Indian market could re-rate from here

Be very selective, look at companies that will benefit from scale, says PVK Mohan, Head – Equity, Principal Mutual Fund, in a telephonic interaction with Business Line . Edited excerpts:

Principal Growth and Tax Saver have had a good run since March 2012. What helped this?

The turnaround in performance was helped by two factors. One, alpha from stocks such as Aurobindo Pharma and Escorts, added in 2011, aided recovery. Being overweight on high conviction bets and holding them through the upcycle worked well for us.

Second, we rejigged our investment strategy at the organisation level in 2012 into a three-pronged approach — large-cap, pure mid-cap and diversified strategy. We decided to have a dedicated fund manager for each of these strategies. Reorganising fund management facilitated performance.

Small- and mid-caps have done extremely well in the last 10 months, do you still see big opportunities here?

If you take a two-three year view, there are still opportunities. That said, easy money is off the table. A lot of these stocks have trebled from the bottom; while some of them can still double in the next few years, not all really can. So one has to be very selective and look at companies with good management that will benefit from scale and have sustained their business even during bad times.

Now you need to believe that the economy will transition from the current slow growth phase into a fast growth phase and that the Government will execute on the reforms. If so, then a good number of stocks can deliver healthy returns from here.

Stocks in the beleaguered power and infrastructure space have led the recent rally. How should one play these stocks whose fundamentals still remain weak?

Many stocks have already factored in earnings improvement in 2015-16, so the challenge is to identify companies that will see a positive earnings surprise because of some big policy change or sharper than expected recovery. While revival is already built in, the strength of revival is probably not fully discounted in the current prices.

If the Government can deliver and the recovery is much faster than expectation, then there is an upside from here. That said we are entering a very tricky phase. While fundamentals have not materially changed, sentiment has changed.

The market, which was not willing to look beyond three months, is now willing to look two years ahead because of a decisive government. So, you have to take a longer horizon and identify companies with a higher-than-expected growth trajectory.

What will be the driver for the market, going forward, given the big reform expectation from the new Government?

The vision highlighted in the President’s address needs to translate into reality. For instance, on the agri side, measures to remove supply bottlenecks and disallowing hoarding, if done, will help contain inflation, given that the monsoon has been weak so far. Second, it has spoken about speedier clearances. To be fair to the previous Government, a lot of projects were given clearance in the last eight-nine months. This Government will just have to keep the momentum going; this will spur capex spend by itself.

Third, this Government has promised a very transparent policy framework, for instance, not more than four layers of clearances. If this happens, the ease of doing business will be greater. Fourth, GST implementation will be a big positive for the market. It will drive growth and be margin-accretive for businesses due to better logistics.

With revival in investment cycle, transparent policy, removal of supply bottlenecks and a stable currency, inflationary expectations will get tamed and increase the possibility of rate moderation over the next six-eight months.

All of these will set in motion a fairly strong economy. FY16/17 may probably see growth accelerate from the current 15-16 per cent to 18-20 per cent if the Government backs it up with concrete measures and policies. This may lead to a re-rating for the Indian market from the current 15 times to 17 times.

With the Budget around the corner, are you fully invested or have you increased cash levels?

Our portfolios are positioned to capitalise on the pick-up in India’s economic growth momentum. Though our cash levels are low, they have risen slightly, only to capitalise upon any correction that may follow the strong rally.

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