UBS bets on mid-cap growth story

With India remains a bright spot in the global economy with GDP growing 7.6 per cent in FY16. Much of India’s growth story originate from the fabulous performance of medium size companies as reflected in the mid-cap share prices.

Speaking to Bloomberg TV India, UBS Securities analyst Gautam Chhaochharia elaborate on the mid-cap growth story of Asia’s third largest economy. “India is lot more of a stock pickers market. There are very interesting ideas and companies which should attract a lot of investors’ interest,” he said.

You are having a mid-cap conference. What is the general mood on India at the moment from foreign investors in terms of fund flows?

This conference is more about mid-cap companies. This is not the flagship India conference. This conference is focused on interesting mid-cap ideas for investors. Interests from foreign investors, specifically to this conference, have been elevated compared to the last year. We are seeing reasonable attendance form investors from abroad including some first time visitors to India. In terms of general interest in markets, most global investors still over-weight India. They have trimmed a bit over last year, but still quite heavily over-weight India and their interest remains high on both absolute and relative basis.

Obviously over the last two-three months, the data points have also helped fuel this positive sentiments.

High frequency data and quarterly earnings season – where our stance obviously is to advise investors to not get carried away – some of this may not be as reflective of the underlined trends as the headline numbers suggest.

It is very interesting that you are doing a mid-cap conference. Sectorally what kind of companies are you looking to showcase? Where do you think the investment themes are on the mid-cap side of the Indian market?

The mid-cap theme actually pans across sectors, from financials — including non-banking and micro financials — to consumer space to technology, healthcare and media.

So it is across a wide range of segments. India, as we all know, is more of a stock pickers’ market.

There are very interesting ideas and companies which should attract a lot of investors’ interest. And that is the idea of doing this mid-cap conference.

We have more than 40 of such companies talking and meting investors in this conference.

In terms of money flows are you of the opinion that we may see a significant flow in mid-cap stocks? Because one of the things we have noticed is low liquidity and because of that many of these mid-cap stocks don’t get covered and there is a gradual drift downwards. Could that change in the next 6-12 months?

Liquidity will always be a problem because they are mid-caps. So there will always be some issues around liquidity. In terms of mid-caps doing well, apart from valuation fundamentals, what helped over the last couple of years is strong inflows into domestic institutions like mutual funds etc, which are traditionally bigger buyers of mid-caps. The flows into such funds over the next one year will also be relevant for how these mid-caps do apart from the valuation fundamentals.

Coming to some of the broader issues. Crude oil prices fell almost 75 per cent, but it is clear that the benefit was not passed on to the consumers which means the government’s revenues or may be the revenues of all marketing companies kind of ballooned. Where is all that money gone?

Obviously, the entire oil saving was distributed between fiscal in terms of higher revenues and lower subsidies. Then oil companies whose losses were brought down and thirdly the consumers. And how this is distributed between these three becomes the part of the policy call which has given challenges to growth, inflation and fiscal stability. So that is the fine balance which the government has to draw. The government cannot simplistically pass on the entire things to the consumers or retain all the savings. That helps the government in bringing inflation down, giving some boost to real incomes to consumers as well as improving the fiscal side.

Our rough calculation suggests that a large part would have been retained by the government to improve the fiscal and then may be 20-30 per cent – depending how you calculate – was passed on to the consumers and little bit to the oil companies.

COMMENT NOW