The Hindu Business Line : `This equity market is for stock pickers'

MR TRIDIB PATHAK, CIO of Cholamandalam MF, describes the current market as a stock-selector's paradise. "Only select stocks and sectors will do better than the rest", he notes.

Excerpts:

In which areas are you overweight/underweight at the moment?

In Chola Growth Fund, our flagship scheme with a large-cap bias, we have been overweight in the last three or four months in IT services, cement and international cyclicals - petrochemicals and pure refining. Those overweight positions are being maintained. The fund is underweight in banking, pharma, metals and auto.

What is the rationale for the overweight positions?

As for IT services, the business environment has improved with volume growth picking up and billing rates remaining flat. We now see companies showing volume growth of over 40 per cent, which is what they had delivered during the boom of 1999-2000.

In cement, we think the outlook for strength in cement pricing is bright and demand-supply is now more in balance. With restructuring and cost cutting, cement companies have improved their profitability significantly over the last few years.

With regard to international cyclicals, we find that the improvement in margins of petrochem and pure refining is strong and is sustainable for another one or two years.

How is your new mid cap fund positioned?

Chola Mid Cap tries to identify stocks that have potential for maximising wealth over the next three to five years. Its investments include leaders, that is, stocks that lead in their respective sectors and enjoy disproportionate competitive position.

There are also proxies for large caps as well as names that can be best described as belonging to certain `sunrise' sectors.

Given the current state of the markets and the trends that are likely to set in, do you expect some sectors to be re-rated?

As we have maintained over the last few months, this is no longer a top-down market as in last year, marked by good performance across sectors and stocks. We are very much in the midst of a bottom-up phenomenon.

It is now a market for stock/sector pickers, where select elements will do well due to reasons that are specific to the companies and sectors concerned. This trend is particularly clear in the context of the Q2 results that have been flowing in. We are witnessing clear divergence in performance between sectors and between companies within the same sector.

Can investors genuinely expect equity funds to make money during the rest of the year?

This equity market is for stock pickers, a trend marked by a bottom-up approach in comparison to the top-down view that was evident last year. As we stand here today, only select stocks and sectors will do better than the rest and it will be very crucial to identify them.

Disciplined and process driven investing will win. We continue to see the current situation in the equity market as an opportunity for investors with a horizon of one to three years. Corporate earnings continue to be attractive even though our GDP growth may slow down in the current year. Long-term drivers of the economy are in place. There are outsourcing opportunities, consumption growth helped by retail finance and infrastructure development.

Valuation of the market is once again at an attractive level of around 12x forward P/E ratio, the same level that we had saw a couple of years ago when the index was at 3,500.

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