With 22 years of experience in the Indian equity markets, he manages funds like Religare Invesco Tax Plan and Religare Invesco PSU Equity Fund which have given returns of over 50 percent in the last year. The biggest outperformer has been the Religare Contra Fund with returns of 74 percent in the past year. So which are the sectors and stocks to focus on from here on?
In an interview to CNBC-TV18, alpha manager Vetri Subramaniam, Chief Investment Officer, Religare Invesco Mutual Fund, says he has been seeing a mild recovery in the economic growth, but feels the government needs to now focus on policy implementation.
He says there has been a significant re-rating within the market but the big improvement in earnings growth can be seen in FY16. “Valuation plays major role in our investment decision,” he says.
Religare Invesco MF has added DB Corp and MRF to its portfolio and is “happy to have Tech Mahindra for 3 years” as IT space looks to be well positioned. Interestingly, the fund does not have any pharma names in top order.
Pharma has always been bottom-up sector for our fund, says Subramaniam, adding that Lupin and Sun Pharma are the preferred picks in the pack.
While the fund has increased exposure to consumer discretionary and financials, it has cut down its exposure to industrials. In the financial sector, it has Axis Bank, HDFC Bank, HDFC & Federal Bank in its portfolio.
Below is the transcript of Vetri Subramaniam’s interview with CNBC-TV18’s Menaka Doshi and Senthil Chengalvarayan.
Menaka: Let me start by asking you not just about today’s market action or this talk of a correction that was underway which may have ended but more a sense of where we are in this bull run according to you?
A: We have gone from market which was very pessimistic about a year ago to a market which transitioned to what I would call the hope trade in the first half of the year leading up lets say to May 2014 and post the election verdict the market is starting to get a little bit more selective and is starting to think about where actually the visibility is in terms of earnings growth. So, there has been a significant amount of transition over the last one year. As far as the economy is concerned the good news is that there are signs of a mild recovery underway but at this point it is still very mild and I think in terms of seeing significant government led policy action which can give the economy more traction I think we are yet to really see much of that and hopefully we will see that over the next few months.
Senthil: How much of that have already been priced in? How much of that hopes that there will be government action which has already been priced in and so will the government have to do a hell of a lot to meet these price expectations?
A: There is a simple way to look at that. If you just look at the market which is up about 40 percent over the last one year, if you actually look at how much earnings are up during this period– they are up only 14-15 percent. So what you can conclude from it that the rest of the gains are essentially the change in the PE multiple and essentially that in some senses reflects the change and the optimism that future earnings growth for the market will be significantly stronger.
So a significant portion of the multiple re-rating has already taken place and I sort of think of this as the phase in which the market is saying show me the earnings and I want to see that earnings visibility. So some of that re-rating has taken place very specifically and the best example of that would be in the capital goods sector. If you go back a year ago it was trading in the low teens in terms of its PE multiples pretty much among the cheaper sectors in the market and if you look at it today it is trading at a PE multiple of more than 30 and it is among the three costliest sectors in the market. So there has been a significant rerating within the market and you need to take cognisance of that.
Menaka: Are you therefore not very optimistic or buoyant or not expecting much from this earnings season which would be underway tomorrow with Infosys and may be even the December earnings season. So, it is probably only the Q1 of FY16 that you hope to see better signs of recovery reflect in corporate bottomlines?
A: I think so. What we have really seen post the election is a clear improvement in sentiment among business and industry. I wouldn’t downplay that, it is very important because unless business and industry feel positive about the future they are not going to invest, they are not going to hire and they are not going to create that momentum for the economy. However if you pin it down into hard numbers in terms of the kind of traction that they are seeing on the revenue line or in terms of margins things are looking a little bit more challenging on that revenue line which is why I think at this point of time in terms of actually looking at a recovery in corporate earnings I think that is really more of a 2016 story than a 2015 story. There could be select cases here and there of a few sectors or few companies that might start to surprise you earlier but in general I think in terms of a big outperformance, in terms of earnings growth it is certainly a 2016 story.
Menaka: The Contra fund did 74 percent in terms of returns over the last one year versus a benchmark performance of 38.5 percent. Talk us through really how you strategized or managed to achieve that and how you are positioned hereon on that Contra front?
A: The Contra fund to put it simply has got a very strong value approach in the way that it goes about identifying companies and businesses and it is also very early to take on risk because we are able to perceive valuations as being attractive enough we don’t wait for the accompanying sound bytes of an improvement in growth outlook or earnings growth number to really start getting invested. So we are always early to take on risk in that portfolio and if I look at that portfolio honestly, it gave us a lot of grief in the first half of calendar 2013 because even after we started finding a lot of the economy sensitive sectors of the market cheap many of those sectors actually got battered and bruised all the way up to about August 2013 and really when you look at the strong outperformance that has come after that it has really been a function of the fact that we held on to most of those positions because we have the conviction that valuations were on our side and we did see some cyclical bounce playing out into 2014.
But at the point when we built these positions we had no clue about who might even contest the elections leave alone the market would perceive Narendra Modi as being a very pro-growth Prime Minister. So these positions were built much in advance of these news flows simply because the valuations were supportive and in one word that describes our approach in that fund. We were always very valuation conscious in terms of where we want to allocate our money into and which stocks that we are willing to buy. Once we have done that we are happy to let those stocks run, we are happy to let those stocks run up as businesses do well but we are very careful about where we deploy that money and what stocks and what valuations we buy them at.
Menaka: On the screen we have a graphic plate that sort of depicts the top holdings in that particular fund. How many of these stocks have run out of breath though you are happy to watch them run for the last 12 months? Tech Mahindra, Maruti, HDFC Bank, Britannia, Bharat Forge, Wipro which has not necessarily had a great year to date, Federal Bank, DB Corp, Gateway Distriparks and ONGC.
A: Some of them have run up quite a bit and we are not really adding to them anymore. However if you look at a name like HDFC Bank, it didn’t figure in the portfolio last year. It is something that we added because it saw significant amount of underperformance some time earlier this year. We have also added some of the names like DB Corp, MRF, those are portfolio names that we have added to. Some of those other names have just sort of risen to that top end of the portfolio because we have nursed those positions for 2 or 3 years or more. Tech Mahindra for example is a classic case, we have held that stock for more than 3 years now and we have just been happy to participate in the run up as the company has executed well. So, the portfolio is always a mix of sort of names that we are looking to buy into as well as other names that we may have bought earlier and now we are just happy to ride the good performance those companies are bringing home today.
Menaka: Ahead of those Infy earnings I am going to get your view on where you see tech headed over the next several months. You mentioned Tech Mahindra, HCL Tech, as well as Wipro I am told are amongst your top holdings across the schemes that you manage. What do you make of the performance that some of these stocks have had besides Tech Mahindra which you have already spoken of. HCL Tech year-to-date (Y-T-D) that is up 33 percent, Wipro is up barely 4or 5 percent YTD if I remember correctly, TCS and then of course, Infosys which will report earnings tomorrow?
A: We still think tech in general is well positioned. They have got fairly reasonable revenue traction growing in sort of the mid teens numbers, so we think that is healthy. So overall it is a fairly nice scenario for them. They don’t have the kind of currency buoyancy that they had last year which really under wrote their earnings growth but the currency we think will continue to stay on a mild sort of depreciating trend which over time will anyway benefit them but the currency is not really the key reason which we think drives these companies. It is really revenue growth and at the mid teens levels we find valuations in tech quite reasonable at this point of time. So that is an area that we are quite happy to own in many of our portfolios. The names itself might differ.
Since you asked me this question one reason why we never owned TCS in Contra fund is that that stock has traded at a huge premium to the rest of the sector for the longest time. So it never made it through our filters in the Contra fund, though if I do recollect we do own it way back in 2009. So there will be a difference in the kind of names that we own across the funds but in the Contra fund it typically tends to be allocated to names where we think the valuation comfort is much high.
Menaka: I get why TCS is not in your contra fund, it is not amongst your top tech holdings across the funds that you manage, that is what the data I have says. So, I was just curious to know how you are positioned in tech? You have already given us an answer to that but are you adding more money to your tech positions for instance Tech Mahindra or HCL Tech or Wipro at this point in time?
A: Not yet. They have had huge outperformance over the last 3-4 months but we did add quite a bit in May-June when it was coming down quite sharply because people were worried about the outlook for tech and money was rotating into economy sensitives and there was a lot of talk of the rupee going to 54 and 55. So, we thought that was a good opportunity to add to tech. Right now we are not really adding very significantly to those positions.
Menaka: Based on the data I have it doesn’t seem that you are very bullish on pharma because top holdings across the schemes that you manage don’t seem to feature a pharma stock. No pharma stock from the top holdings. In financials those top holdings include HDFC and HDFC Bank, in auto they include Maruti and Hero Motors. In tech they include HCL Tech and Wipro. I can’t spot a pharma name, correct me if I am wrong.
A: You are absolutely right. We don’t really have any of the pharma names right at the top of our portfolio. We do own it and we are overweight on some of our portfolios but typically we have always followed an approach in pharma of buying a bouquet of companies. So, whatever exposure we have is always spread across 3-4 names. To us pharma has always been a very bottom up sector because the distinction and the differences in business model between these companies is very acute. So, we have never favoured taking a strong top down call in pharma, it has always been about finding a bouquet of companies that we are comfortable owning to try and reduce the risk of major things that could go wrong. What could go wrong in pharma? We have seen several examples of companies run into problem with the FDA, lose key molecules, run into problems on litigation. So, it has always been a bouquet approach and we have never concentrated ourselves in just one name or two names but you will find that across portfolios it is there.
Menaka: What is the best selling flower in that bouquet?
A: I think Lupin would pretty much be among the top names if you looked across the portfolios followed most probably by Sun Pharma and among the younger names it would be Biocon and IPCA.
Senthil: This propensity to go for bouquet in pharma, is it only because of regulatory issues or is it also because you are not very comfortable with management qualities?
A: It has just got to do with the intricacies of the business models that they are very difficult to understand and each company has very district sort of elements in terms of the geographies in which they operate and the kind of kind of reliance that they have either on specific product lines or products or for that matters specific where they generate their revenue from. So we have just felt more comfortable from that kind of diversified approach rather than just betting on one or two names which is very different, for example, from the way we have our financial exposure where in financials we actually prefer to back only those names that we feel very strongly about and therefore in financials you will see that may be three or four names will account for 70-80 percent of the exposure in many of our portfolios and this despite the fact that financials as a part of the market is actually the single largest part of the market.
So they are happy being concentrated in areas where we have the conviction and we have an understanding of the business model that gives us the comfort but on the other hand in a smaller part of the market which is pharmaceuticals where we don’t get that kind of a comfort we tend to make it a bouquet approach. So it is question of what is right for each sector which really works rather than just one size fits all approach.
Menaka: A final question on your sector allocation from here onwards. It has been an interesting couple of months, we have seen all the capital goods frenzy, the infrastructure frenzy that took place prior to the elections and just right after the results sort of ebb off a bit. We have seen defensives come into favour over the last couple of weeks or so. How are you positioning or what do you expect will be the sectoral allocation here onwards, what will do better than the rest?
A: The area that we were hugely positive about a year ago which was industrials because we thought valuations were very cheap, that is not the case anymore. So, largely we have either reduced industrial exposure or gone to underweight in some cases. The area where we have increased exposure very dramatically has been more in the consumer discretionary space which is auto, white goods, media that sort of stuff. Financials is the other place where we have added weightage simply because we think these two will respond to any improvement in the economy much quicker in their P&L account as compared to industrials where I think a revival in the investment cycle appears to be a prolonged effort and also simply because I don’t think government policy at this point is really bringing that urgency to the table in terms of kicking off the investment cycle. So, everything put together valuations plus the context, that is the way the portfolios are currently positioned.
Menaka: You mentioned financials as one of the key sectors that you would be betting on here onwards. I see HDFC and HDFC Bank populated across your schemes. I see stocks like Federal Bank as well. What I seem to be missing is ICICI Bank anywhere?
A: When you look at the private bank space the favoured bets that we have had at this point of time have been the HDFC twins along with Axis Bank and also Federal Bank and we have not really backed ICICI Bank in a big way simply because we thought the value equation that we were getting in terms of growth in Axis was much better but these things will change overtime. So I am not really making a comment on one bank or the other.
Menaka: Some interesting stocks and even if you can’t comment from a stock specific point of view if you can talk us through your view on those sectors and how you are measuring performances in those sectors. For instance, PI or VA Tech Wabag or Gateway Distriparks, these are some of the stocks that feature across some of your schemes. Can you talk us through how you are approaching the midcap space and what sectors or spaces look most interesting to you as subsets of that?
A: More than just sectors I would say, since you highlighted these three names what is interesting about these three names; one is that these companies have been fairly disciplined in terms of the way that they have spent their capital; B, during the difficult times over the last three-four years many of them have made significant investments, I would say in some cases beachhead investments, in some cases it has been of building a significant global footprint or getting into some kind of new venture which has added steam to the existing business model and now they are all quite well positioned in terms of reaping the benefits of these initiatives that they have made during difficult times as the economy starts to improve.
So this is pretty much a common thing that you will see in many of our portfolios which is that even in the midcap space we have typically invested in companies which show a reasonable amount of discipline towards capital allocation. They enjoy reasonable levels of return on capital which means that during the last few years when business has been difficult their balance sheet has never been under stress. Maybe their P&L has come under some degree of stress but never their balance sheet and that is what uniquely positions these companies today because they gone through the difficult times, the entrepreneur has survived those difficult times, they have come through with strong strategies, they have built their new export oriented plants, their new beachheads, their new business lines and now they are very well positioned to be able to benefit from growth as and when it happens. So this is a common thing that you will find across many of the midcap stocks that we own in our portfolios particularly the younger sort of companies.