“In the coming quarters, there is good possibility that topline growth will start getting better for many sectors, even though many will not get to see the benefit of lower commodity prices which they had earlier,” says Taher Badshah, Fund Manager and Head-Equities MF, Motilal Oswal Asset Management. Excerpts from an interview with BusinessLine :

Mid-cap stocks and mutual funds have withstood market volatility in the last one year better than the large-caps. How long do you expect this to continue?

Over a slightly longer time frame of two to three years, mid-caps will continue to do better than large-caps. Compared with the bigger ones, most mid-sized or small-sized companies are linked to the domestic economy and not as much to the overseas markets. So, since we expect that the Indian economy will probably fare better than most of the global economies, companies which are linked to the domestic market will show better growth rates. Plus, given their smaller size, companies which have the necessary competitive advantages will gain market share and grow at faster rates.

But in the near term, action is possible in large-cap stocks since they are beaten down. The impact of issues such as the commodity price fall has been more on some of the larger companies than the mid-caps. Besides, large-caps were also affected by fund flows. People sold out of global emerging market funds, ETFs, BRIC funds, etc., and India also got sold out along with the countries which are leveraged to commodity prices. Now, with commodity prices trying to stage a recovery, reversal in fund flows is likely to get directed more to the large-cap space. So, say over the next six months, it is quite possible that large-caps do better.

Will the next leg of the consumption growth story be supported by a rural push?

Consumption has been a continuing story in the last few years; only, the growth rate had decelerated a little bit. The deceleration was largely because the rural economy was slowing down. I think there is a fair case for rural consumption to come back now after two or three years of lull. More resources have been committed for this sector in the Budget, which will spur growth by helping rural income and increase spending levels. Secondly, a price fall not only affected oil and metals. There were sharp corrections in agri commodities, too. Commodities like rubber, milk, palmoil, pulses and oil seeds saw a notable decline. This also had a significant impact on rural incomes. With some of the commodity price reversal that is happening currently, a firming up of agri prices will also lead to better rural incomes. Good monsoon will only be the icing on the cake. FMCG, lower-end consumer discretionary and consumer financing will be interesting areas to watch in terms of how growth unfolds.

Corporate earnings have been quite sluggish so far. What can be different in the coming quarters?

We are no longer running with expectations of 20-odd per cent earnings growth. It is at around 15 per cent or probably even lower. The downward reset is a good thing. It’s now coming into a range which is more deliverable. Commodity prices are moving up. So, there is a possible revision in earnings of companies that are in the commodity industry. Companies leveraged to rural economy will also see a bit of acceleration in their earnings.

So, if we get steady earnings from some of the core sectors such as IT and private sector banks and additionally see reversal of earnings for some of the cyclicals, oil and gas companies, metals and some of the public sector banks, it can lead to 15-odd per cent growth. Reforms on the industrials side will have a trickle-down effect. So there is good possibility that topline growth will start getting better for many areas, even though many will not get the benefit of lower commodity prices which they had earlier.

Your mid-cap and multi-cap funds have been chart toppers in the last one year. What has helped? Are their concentrated portfolios a risk?

What has worked for us is that we have a well-defined philosophy on where and how we want to invest. We look for investing in companies which are high quality and are growth oriented; companies where we see good amount of long-term competitive advantages and which are available at a decent price. We don’t necessarily buy low PE multiple stocks. Secondly, we never viewed concentration as a risk. We only felt that running higher conviction portfolios reduces risk. We have done our own portfolio analysis for past periods and found that over longer periods of three or five years, even though they carry high level of concentration, the level of the volatility of our portfolio has been less than that of the market. If you ensure enough quality in your portfolio, then the volatility is relatively low. But at the same time, concentration helps you generate the alpha or additional return over market rates of return.

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