'Telecom to do well this year' | Value Research Soumendra Nath Lahiri of L&T Mutual Fund tells us why they're keeping a close on the telecom sector...

'Telecom to do well this year'

Soumendra Nath Lahiri of L&T Mutual Fund tells us why they're keeping a close on the telecom sector...

Soumendra Nath Lahiri, Head - Equity, L&T Mutual Fund, believes the reforms and policies announced in the past few months haven't picked up pace. He tells Varun Chabba why this might lead to muted growth expectations.

What's your outlook for the near term (6 months to 1 year)?
Markets did extremely well in 2012 due to the downgrade cycle nearing an end and strong FII inflows. A combination of better than expected numbers and strong portfolio flows ensured that we had a good last year. This further continued into the first two months of 2013. Clearly, it looked like the worst was behind us, and the pace of recovery from here onwards would be pretty slow and gradual against the backdrop of reforms and policies seen in the last few months.

However, on the ground, the pace of execution has been tardy. This is clearly visible in areas which involve decision-making and policy changes such as the infrastructure space. Unless some of these issues pick up pace, I would think the coming years should see a much lower growth expectations.

If we track the earnings per share growth over a time frame of 5 years, you will see that except for a good revival between 2009 and 2012, growth has been mediocre. This year, for instance, in 2013-14, our growth expectations would be around 10-12 per cent. So we would expect markets to track these kinds of growth rates over the next year or so. If you take a 20-year data, earnings growth have been in the region of around 14-15 per cent and markets have given similar kind of returns. Today, where things stand, we think the market should track earnings growth.

With this outlook, how do you plan to position your portfolios?
Our primary objective is delivering long-term and consistent performance on a risk adjusted basis. We focus more on in-house research and have broad-based our coverage across various analysts. Bottom-up stock selection is central to our portfolio construction and we have built a team of six analysts, one head of research and three fund managers.

In the current environment, we have three baskets to choose stocks from. The infrastructure space is the first basket: it could be telecom, capital goods, utilities, resources, asset owners, etc. The sector has not done well given the ground realities impacting this segment. Nonetheless, we believe telecom would do better despite the regulatory overhang. We think the competitive intensity there has come down quite considerably and over the next 9-12 months, one should start seeing the benefits of pricing power from existing established players. The second space is the consumption stocks which have been witnessing some slowdown but valuations are still on the higher side. And the third basket is the one that caters to the export markets or the outsourcing markets. A combination of better environment in the end-user market, together with favourable tailwind of currency, will benefit the sector. So, pharmaceuticals and technology are areas where we are overweight in our portfolio.

Oil and gas is another space where we are seeing benefit of government reforms and recently, the sector benefited from a global correction in prices of crude oil and commodities. Following a period of poor performance compared to the broader markets, valuations have become pretty attractive. Apart from these, we also believe there is a huge opportunity for private sector banks to grow the business considerably over the next 3-4 years given that their market share relative to state owned banks is pretty small.

Which sectors are you keeping away from?
We have been highly underweight in the metals sector. Public sector banks is another space where we have been somewhat underweight. However, with the recent price correction witnessed in this space, valuations have become attractive and at this juncture, the state owned banks space looks more interesting.

Any major difference you find to fund management at L&T?
The basic philosophy is the same in terms of stock selection, research and additions to the portfolio. We have also been more or less following the bottom-up approach which is similar to what Fidelity adopted. So personally, I think there is hardly any difference in the way we go about identifying stocks in portfolio.

Do you have any specific strategy in place to take the ex-Fidelity funds forward?
The process remains similar to what was done before. In the last three months or so since we took over, we booked profits in some stocks in the portfolios which had run their course. We added new names which we believe have the potential over the long-term. And where we felt that the idea was worth holding onto, we continued our positions.

What is the emphasis on in managing the L&T Special Situations Fund?
L&T India Special Situations Fund is focused on creating long-term value through a diversified portfolio built around high conviction stocks in Special Situations. Special Situations are unusual circumstances that companies sometimes find themselves in – either in terms of their business or their stock price – or both. These could include turnarounds, new business streams, underappreciated growth, asset plays, corporate actions, or could simply be companies whose stocks have fallen out of market favour. The fund provides access to those situations in the stock market that have the potential to deliver superior returns if spotted early, analysed carefully and held onto for the right amount of time. So, there are a lot of situations where we think the stock price may not reflect the true potential of the company and these stocks could be out of favour. We believe that if we do a good job in identifying such ideas early then I think a there is a good amount of money to be made.

Do you think that the 3-year lock-in period in your Tax Savings Fund influences your stock selection?
To some extent yes. The way we would want to position stocks and the fact that we have money locked in for 3 years gives us an opportunity to think differently in terms of buying at least a percentage of the portfolio. I think as a result of this we will have more bias towards market capitalisation and at this point it is mostly large- cap bias which sort of suits the current market situation. Over a period of time as opportunities come about in the mid- and small-cap space, we would definitely diversify the portfolio accordingly. The focus there has been on the fundamentals – looking for companies and businesses that are of good quality, sustainable, looking at managements which have reasonable track record and then valuations. If all this turns out in our favour then we buy the specific stock. The 3-year lock-in actually helps us in taking a slightly longer term view here.

Your view on infrastructure space...
The infrastructure space has borne the brunt of policy inaction and reforms. We believe the situation is changing at the margin. Clearly, there are some areas which would benefit going forward. So we have the power segment, the oil and gas segment which has seen price deregulation and the roads space. We also believe that the macro environment has been improving against a backdrop of lower inflationary pressures, wage growth stabilising and a cut in interest rates. All these will help improve investor sentiment. An area which we currently favour is the cement sector, which we think will get the benefit of being a local commodity although capacity utilisation is slow but pricing has so far remained stable. Incremental capacity addition in the sector will take time to show up.

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