LIC Mutual Fund manages assets worth Rs 20,426 crore on average and is the 18th largest fund house in the country
LIC Mutual Fund is betting big on the information technology, pharmaceutical, banking, and automobile sectors, and has deployed most of its equity assets in them. The fund house believes that companies belonging to these sectors are likely to report better earnings and an improvement in their profit margins.
On the other hand, sectors such as telecom, metals, mining, capital goods, construction, and NBFCs are not looking as bright, says Saravana Kumar, Chief Investment Officer at LIC Mutual Fund.
The fund house is currently sitting on a lot of cash in its equity funds as it feels the upcoming 5 state assembly elections have given rise to some measure of uncertainty in the market. It is now gradually deploying its cash, taking into account stock valuations and growth.
LIC Mutual Fund manages assets worth Rs 20,426 crore on average and is the 18th largest fund house in the country. In an interview with Moneycontrol, Kumar explains the fund house's outlook and investment rationale, and talks about a host of other factors affecting the market.
Edited excerpts:
Q: The earnings season has just started. How do you think it will pan out?
A: Two-wheeler companies are likely to drive earnings growth of the sector for the September 2018 quarter due to sustained volume growth despite many disruptions. A sharp 18 percent rupee depreciation since January 1, 2018, against US dollar and momentum in IT projects on the digital platform will be a key growth driver for the IT sector.
The September quarter performance of pharma companies is likely to indicate the bottoming out of price correction in the US generics market. It is observed that there has been a rationalisation of in pharma R&D (research and development) expenses. Banks with higher corporate loan book may announce higher new bad loan recognition in the September quarter numbers. In the cement space, the July-September quarter is expected to be driven by volume growth instead of a price increase.
Q: As the festive season is about to begin, do you think consumption will drive corporate earnings?
A: Gradual recovery in rural demand will support the performance of the FMCG sector. However, the below normal monsoon is a concern. Since many input prices like LAB (Liquid Alkyl Benzene), packaging material, cobra, thalic anhydride, edible oil have moved up in the last two quarters. FMCG companies are likely to pass the rise in input cost.
Q: Which sectors are you betting on at this point and why?
A: Select companies in information technology, pharmaceuticals, finance and banking, consumer goods, automobiles are likely to show better numbers. These sectors will show better operative and net profit margin going forward.
Q: Which sectors are you avoiding?
A: We need to be cautious about telecom, metals and mining, capital goods, construction, and NBFC sectors. The competitive pressure will continue to eat the profit margin of the telecom sector. Like past quarters, the sector will see headwind for some more quarters. Weaker order flow from private corporates may put pressure on the capital goods sector for some time.
On the project execution side, still, there is slowing down in the construction space. Infrastructure companies’ receivable side there could be delay going forward.
Post IL&FS episode, the NBFC sector needs to borrow at a higher rate. We have observed in the last three years that NBFCs had seen an average growth rate of 30 percent plus. In the future, we may see the growth rate would come down. NIM (Net Interest Margin) of many NBFCs would reduce going forward.
Q: After the recent fall in the stock market, where do you think valuations and earnings currently stand?
A: Regarding September 2018, Nifty 50 corporates are likely to report 11 to 11.5 percent year on year growth in net profit. The operating margin of Nifty 50 is likely to expand 55 basis points to 21.5 percent. EPS growth rate of the index is approximately 20.5 percent for the year ending March 31, 2019, which translates to a price-to-earnings ratio of 15 times.
Q: Most market experts do not see much upside in the Indian market over the next 6-12 months? What is your view?
A: In the last 2 months, there were significant global headwinds and they are likely to persist for some more time and that could make the correction period a bit longer. US equity market correction and rise in US treasury yield had made emerging market equities less favourable. US technology sector stocks sell off was happening due to the higher valuation. Currency economists are predicting rupee to depreciate to 78 to the US dollar by March 31, 2019.
Regarding domestic market concerns, the equity market has corrected due to factors like increase in crude oil price, depreciation in Indian rupee, credit default of IL&FS and its group companies, possible ALM (asset liability mismatch) in NBFC sector, outcome of five state elections in 2018 and outcome of the general election in 2019. Based on the above factors, the market may see a rally in near future. Selective stocks may perform better.
Q: Do you think we are on the verge of another financial crisis because of IL&FS' defaults?
A: Since the government has changed IL&FS' board of directors and is trying to solve the crisis, the market is anticipating that the crisis would be averted. Government intervention led to confidence coming back to the financial market.
Q: What is your view on NBFCs? Do you think their golden run is over? Any NBFCs that you think are still good buys on dips?
A: Due to the IL&FS crisis, NBFCs, including HFCs, are facing challenges in the form of ALM, long-term borrowing. RBI has announced that it would strengthen norms for NBFCs to avoid rollover risks. RBI had also instructed NBFCs to reduce their dependence on short-term funding and instead make use of long-term funding. RBI could extend requirements such as liquidity coverage ratio to NBFCs, which are currently applicable to banks.
Due to likely implementation of above measures by RBI, it is observed that the growth rate that we had seen in NBFCs of more than 30 percent in the last 3-4 years may slow down going forward. NIM (Net Interest Margin) of NBFCs, including HFCs, will come down. Due to cash flow challenges, highly-leveraged NBFCs may face further challenges in growth and profitability.
Q: What investment strategy have you adopted, considering what is happening in the market right now?
A: We are holding some percentage of cash and this was more in response to the upcoming 5 state elections that have created some percentage of uncertainty. We are deploying cash based on the stock valuations and growth.
Q: What advice would you give investors at this point?
A: Retail investors should invest through the mutual fund vehicle. Timing the bull rally is difficult for the retail investors. They should invest in SIP (systematic invest plan) and invest regularly, irrespective of market conditions. Equity investment through MFs will reward retail investors substantially over a period of time. Investment during a bear market would help maximise wealth over a period.
Q: Large-caps are performing better than small-caps or mid-caps. Passively-managed funds are outperforming active schemes. Your thoughts?
A: During volatile times, retail investors should focus on investing in large-cap MF equity schemes. The large-cap index would outperform the small and mid-cap indices in a bear market. The combined net sales of Nifty 50 corporates are likely to grow 26 percent year on year. Strong growth is expected in the net income of consumer-focused companies, information technology companies, upstream energy companies, selective retail-oriented banks.
Q: We are also expecting general elections next year. Is the market going to remain volatile next year also?
A: The five state elections are being viewed as a run-up to the Lok Sabha elections, scheduled for May 2019. Political pundits believe that the 5 state elections will test the popularity of government and its policies amid rising crude prices that might lead to inflation, turmoil in banking and finance sectors, and depreciation of the rupee. But certainly the state elections would make an impact on India's economic reforms, or possible pre-2019 alliances with regional parties.
Another interesting factor to be noted is that in the last 4 general elections in the past 21 years, data indicates that the BSE Sensex had gained during the general elections. It is observed that 55 percent of Sensex gains have accrued in the period of 5 months before the elections to 5 months after the elections. It is also to be noted that 55 percent of Sensex gains over the past 21 years came in just 4 years.
