Pankaj Murarka, head of equities, Axis Mutual Fund is positive on Indian equities and foresees further gains in the market. In an interview to CNBC-TV18, he says retail participation has been on a rise lately and he expects equities to be best performing asset class going ahead. Lack of retail participation has been a key concern for the Indian mutual fund industry since entry load was banned by market regulator Sebi in 2009.
On specific sectors, Murarka is very constructive on financial and manufacturing space. He also likes automobiles. One is seeing lot of demand coming from this sector and as the economy recovers, growth in commercial vehicles and passenger vehicles will grow, he said.
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Below is the verbatim transcript of Pankaj Murarka’s interview with CNBC-TV18’s Anuj Singhal and Ekta Batra. For the complete interview watch the accompanying video.
Anuj: You have seen a big rally in the last few months or so, what is your sense, is this going to continue and is retail participating in the market since you represent the mutual fund industry and what is the way forward from hereon?
A: Markets have done exceedingly well over the last one year. Sometime around end of August last year, markets had bottomed out and last one year index is up about 45 percent, but we still believe — our view on equities remain fairly constructive. We are at very early stages of a long bull market.
This is a third successive year where India is recording a sub-6 percent growth, which is significantly below our potential growth rate. As growth for the overall economy accelerates towards the second half of this year and going into the next year, we think we will see a significant improvement in corporate earnings, which has been growing at a single digit rate over the last three years.
We believe that there is significant amount of latent demand that exists in the economy. As well there is a significant amount of unutilised capacity that exists in the overall economy. So as growth accelerates, earnings growth will recover very significantly and equities an asset class should do exceedingly well.
We have seen a significant improvement in the retail participation over the last six months or so. Investors have acknowledged the fact that they are looking for much better times for overall economic environment and for growth outlook for India and we have seen increased participation from investors in our funds.
Ekta: Can you tell us how much in terms of a possible percentage increase we can see from current levels for the Nifty on an approximate basis and by when?
A: If you look at the last cycle between 2003 and 2008, corporate India’s profits grew at about 25 percent compounded annual growth rate (CAGR). Corporate India’s profits grew at about 25 percent CAGR over a period of five years. Given the fact that we are just at the beginning of a new growth cycle for our economy, we firmly believe that profit growth for corporate India should accelerate very significantly because they have made significant investments over the last three-four years, which will yield results going forward. At the same time, margins for corporate India will expand significantly because they have taken quite a hit in terms of higher rates and their inability to pass higher raw material cost.
So as all of that happens, I think earnings growth will accelerate significantly. At the same time when you look at from a valuation perspective, equity valuations are pretty inexpensive, markets are trading at about 15 times forward earnings, which is somewhere closer to the mean valuations these markets have traded.
When growth accelerates, Indian markets have a tendency to trade at a significantly higher valuation than where they are. Combination of higher earnings growth and a potential valuation rerating could lead to significant returns from equities. I firmly believe that equity should be one of the best performing asset class when you look at it from a medium-term perspective.
Anuj: In terms of individual sectors and stocks, what would be the leaders for this market from hereon, would you bet on the likes of infrastructure, capital goods, banks or IT, pharmaceuticals, what do you think would be the best performing sectors hereon?
A: We have always remained very constructive on financials because we think that opens up the core of the economy and that will be one of the biggest beneficiaries of recovery in the economy. But apart from that, we are equally constructive on the manufacturing sector because we think that is one sector, which has been the most impacted because of macroeconomic slowdown that we have seen in the Indian economy over the last three years.
Just to give you perspective, India’s index of industrial production (IIP) had a negative growth or a contraction last year that was -0.1 (minus 0.1) percent and India has never had a contraction in the industrial production over the last thirty years. So that just puts in context the magnitude of slowdown we were seeing in the manufacturing sector in India and as growth recovers, I think that sector will be one of the biggest beneficiaries of the growth. We are pretty constructive on the outlook for the manufacturing sector.