part of our portfolio. We believe that in the current environment, such companies stand to benefit the most as they gain market share from weaker players who succumb to challenging market conditions.
Debt: Volatility and uncertainty have become the ‘new norm’ as far as bond markets are concerned. In recent times, credit quality has also come under a lot of scrutiny. Our investment strategy involves picking robust credits and avoiding aggressive positioning of portfolios to minimize volatility. We engage in tactical trading in order to take advantage of market movements and deliver superior returns to our investors.
What do you expect from Q3 FY16 earnings season?
In the quarters ended Sep 2015, Jun 2015, and Mar 2015, Nifty 50 companies reported a sales decline of 4.2%, 3.4%, and 6.1%, respectively, yoy. The companies in our portfolio reported sales growth of 5.6%, 8.1%, and 5.9% respectively yoy. In terms of profits, Nifty 50 companies reported decline of 1.1%, 3.6%, and 13.5%, respectively, yoy. The companies in our portfolio reported a growth of 15.6%, 2.2%, and 2.9%, respectively, yoy. For our set of companies, we expect a pick-up in earning and profitability over the previous year, outstripping the general market by a significant margin.
What strategy would you suggest for retail investors in the current market?
We always recommend retail investors to go for the SIP route for equity investment. As far as debt is concerned, we retain a positive outlook for bond markets in the medium term investment horizon. Retail investors with an investment horizon of say three to six months may (depending on their risk preferences) invest in ultra short or short-term funds. Dynamic funds will also be a good bet for investors with a slightly higher risk appetite. Investors having investment horizons of more than a year should look into accrual-based products/ products that help lock higher interest rates.
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