“By and large, I feel that the valuations of midcaps do not leave any material upside in the short to medium-term”, says Prashant Jain, Executive Director & CIO at HDFC MF, adding he is positive on the large-cap index as he believes the profit margins will bottom out in the current year.
Navneet Munot , CIO, SBI Funds Management believes that commodities might bounce back in action after a long period of weakness.
“Over the last couple of years we have avoided any exposure to commodities because of the global macro environment and looking at the demand destruction in China. It looks like most of the commodities both the industrial energy, metals; soft commodities are at their lowest point in last 12-15 years”, Munot says.
S Naren, CIO , ICICI Prudential AMC is positive on the non-steel sectors among metals. “Clearly, steel is something which has got much more over capacity and it is clearly a less consolidated industry. Whereas, products like Zinc are much more consolidated so you tend to believe that it would be the consolidated commodities which have a better opportunity,” Naren says.
Another sector on the radar for fund managers is consumption-driven businesses, where penetration is low.
“There are some products within the consumption basket where the consumption in India is still very low. So, alcohol the penetration is only 10-11 percent as far as IMFL goes or garments or branded business where the penetration is quite low. So, we are focusing more towards those kind of consumption themes”, says Sunil Singhania of Reliance Mutual Fund.
Below is the verbatim transcript of Sunil Singhania, S Naren, S Naren & Prashant Jain’s interview with Latha Venkatesh on CNBC-TV18.
Q: You have been one of those stayed investors who have betted on the Nifty, on the bigger stocks. However, 2015 has not quite rewarded those who went with the Nifty. In fact there, perhaps you had a negative return. We had a calculation – if you had put the same amount of money in all the BSE 100 or CNX 100 stocks who would have got a 24 percent gain. Whereas the Nifty would have given you probably a 5 percent to 10 percent negative return. Would 2016 continue to be a midcap year?
Jain: It is hard to say, to be honest. However, one year back also it was equally hard to foresee this. I by and large feel that the valuations of midcaps do not leave any material upside in the short to medium-term. So, they are good businesses but with the very, the large gap in returns, between large-caps and midcaps over last two years there is no material discount of midcaps over large-caps. So, I would not expect these materially high returns to continue.
Q: The front liners themselves, the Sensex – Nifty stocks, the argument has also been that about 60-70 percent of them are externally focused – you know export oriented as well and the world is not a great place. Will that change, will large-caps either because of valuations or because of cyclicality give you returns in 2016?
Jain: I would be quite positive on the large-cap Index. Midcaps may do better or they may do less but just talking about large-caps standalone it is a fair comment that reasonable part of the Index, the businesses rest outside India or they are exposed to outside India business conditions. However, still I think the way the economy is improving, the way the index of industrial production (IIP) is improving and I think profit margin in companies are bottoming out in the current year.
Next year onwards even commodity companies may deliver better profits than the current year. So, I would be quite optimistic on the large-caps as well going forward.
Q: Month of December has been very kind to commodities. I was looking at the London Metal Exchange (LME) charts as well they are back to 10 week highs. Would you share that enthusiasm that commodities are back in fashion?
Munot: Mostly likely they have bottomed, looks like. Over the last couple of years we have avoided any exposure to commodities because of the global macro environment and looking at the demand destruction in China. It looks like most of the commodities both the industrial energy, metals; soft commodities are at their lowest point in last 12-15 years. Several of them are below the cost curve.
It is very difficult for most of the producers to survive at these levels. It looks like a bottom is getting formed and may be it could be different. In terms of companies, of course the kind of slowdown or the kind of destruction that we have seen those who will be able to protect their balance sheet and have invested in business may be the gainers next year but you have to be extremely selective.
Q: Would it be only a tactical purchase because after all the Chinese over capacity in some metals at least in steel is fairly onerous so is this just a tactical recovery you would say or like Navneet Munot you would go a little stronger on commodities stocks say steel stocks?
Naren: I think the super cycle is over, as far as the Chinese super cycle. If India can create a super cycle there is a possibility of a new super cycle.
Q: But this is one-tenth the economy
Naren: Doesn’t seem to be in the anvil but otherwise that super cycle of China consuming the industrial metals is over. However, the valuations have become clearly extremely cheap. So, if something were to go from 0.5 times book to 0.6 times book and go up 20 percent that is very easily possible in this kind of environment.
What we have seen is that by and large very year there is a good move in commodities and that we have seen over many years at this point of time. The problem is if you buy after the boom then it falls for a long period of time so that is where what we see. So, I think there is margin of safety, there is some value but the structural cycle on metals is something which we will have to worry about.
Q: Would it be steel or would it be non-steel?
Naren: Clearly, steel is something which has got much more over capacity and it is clearly a less consolidated industry. Whereas products like Zinc are much more consolidated so you tend to believe that it would be the consolidated commodities which have a better opportunity.
Q: Would it be metals or would it be oil that you will bet on? Are our advantages of oil over, will 2016 be a negative year as far as India is concerned in terms of oil?
Singhania: I don\’t know why you say that. We are not experts on oil but the way the scenario is developing, I think technology is changing, you have cheaper sources of fuel which will include renewable. You have more production happening and the world is not a very great place as far as growth is concerned. So, demand scenario is also not going to be very robust. So, given all this we are definitely in the camp of oil not hitting the earlier highs.
It has fallen to USD 35, may be it might rise to USD 40-50 per barrel. However this year we have got only 50 percent of the advantage of oil because it has been continuously going down. If these prices continue we will get extra benefit as we have got this year. So, full benefit of oil is going to be in 2016. In 2015 you have not got that full benefit of oil.
At least we would tend to believe that the days of oil hitting highs are much behind us.
Q: I was only worried about the fisc. You think that FY17 also one needn\’t worry that our subsidy bill will shoot up or that we will lose the advantage?
Singhania: There is no subsidy left because the fuel is now linked to market price. Second, we have not got the full benefit. This year may be the average price of crude which India has imported is may be USD 70-75 per barrel, it is not USD 36 because we started with a very high base. So, till it reaches that levels next we will have that much kind of an advantage.
At least we would tend to believe that oil moving beyond USD 50-55 in this kind of a scenario looks very difficult.
Q: Commodities would form a part of your stock selection also?
Singhania: I agree with all the panellists that it is time to look at them but having said that the balance sheet of some of the commodity companies in India have been stressed. So, interest is becoming a big component.
Second thing is, the advantage which India had because of cheap raw material cost is sort of getting negated because while the world has moved towards a lower power cost, in India the power cost for lot of these companies has gone up because they have had to buy coal blocks at a higher price. Earlier they used to just get coal blocks for free.
So, the dynamics from being one of the lowest cost producers, I think even companies like Hindalco have moved towards the centre of the cost curve rather than at the lower levels. So, it is not as easy as it looks like.
Q: In your top holdings I don\’t see any commodities at all and you are not going to make any entry.
Singhania: We have some commodities in some of the funds. It is not that we don\’t have any commodities but there is no real sort of a comfort we have that we should just go overboard and buy 5-10 percent commodities. Having said that I think the world is a very dynamic place. You have to keep on looking, you have to keep on analysing, you never know what might happen because trends are changing very fast. So, it is our job to be on the toes all the time.
Q: Let me start with your top stocks. There is a genuine preference for consumer facing stocks. You have stocks like United Spirits in your portfolio, you also have a lot of drug stocks. So, let me start only with consumption first. Do you think consumption has picked up, would consumption stocks be a theme or would valuations scare you?
Singhania: While admitting that we are bullish on the urban consumption theme, we are also cognizant of the fact that there are some consumption products where the penetration is already very high. So, we are trying to avoid those. There are some products within the consumption basket where the consumption in India is still very low. So, alcohol the penetration is only 10-11 percent as far as IMFL or garments or branded business where the penetration is quite low. So, we are focusing more towards those kind of consumption themes.
Our belief is that with 1.3 billion people and what has happened in the world ultimately is going to happen in India. There is no reason for us to believe that we will follow the global trend and our companies would be much bigger than what they are globally.
Q: Is there a “V” shaped recovery or at least a fairly healthy recovery for consumption stocks or consumption in 2016?
Singhania: I think we are focused on recovery, what shape it is we don’t care. The clear focus is that in 6-7 years a lot of these themes or sectors or sub-products would be 2-3 times what they are today in terms of size and that is where we are focused on.
Q: I was only trying to develop Prashant Jain’s theme that he sees green shoots.
Singhania: There are select places where you are seeing that. Car sales have been pretty good, air traffic has gone up by 20 percent. The month of November though it was a Diwali month we have seen at least the malls doing pretty robust business. The multiplexes in December have done pretty good business. Everywhere you go the flights are full, the hotels are doing very good business, hotels are full. So, there has to be something. Now how do you actually monitor that is very difficult but you can only feel it.