Downside seems to be very limited for Indian markets: Reliance MF

In an interview with ET Now, Sunil Singhania, Head-Equities, Reliance MF, gives his views on markets. Excerpts:

ET Now: How is Reliance Mutual Fund coping up in a tough environment and what has been your basic market and portfolio approach?

Sunil Singhania: There is no denying the fact that last one year has been very challenging and challenges have come first from the global environment. So, whether it was slowing US or mostly concerns on Euro and then recently there have been some concerns even on China. Lately, the concerns have been more domestic and that is exactly the reason why this market is going nowhere. So, on one hand you have economic numbers specifically from India coming very early, whether it was IIP numbers or even the profit growth numbers, which have been cut quite drastically, which have been ensuring that the market sort of caps out at a particular level. At the same time, there have been technical reasons of news flow being discounted and a low exposure to the market, which have been holding up the market, so from a fund house perspective, obviously there has been no clear direction and in this kind of an environment, the focus is more on how we can structure our portfolio to benefit from the stability in the market and the next move whenever it comes. So, more or less it has been 90-92% invested, try and focus on companies, which are not performing well in the markets not because of fundamental reasons but because there has been less interest in the market and try to see how we rebalance the portfolio. It has been more slight rebalancing rather than taking aggressive calls.

ET Now: So what is it that you are mapping in terms of fund flows? Are they inflows in form of SIPs right now, cases of redemption or is there just a shift of funds to debt schemes currently?

Sunil Singhania: There is no denying the fact that last 2-3 years net inflows have almost been negligible. There have been months where there have been some positive flows but last month again was sort of a flat month where the SIP inflows got negated by the regular redemption, so net-net most of the fund houses including us had no redemptions on net basis or no inflows. It is very difficult from a retail investors’ perspective because obviously the markets have been the way it is for the last 15 months. And also the fact that alternative investment opportunities like fixed income have been giving very good returns of 9.5-10%. Though money keeps on coming in those funds, at least in the equities side, there have been no net inflows but the heartening thing is that investors are matured, SIPs have not been discontinued, SIP continue and there have been no redemptions at these levels because investors do realise that these are challenging times in a growing economy like India are not going to continue forever. So, we have to wait.

ET Now: Markets historically have given returns of 2.5% of GDP. Now with GDP itself coming under threat and we have got a print of sub-7% on the GDP, how much return are you expecting in the coming calendar year?

Sunil Singhania: You answered the question. The question is questionable in the sense that investors are not very confident about the growth of the country and that is exactly the reason why money is not coming into the equity markets. The more worrying thing is that India growth has been rapid over the last one or two decades largely because of the entrepreneur spirit and because the private sector has grown rapidly, has expanded rapidly. That is where over the last one year to 15 months, things have come to a standstill. So, you need a real concerted effort from the government and the policymakers to encourage this capacity expansion and the growth from the private sector to start. That would give the markets the confidence that GDP growth of 7%+ is a reality and then we would be back to the levels you mentioned, 2-2.5% of the real GDP growth. Whether these returns are going to come in the next six months, obviously there is a question mark but we still remain very optimistic that whether these kind of returns will come over the period of 3-5 years, we definitely think so.

ET Now: We have got a week left for the winter session to conclude in the parliament. Has the market now given up hope on key bills being passed given the kind of policy stalemate we have seen up until now?

Sunil Singhania: I do not think that anyone has any hope frankly. There have been some attempts made but unfortunately there has been hardly any consensus reached between various political parties whether they are on the ruling side or on the opposition side. And as a result of which, we have seen that session after session being wasted and that is exactly the reason why the markets are the way they are. There have been some small attempts made like the cable bill, which has got approved and a few smaller other ones but by and large the big ticket reforms, which were expected, so whether it was FDI in retail or to some extent an insurance or pension, that was the signal, which the markets looked at. When it was announced, you saw the markets really appreciated and you saw a decent run-up but somehow due to the political scenario, it has got back to the backburner, so at least nothing major is expected from the parliament. At best if something, we might see the policy from the RBI might bring to some extent some hope.

ET Now: The inflation data is due today and the street estimates are that inflation today for the month gone by would be at about 9%, which is the lowest in last 11 months. Does this make a strong case for RBI to cut rates when they will announce and table the credit policy on Friday?

Sunil Singhania: Cut might be a little bit too premature but even if the RBI starts to give a signal that finally we are at a situation where inflation is decisively going to come off, that itself can be fundamentally positive. One good thing is that because they have tightened so aggressively and definitely we are not in favour of this being done the way it is because it has really put a lot of problems as far as the companies’ finances are concerned and that is also one of the reasons why the growth is slowing down. But the fact that we have tightened so aggressively also means that India as a country has probably the most leeway in terms of a loosening monetary policy. And once it is backed by some action on the decision making front, probably that can be the trigger going forward but it is too premature to say. So, from our perspective even if the signals come that yes, we are coming to a phase where we can start to look at interest rates being cut, that itself can be to some extent positive.

ET Now: So what rate action is the market pricing in right now, a pause this time and a cut in April?

Sunil Singhania: I do not think anyone is looking at it right now. Everyday you look at the markets. There are some or the other concerns, which keep on hitting the market. The good thing is that no one is invested in the market and everyone is so negative on the markets that every time the market looks lost, there is something, which props the market. So, whether it is one day the IT sector, some other day the commodity sector, the technicals are definitely in favour of markets not going down but I do not think market is looking at too much from the RBI policy itself.

ET Now: Overseas fund mangers also have been underweight on India. Do you see come 2012, things could improve?

Sunil Singhania: From a global investors’ perspective, again they have been probably underweight India but it is like in India where everyone has just gone into the consumption theme even if the PE is 35 and 40, probably that is exactly the situation globally, so global investors again are in a risk-aversion mode. They have gone to safer countries where the currency is a little bit much more stable. In India, they have been hit by 25% fall in the markets and a 15% hit in the currency, so which is not a good thing from a global investor’s perspective.

ET Now: The pace of the falling rupee is pretty concerning at this point in time. We are already seeing 54 levels this morning in sight, 53.74 on last count. How much more downside can we see when it comes to the currency? Can 55 be a floor or could it get worse from there?

Sunil Singhania: Again we are not currency experts but when we read the reports, even reports which are as recent as 3-4 months old, across whether it was a foreign broking outfits or the domestic, no one had a rupee even at 48 as a target. So, definitely currencies have baffled and proved everyone wrong and we would not claim to be experts on that but the fact of the matter is that rupee is at 53 and we have to live with that reality. From a global investor’s perspective, what would change this is rupee stabilising, probably some decision making and again alternatives becoming a little bit more risky than India. Actually from a foreign investor’s perspective, India can become a better buy much earlier than domestic investors because they are getting India cheaper because of the rupee depreciation.

ET Now: On the Q3 earnings considering they are just a month away, are we looking at single digit earnings growth or is that too pessimistic?

Sunil Singhania: Third quarter, I will be surprised if there is an earnings growth frankly because again there will be a few companies, which will be hit by rupee at 53 versus 48.5, which it closed at in September. Unless there are some below the line adjustments, we are not going to see too much of a profit growth from a lot of these companies. Obviously there will be some sectors, which will be benefited because we had a festival season in this quarter. Some companies will be benefited because of rupee depreciation but by and large I do not think too much growth can be expected in this quarter. In fact overall as financial year FY12, the earnings estimates have already been cut to growth of less than 10%

ET Now: How long can you be long on the IT space just on the factor that rupee is being weak and that is going to augur well for some of these companies?

Sunil Singhania: IT has been a good sector. They have good companies who have been very consistent but to take a bet purely because the currency has depreciated, I do not know because the currency has surprised everyone and become 53. We do not know whether it is heading to 50 or 55. We do not know how much is the hedge of each company, which we will know only at the end of December. So, it is a safer sector in the current scenario but whether you can blindly just buy at any valuation, it would not be wise. Even from our perspective, we are definitely looking at a few IT companies, which would be benefited because of this but you have to be very selective because different companies will have different hedging policies and we have seen in 2008 that long-term fundamentally they can benefit from weakening rupee but if a lot of their forwards is already hedged, then the near term pain by way of mark-to-market provisions can be equally high, so we have to play it stock by stock.

ET Now: So what is it that you prefer, large caps or small cap IT names?

Sunil Singhania: Right now, it does not make sense to look at very small companies. There is definitely value in some of the larger mid-caps and I mean by larger mid-caps is not necessarily by market cap but by the size of operations, so we have companies, which have employees of numbering 6000, 10000, 15000, those are the companies, which are good valued but you have to have a slightly longer term outlook. Even on the large caps, there are a few companies, which are now trading at probably one of the lowest valuations, which they have traded over the last 6-7 years in the IT sector and those are the companies which definitely merit to look.

ET Now: At these levels given the way how financial stocks have corrected, is there a contra trade there?

Sunil Singhania: Two things have hit the banks. Obviously, they are sensitive to the interest rates, so interest rate rising is not good for them. Secondly, with the economy slowing down the way it has, obviously it has put a lot of stress on some of the sectors and that is being reflected in expectations of higher than normal provisioning for the financials and that is also weighed down on the financials. Going forward the biggest trigger obviously would be a clear-cut like a scenario where interest rates clearly look like falling. That would be the biggest trigger because that can to some extent also solve the problems of NPLs because lower interest rates would make a lot of these companies more able to repay the borrowings, which they have. So, at the margin they are a good play if the view is that interest rates are going to fall substantially.

ET Now: What about capital goods? How bad can it get in terms of order flows and then earnings as well that the markets may be pricing in right now?

Sunil Singhania: Next one year is definitely going to be challenging. There are no new projects of substance, which are being announced either by the public sector or the private sector and that will start to get reflected in their order book. And they have already started to feel that the order book is not growing and once that feeling becomes a little bit more clearer, you will see a sustained pressure there. But having said that, some of these companies have huge operating leverage and India is a country, which has got a huge opportunity going forward. We do believe that India is definitely on course to becoming a $5-6 trillion economy over the next 12-15 years. These are the companies, which would actually benefit, so at a price a lot of these companies would become decent long-term bets where you can definitely have great returns. So, while being negative in the near term, probably if there is any sharp correction, these are the very companies, which can be the differentiation as far as an investors portfolio is concerned.

ET Now: What are your thoughts on pure builders and cement companies also?

Sunil Singhania: Infrastructure completely depends on government policies, so that would be one sector, which we would like to wait till there is clear-cut government policies on that. Cement is a sector, which has been doing well in terms of profitability but there is overcapacity. Again luckily because there has been overcapacity, there are no new substantial capacities coming up. So, from a 2-3 years’ perspective, that can be one sector, which again can give decent stable cash flows.

ET Now: What about autos? Is the worst behind us with regards to sales volumes or you think the New Year and new launches can revive growth to some extent?

Sunil Singhania: Auto is a part of the discretionary spending as far as the passenger vehicles are concerned. Obviously there have been multiple headwinds, one is obviously the fact that because of higher inflation and because the economy has been slowing down, the outlook on salary increases to that extent is a little bit more muted than it was say three months back. You will have the discretionary wallet of every individual shrinking to that extent and which might definitely have an impact on passenger auto sales. Also, with the interest rates increasing the EMIs have been increasing, that also would probably lead to some down trading, so someone wanting to buy an Rs 8 lakh car might settle for a Rs 6 lakh or Rs 7 lakh car. On the commercial vehicle side, things have so far been pretty decent but there is definitely a possibility of some slowdown. So, while being a little bit cautious, auto among the various discretionary spending sectors is a little bit better placed because the valuations are not very stretched, the way the other discretionary spending sectors are.

ET Now: Is there a trade in any of the oil and gas or energy stocks or it’s too early to buy oil and gas and energy stocks given the kind of policy backdrop we are in?

Sunil Singhania: As far as the government companies are concerned, definitely. In this current environment where government finances are so stressed, there is that much more apprehension about what will happen to these companies. But there are some other private sector oil and gas companies, which at these current prices have started to look interesting. So, that’s a large sector and a sector, which no investor can ignore.

ET Now: So how does the fund manager, you formulate a strategy sitting at 4700? Is that the floor or can we see worst levels from here?

Sunil Singhania: We do not know from a day-to-day perspective but one thing is very clear, we have seen these challenges come in front of India a lot of times. We have also seen that India and Indians act only when pushed to the wall and right now they have definitely been pushed to the wall, so we can definitely expect surprises, which no one is expecting. Our view would be that have faith in the economy, this $1.5 trillion economy is definitely going to be 5 trillion or 6 trillion, probably we have lost one or two years because of what has happened over the last 15 months. But nevertheless there is definitely hope and from our perspective, we are always looking at companies, which will survive these difficult six months and come out winners from a 5-10 years perspective.

ET Now: And how bad it could be, 5%, 10% or even 15%?

Sunil Singhania: Again it is very abstract to give a number because numbers are always proven wrong. If you would ask me at 5500, how much would be the downside? My answer would have been 5-10% but because so much is already expected negatively out of the market and because we are so underinvested, that itself is acting as a floor, so we will tend to believe that despite all these negatives, the downside seems to be very limited.