Chandresh Nigam, Managing Director and CEO, Axis Mutual Fund, talks about where investors should place their bets after the market correction
Axis Mutual Fund is one of the few recent new entrants to the mutual fund industry which have managed to carve out a reputation for themselves, especially in the equity fund space. Its funds have been extremely stable benchmark beaters. We spoke to Chandresh Nigam, Managing Director and CEO of the fund house, for his take on the recent market correction and where investors should place their bets.
Last year, just after the elections, most market players and funds had taken a very bullish view on equities. Now we find that the earnings picture is not really panning out as they expected. So are you revisiting your equity fund portfolios?
If you look at the situation from the Axis perspective, I think things haven't really changed too much. The companies we own have, by and large, met expectations. At the time of the elections, we thought the revival would take 12-18 months. But the problems are quite complex and we now think the revival may take another 12 months. To my mind, the excessive expectations that were built up in the middle of 2014 were without solid anchors and have been belied.
Some of the better-quality cyclical stocks have not fared badly (in this correction). But second-rung cyclical businesses, which are really dependant on the economy, have corrected. So, coming to your question, I don't think much has changed for us. Out of the 250 odd companies which make up the value-creating universe in this country, we are only looking to find 50-60 companies that offer value. We are able to find that value. Yes, one area where things have changed is the valuations of mid caps and small caps. Three-four months ago, we felt that the risk- reward ratio was not making sense in the mid- and small-cap space. Valuations of some mid-cap stocks had gone above the comparable large caps in some sectors. That has now corrected and we see some buying opportunities. In fact, some of the businesses which we really like have become cheaper. Earlier we could not buy them in sufficient quantities because of valuations. Now they do look more attractive. We are not overly sanguine. We are saying that with 6-7 per cent growth, our businesses will grow in double digits. Some segments will grow at 17-20 per cent.
I think that one big problem has been all the negative publicity surrounding the government in the last thee to four months. That is a function of very high expectations created before the elections, which are leading to all this disappointment now. Even if the government performs at some reasonable level, which is what all of us want, we will get our 7 per cent GDP growth. But unfortunately sentiment has been affected. This is a worry. Ultimately, in the economy, both investor and consumer actions are affected by sentiment. In that sense, GDP is a sum of sentiments. And we are past those days where you could just have one or two policy actions and the entire sentiment would turn favourable. Turning around sentiment now is not going to be easy.
There has been some recent worry regarding FIIs rebalancing and reducing their India allocations.
Our view on the economy, both local as well as global, remains the same. Yes, a lot is being made about foreign investors, especially global funds rebalancing to China rather than India. That may happen but I think it's a very short-term, three-six months' issue. I think the big story that is not appreciated well enough is how unique India's position is in global markets. The world is still in a very slow growth, deflationary environment. Has the basic India story changed? No. India's growth rates remain high. Demographics are supportive. And because of inflation coming off, we see a good chance of another 50 basis point rate cut.
Today a lot of fund managers are talking about avoiding leveraged companies and going for zero- debt ones. Do you think there's too much money chasing these 'quality' stocks?
Our definition of quality is a company's pricing power, sustained marginal return on capital and, yes, we certainly like regular cash flows. The business should have rising dividend payouts. But I think the heart of what we look for in a business is pricing power. If you don't have pricing power, you will never meet the other parameters. So, you're right, maybe there is money coming in and people feel lower-quality stocks are too risky, so let me get into quality.
But one reason why I'm happy about this is that eventually if people really follow that strategy, I think Indian investors will have a much better return experience.
To my mind, value investing makes no sense in India. What people call 'value' in India is basically buying a good business at a low price. But the pure definition of value is buying a distressed business below its book value or replacement cost. Overseas, investors or fund managers can come in and take control of such businesses or influence the management to sell off, and hence value unlocking can happen. But this rarely happens in India.
At the market level, the concern is that analysts have been projecting forward earning growth of 15-20 per cent every year and it has not been coming through. Then how can you keep justifying forward valuations of 16 times or more for the Sensex?
It again comes down to individual businesses. There are businesses which provide you with reasonable visibility and predictability. A case in point is private-sector banks; they are still growing at 15-20 per cent. Similarly, look at consumption-oriented companies, look at pharma, even select infrastructure stories and capital goods, you can find companies growing at 15 per cent. In the long term, we have seen Sensex earnings or Nifty earnings grow at 17-18 per cent. But it has never been at 17-18 per cent right across the years. There have been variances from year to year. In the last cycle, from 2003 to 2008, we started very slow but then the economy picked up steam and eventually profit growth was at 35 per cent. We can't say that kind of growth will be repeated, but growth will surely come back. And markets will factor it in before it happens. Yes, if this whole assumption goes for a toss and we are not going to get growth at all in the economy, then the market will fall.
Consumer-good stocks have led the rally. Yet the consumption cycle is not looking very good now. What are your views on this?
Until 2010-11 or so, volume growth for some of these consumer companies used to be at 10-11 per cent. With inflation at 9-10 per cent, sales growth used to be as high as 20 per cent for some. But the rural market is in a bad shape today for various reasons, such as low MSP increases, monsoon and so on. So that's the part of the market which is underperforming. Urban growth went down to 2-3 per cent in some sectors in FY14, but I think it has improved to 4-5 per cent again. But rural growth has really slumped sharply and this is hurting. Ultimately, how long can you keep supporting the farm GDP through price increases? When you look at our main commodities, Indian prices are higher than international markets. So there is this massive requirement for agricultural productivity to increase. The government is putting in place some measures like higher spending on irrigation and so on. But yes, it is a worry.
What is the outlook for capital goods and investment-related companies?
Growth cannot pick up without the investment cycle looking up. Every developing economy in Asia has gone through this cycle and our demographics are no different. This is a two-part story. First the demographics change - urbanisation increases, young people enter the workforce, the dependency ratio falls and all these drive economic growth. So is India's dependency ratio getting better? It is. Is the urbanisation story happening? Absolutely, just look at the traffic in Bombay. The second leg is penetration. Incomes are rising and that should lead to more consumption of products and services. The economy is a supertanker. You can't expect a supertanker to suddenly become a speed boat. With a real GDP growth of 7 or 8 per cent, we should be very, very happy.
Axis Mutual Fund focuses a lot on risk management. So how does one prepare for an event like the US rate hike?
Any event that is so frequently debated and discussed in the market is bound to get factored in. When something is so much talked about, you feel a sense of relief when it really happens. In my view, unless the US Fed comes out with a guidance saying 'we will get to 2 per cent in six months' or something like that, the impact will not be all that big. If you look at US economic numbers, the big worry is if they start to get high inflation rates despite very low growth rates.
At some places in the US, there are some pockets of inflation building up. So what they call core CPI seems to be rising. Inflation in rentals is also rising. I don't think there is anything to worry about, but it's always good to just keep your eyes open.