Difficult for the markets to hit an all-time high without growth: Satish Ramanathan, Sundaram Mutual
With manufacturing & infra ebbing & cooling off, it is difficult to see markets hit an all-time high, says Satish Ramanathan, Sundaram Mutual.
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| Updated: In an interview with ET Now, Satish Ramanathan, Director & Head Equities, Sundaram Mutual, shares his views on the market range and portfolio strategy. Excerpts:
A comment on the macro environment and what do you think it means for Indian markets?
Overall, the macro environment is slowing down, especially on the industrial side. Agriculture side is doing fairly well and on the services side, there will be a slowdown, but it will be far less than the industrial one, primarily because of the fact that the interest rates are going up and credit growth is expected to come down. So overall, the GDP rate would be in the 7.5% to 8% range for FY12 and consequently, top line growth for companies would be that much lower than FY11 and there could be some profit pressure as well coming through because of margins coming down. As a result, we could see profit growth big far lower than what the street expects.
Is the market really keenly watching out for what comes around tomorrow once the election results are out?
That is one. What the markets are looking forward to is the fact that whether the government is firm on reducing subsidies, especially the oil subsidies, considering oil at $105-110 would mean that our subsidy levels do go up significantly as also fertiliser subsidies. So, the government has to reduce its subsidies and its fiscal deficit. Something has to give, either fiscal deficit has to go up or subsidies have to come down. We are watching for that.
Of late, what has been your portfolio strategy because last time when we interacted on this forum, you were negative on commodities and you were bullish on banks?
We turned a little bearish on banks after we met last, primarily because of asset quality issues and also to some extent, we were cautious because of the interest rate hike. So there has been shift in strategy there. And in terms of commodities, we are still underweight, we are still underweight on real estate, we are still underweight cyclicals and infrastructure stocks and positive on the consumption theme as a basket.
Just want to get you in on FMCG and this entire consumer-driven theme. Would you be bullish considering these are the only ones which still have the pricing power in their hand?
We are positive. Having said that, profit growth need not be too exciting because commodity prices are moving up as well for them. You have seen palm oil hit an all time high, just cooled off a little bit. Same holds true for a lot of other commodities, both petro-based and natural-based commodities. So there is a little bit of input price pressure for these people, but having said that, the resilience of demand is the highest for this segment.
If I look at your portfolio holding, currently you are overweight on Bharti. What is the logic there?
It is again high margin business. It has faced a fair bit of brunt of competition; competition is actually easing off for these people on the domestic market. You also have seen the balance sheet impact of 3G hit them, but you are going to see the revenues from 3G coming through the next two to three years and may not be significant, but it is still going to be there. And then the black box, which is Africa, as to how it turns around or does not turn around, but having said that, it is a very defensive stock with most of the negatives priced in.
A comment on the macro environment and what do you think it means for Indian markets?
Overall, the macro environment is slowing down, especially on the industrial side. Agriculture side is doing fairly well and on the services side, there will be a slowdown, but it will be far less than the industrial one, primarily because of the fact that the interest rates are going up and credit growth is expected to come down. So overall, the GDP rate would be in the 7.5% to 8% range for FY12 and consequently, top line growth for companies would be that much lower than FY11 and there could be some profit pressure as well coming through because of margins coming down. As a result, we could see profit growth big far lower than what the street expects.
Is the market really keenly watching out for what comes around tomorrow once the election results are out?
That is one. What the markets are looking forward to is the fact that whether the government is firm on reducing subsidies, especially the oil subsidies, considering oil at $105-110 would mean that our subsidy levels do go up significantly as also fertiliser subsidies. So, the government has to reduce its subsidies and its fiscal deficit. Something has to give, either fiscal deficit has to go up or subsidies have to come down. We are watching for that.
Of late, what has been your portfolio strategy because last time when we interacted on this forum, you were negative on commodities and you were bullish on banks?
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We turned a little bearish on banks after we met last, primarily because of asset quality issues and also to some extent, we were cautious because of the interest rate hike. So there has been shift in strategy there. And in terms of commodities, we are still underweight, we are still underweight on real estate, we are still underweight cyclicals and infrastructure stocks and positive on the consumption theme as a basket.
Just want to get you in on FMCG and this entire consumer-driven theme. Would you be bullish considering these are the only ones which still have the pricing power in their hand?
We are positive. Having said that, profit growth need not be too exciting because commodity prices are moving up as well for them. You have seen palm oil hit an all time high, just cooled off a little bit. Same holds true for a lot of other commodities, both petro-based and natural-based commodities. So there is a little bit of input price pressure for these people, but having said that, the resilience of demand is the highest for this segment.
If I look at your portfolio holding, currently you are overweight on Bharti. What is the logic there?
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It is again high margin business. It has faced a fair bit of brunt of competition; competition is actually easing off for these people on the domestic market. You also have seen the balance sheet impact of 3G hit them, but you are going to see the revenues from 3G coming through the next two to three years and may not be significant, but it is still going to be there. And then the black box, which is Africa, as to how it turns around or does not turn around, but having said that, it is a very defensive stock with most of the negatives priced in.
What are your thoughts on the market range? Do you think for the year, Indian markets have topped out or towards the second half, we could actually touch a new all-time high?
I do not think that the markets could break out from this level unless something changes on the policy front. We need to have much more proactive government, especially on infrastructure. With manufacturing and infrastructure ebbing and actually cooling off significantly, it is difficult to see the markets hit an all-time high. Consequently, financials are also cooling off and where people are actually looking at safe havens rather than growth and India is a growth market and if we do not have growth or confidence of growth, markets hitting an all-time high will be difficult.
What about autos because they are sensitive to both interest rates as well as commodities?
In auto, we really have to be very case specific. It is no longer a generalised situation.
For next 6 months, for next 12 months, how are you positioning yourself against this commodity inflation? Are you betting on buying more commodity stocks or are you actually looking at avoiding commodity consumers?
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We are looking at commodity consumers actively because a lot of the commodity rallies have been on the back of easy money around the world and with some restrictions on trading as well as probably demand cooling off in the developed markets, we could see commodities easing off. So highly-leveraged users may actually benefit a little bit more than the commodity stocks itself and therefore, we are looking at that rather than looking at commodity stocks etc.What about capital goods because as fears of growth slowdown kick in, this is the space which would be the hardest hit?
Yes, not only growth, there is also going to be a bit of margin pressure because if China slows down a little bit, then you are going to see a lot of capital goods supplies from China as well into India. We are seeing that in the power sector and consequently, we have to build the case of slower revenue growth and lower margins and then the picture is quite pretty.
Outline your top 3 ideas for us -- large cap, midcap, and small cap. I would keep this one open, but names where you are absolutely convinced that it makes sense to be a buyer.
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In terms of the large cap stocks, we have Cairn as one of our top picks, which is in the oil and gas field. India is deficit on oil and we also have Petronet LNG as one of our top picks which is in the gas import business and we continue to like ICICI Bank. So these are the top 3 picks that we have.From a market perspective, how crucial is the outcome of assembly elections?
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Not too much really. What we really need to watch is what the Centre does in terms of reforms and moving ahead on the infrastructure space. These elections may seem important, but in retrospect, may not be that important.Download
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