Mutual Funds

‘The market is overpaying for visibility of earnings’


NEELESH SURANA, Head Equity, Mirae Asset

The second half of FY16 should see earnings stabilising and growth returning

Corporate earnings are likely to pick up from the second half of this fiscal, says Neelesh Surana – Head Equity, Mirae Asset. He gives his opinion on themes that look good over the next few years, in a conversation with BusinessLine.

The market consensus is that March 2015 quarter earnings are expected to be tepid. When do you see earnings revive substantially?

The second half of FY16 should see earnings stabilising and growth returning. There is clarity now on many issues, like mining, for example. Private players have got the mines now and they will focus on restarting operations. Almost 60 per cent of commercial vehicle (CV) sales are mining-dependent, so that will also look up.

We have had crude and other commodities cooling off, but it doesn’t seem to have actually got input costs down for companies substantially. Will this begin to play out this quarter at least?

As far as crude is concerned, ₹7-8 was taken by the government due to excise duty increase. To that extent the benefit is not getting reflected fully. For other commodities, there is a lag. There is always the impact inventory in the system. I think the next few quarters will see the impact of lower commodity prices.

In expectation of good news on the macro front, commodities, etc, markets have moved up. Are there any pockets still waiting to be discovered?

Most of the high-quality businesses, where there is clarity for growth in the next two-three years, have always been well-discovered and they have only got expensive. I think it is much more to do with individual stock picking than taking a broad sectoral call. Going forward, easy money is over. The market is overpaying for clarity of earnings and high quality for a certain set of stocks. Avoid the two extremes — one which is quite expensive because of quality and because of clarity on earnings; the other where stocks have moved up in anticipation that the numbers would come in, but is not worth looking at. Value is somewhere in between.

Any segments that you would like to mention?

There is a confluence of two-three themes that will play out over the next couple of years. There will be operating leverage because of commodities and raw material prices being benign. When the Goods and Services Tax (GST) comes in, the entire building materials space looks interesting; whether it is quality businesses, such as paints or commodities or segments such as cement, or building materials like sanitaryware, those spaces looks interesting from a two-three-year viewpoint.

Do you think the strong currency we are seeing now will weaken the Make in India theme?

Currency is a factor to some extent. In many export-oriented businesses, wherever the cost differential is huge because of some technology or some research input, I don’t think that would change significantly because of the currency impact. Businesses more on the commodities side may probably be impacted.

You have two funds focused on China. The growth outlook for China continues to be weak for 2015. What is your strategy in these funds?

The India-China consumption fund is more focused on businesses which are domestic consumption oriented, the way the economy is transitioning — businesses which are more dependent on incremental infrastructure or incremental export-related growth. Just like in India where we have polarisation of wealth in a set of businesses, the same is the case in China also, where we are seeing many of the internet-related consumption, discretionary consumption-related themes doing well. Our funds are focused more on that. And also, though growth has been coming down, at the aggregate level, China is still growing at around 7 per cent.

Why does Mirae India Opportunities fund have more of a large-cap tilt than a multi-cap approach which usually opportunities funds are supposed to have?

There are two or three things to note here. One, it is benchmarked to the BSE 200, which mostly has large-caps. Two, on the investment side, the approach is not based on size, but more on the quality of businesses. The fund has just completed seven years. If you look at a longer time frame of five-seven years, you will be surprised to see many of the large-caps have been multi-baggers. Many of the pharma names, over five-seven years, have shot up 8-10 times. Many consumer names too have run up. Even reasonably large-sized companies have delivered extraordinary returns.

Third, preference is more towards businesses which have some scale. Many of the stocks in the last seven years have moved from being mid-cap to large-caps. So, our large- to mid-cap ratio will be like 70:30.

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Published on April 19, 2015
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