Mutual Funds

‘We prefer consumer cyclicals to industrials’


Vetri Subramaniam, CIO, Religare Invesco Mutual Fund

Religare Invesco Mutual Fund is positive on auto, media and consumer durables, says CIO

There are hardly any obvious pockets of undervaluation in the market, feels Vetri Subramaniam, CIO, Religare Invesco Mutual Fund. Even as most cyclical businesses turn expensive, he bets on auto, media and consumer durables. Excerpts from his conversation with Business Line:

Do the June quarter earnings point to a recovery for Corporate India?

The earnings are not throwing any new light. In the sectors linked to investment spending, the trend continues to be fairly weak both in the P&L and order flows.

While data such as industrial production, cement sales and car sales indicate stability at a lower level, there are no clear signs of acceleration. Same with corporate earnings too. In most domestic focused businesses, there is no noticeable change in the trend when compared with the March quarter.

Export-oriented companies or those with large global operations only continue to drive growth. One takeaway from the results conference calls or meetings with companies is that they are sounding a little more optimistic. To what extent these are based on hard facts is still not clear.

So, have markets run up ahead of fundamentals then?

Markets are at a 12-13 per cent premium to the long-term average multiple on a trailing basis; that way market is neither cheap nor expensive. A year ago, it was at a 12-13 per cent discount to long-term average trailing multiple. The move in the last 6-12 months is explained more by a change in the PE multiple rather than by earnings growth. In our view, any significant progress for the market, from here, will have to be led by earnings growth.

If you look at the best performing stocks from the day when election results were announced, to now, they are high-quality stocks such as Sun Pharma, HDFC, Lupin, Tech Mahindra, Maruti Suzuki, Mahindra & Mahindra and HUL.

All the so-called high beta, leveraged kind of players have not done very well.

Are there any pockets of value still available right now?

Honestly, it is very hard to find pure cases of undervaluation right now. Earlier in May there were opportunities in the small- and mid-cap space, PSUs and value stocks were trading at a discount to the market.

But today, all those gaps are gone. Now, you can only focus on the sectors where earnings growth could be significantly strong if the economy were to revive. But at this point in time, in some of the cyclical businesses such as industrials, valuations are just not conducive.

Our preference in the last two three months has been for companies in the consumer cyclical basket. Here, valuations are still reasonably better compared with industrials.

We are positive on auto, media and consumer durables. But again, valuations are not particularly cheap; for instance, valuation for cement is not comforting.

What is the outlook for PSU stocks?

PSUs have done fantastically in the last one year, as valuations of PSUs were at a significant discount to the broad market. This was even after adjusting for the higher PE sectors such as pharma and FMCG. But that gap has narrowed now.

Most PSUs are in cyclical businesses. To that extent, their end growth would also be more leveraged to economic growth as compared with the broad markets. But we think it is a 2016 story rather than a 2014-15 story.

While it is still early days, there is certainly hope that this Government will not use PSUs as a piggy bank to dip into every now and then to meet some of their other public policy objectives.

Will IT and pharma still continue to be good defensives?

Data suggests that IT spends will continue to be healthy. Most of them expect growth to be similar to last year, may be in some cases, even better.

IT company valuations over the last quarter have actually been trading in line or at a slight discount to their long-term average. We have increased our exposure to IT over the last few months. In pharma, valuations are not cheaper than average. But business models are very different. The impact of specific products and patents is very critical. But unlike in the case of IT, valuations are not cheap.

Your mid- and small-cap and contra funds have done pretty well, whereas the equity scheme has underperformed. Why?

The Religare Invesco Mid – and Small-cap fund buys stocks of quality mid-sized companies that can grow in size and scale over a period of time and growth is the focus there, not necessarily valuations.

The Contra Fund has been a good performer and benefited from the re-rating for value stocks. In January 2013, we were overweight on economy-sensitive sectors such as industrials, which hurt us. But when the markets turned around, we benefited from the rally.

We have now started to rotate sectors — increased exposure to housing finance companies, IT and media. Higher cash position and concentrated exposure to a smaller set of 18-20 companies have hurt the performance of the Equity Fund.

Given that markets have run up on PE re-rating rather than earnings momentum, our low exposure to industrials and financials has eroded performance.

Published on August 24, 2014

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