If There Is No Pain, Why Should Valuations Be Attractive From A Long-Term Perspective - Outlook Business

16/06/2016
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Home/Specials/India'sBestFundManagers/"Ifthereisnopain,whyshouldvaluationsbeattractive?"
|MAR09,2016
India'sBestFund
Managers
"IfThereIsNo
Pain,WhyShould
ValuationsBe
Attractive?"
PrashantJain,CIO,HDFCMF
onhismarketoutlook&whyhe
isbettingonbanks
N Mahalakshmi
PrashantJainhastohiscreditthebest20yearperformancetrackrecordamongmutual
fundsnotonlyinthecountrybutalsoacrosstheworld.Yet,beinginthemoney
managementbusiness,withcustodyofRs
3
.0,000croreofassetsdirectlyunderhis
http://www.outlookbusiness.com/specials/indiasbestfundmanagers/ifthereisnopainwhyshouldvaluationsbeattractivefromalongtermperspecti
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16/06/2016
management,hecantescapebeingjudgedonhiseverymove.Forthefirsttime,hisfunds
arestrugglingtokeeppacewiththebenchmarkoverafiveyearperiod.Overthepastfive
yearsendingFebruary16,2016,HDFCEquityFunddeliveredareturnof6.43%versus
6.04%forbenchmarkCNX500andacategoryaverageof8.87%,whileHDFCTop200
delivered6.02%versus5.67%fortheBSE200andacategoryaverageof6.47%.Of
immediateconcernthoughisJainscontrarianstancethatistherootcauseofthispain.
Jainhasforegonehiswinningbetsintheconsumptionspaceinfavouroffinancialsand
capitalgoodsthatarecurrentlyunderstress.InthisfreewheelinginterviewwithOutlook
Business,Jainexplainshisstance.
Thisisperhapsthefirstfiveyearperiodwhereyourperformanceisbarely
matchingtheindexperformance.Doesthisworryyou?Rather,shoulditworry
yourinvestors?
Normally,35yearsisareasonabletimetomeasureperformance.Butwhenmarketcycles
arechangingthismaynotsuffice.Forexample,in1999,ifonewantedtopreservenearterm
performanceoneshouldhaveheldontoITstocksandnotboughtoldeconomystocksthat
wereremarkablycheap.Againin2007,ifonethoughtfromtheneartermperspective,it
wouldbeverydifficulttosellpowerorinfrastocksandbuyconsumer,pharmastocks.
Whenonefeelsthatthemarketismovingfromonethemetotheother,youhavetoletgoof
yourwinningbetsandbuysomethingthatispromisingforthefuture.Tillthetimethis
worksout,performancesuffers.Andifyouroneyearperformanceisweak,itimpactsthe
threeandfiveyearperformanceaswell.Fortunately,thisisnotthefirsttimeIamfacing
weakperformance.In1999,wetrailedcompetitionby60%.Why?Becauseafterwesold
Infosys,thestockdoubledandsodidthePEfrom150to300.ButwhenITstocksfell,we
morethanmadeup.
TheNAVofHDFCEquityFund,sinceits
launchin1994,hasgrownfromRs
1.
0toRs
4
.40
now.Asyoucanseefromthechart,thereare
periodsofunderperformanceinthisjourney.
Buteachtimethefundhaslaggedbehind,it
hascomebackstrongerandmorethanmade
upfortheunderperformance.Forexample,
2007wasaweakyearforusaswestayed
If there is no pain, why should valuations be attractive
awayfromrealestate,infraplays.Instead,
2/12
16/06/2016
from a long-term perspective?
weconcentratedonFMCG,pharmaandauto
sectors.Today,theindexisupsome20%
andthefundsNAVhasnearlydoubled.Iftoavoidunderperformancein2007,wehad
insteadparticipatedininfra,realestatesectors,todaysresultswouldnothavebeen
possible.
Whyareyoubettingonbanksandcapex?
Inmyopinion,thepainismaximumincapexandrelatedbusinesses.Capexshouldgrow
fasterthantheoveralleconomy.Consumptionandexportorientedbusinessesrepresent
highqualitybut,inmyjudgement,therearebetteropportunitieselsewhere.Also,therisk
rewardoflargecapsappearstobebettercomparedwithsmallandmidcaps.
Youarenotjustbuyingsharesthatareundervaluedbecausethemarketis
focusingelsewhere,butstocksthatareactuallyunderstress.Isntthatrisky?
Valuationsareattractiveonlywhenthereispain.Ifthereisnopain,whyshouldvaluations
beattractivefromalongtermperspective?Thekeyistofigureoutifthebusinesscandeal
withtheissuesandcomebacktohealthoveraperiodoftime.
Whenyoulookatfinancials,youhavetofirstunderstandthattherearetwotypesofbanks
inIndia.Thepopularwayoflookingatbanksaspublicvsprivateisnotthemost
appropriate.Inmyopinion,corporateversusretailframeworkismoreapt.SBI,ICICI,Axis
Bankandseveralotherpublicsectorbanksarecorporatelenders,whileHDFCBank,Kotak
Bank,IndusIndarepredominantlyretailbanks.BotharegoodbusinessmodelsandifIndia
weretogrow,bothshoulddowell.Butcorporatelendingismorecyclicalitgoesthrough
upsanddownswithbusinesscyclesandinstressedtimesassetqualityissuescanrise.This
iswhatishappeningtoday.Itsnotthefirsttimethishashappenednorwillitbethelast
suchcycle.Waybackin2001,thesituationwassimilar.Astheeconomyimproved,thestock
performancedidtoo.Inmyopinion,thesameshouldhappenthistime.
Aseconomicgrowthimproves,interestrates
movelower,someassetsaresoldandbanks
provideforimpairedassets,thingswill
improve.Also,therearechancesthat
impositionofminimumimportprice(MIP)
willworkoutfavourablyforthestressedsteel
sector.
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16/06/2016
Inanycase,postassetqualityreview(AQR)
bytheRBI,bankshavealreadyrecognisedor
willrecognisestressedassetsbyFY16.Bank
ofBaroda'smanagingdirectorexpectssteady
improvementinprofitabilityandhas
suggestedthatreturnonequityshouldreach
15%byFY18.
AsBuffettsays,Thefutureisneverclear.
There's no correlation between fund size and
Youpayaveryhighpriceinthestockmarket
performance. Only, large funds are more noticeable
foracheeryconsensus.Uncertaintyisthe
friendofthebuyeroflongtermvalues.
Governmentsusuallytakethepathofleastresistanceandcando
unpredictablethingsthatmaynotpleasethemarket.Althoughsomepublic
sectorbanksmaylookrelativelyrobust,thereareothersthatareundermore
stress.Isthereanoutsidechancethatthegovernmentmaysaddlebetterbanks
withbadapplesthatwillonlydestroyvalue?
Inmyassessment,whilemergerscantberuledoutcompletelytheyareunlikely.ButasI
said,withtheimpactofAQRbehindus,likelyimprovementincashflowsinthesteelsector
postMIP,assetsalesbysomeleveragedcorporates,andcapitalinfusionbygovernment
shouldleadtoimprovementFY17onwards.Thatwillprettymuchtakecareofthings.
Whenitcomestobanks,isthefactthatstresswillsubsidesoonfrombalance
sheetsenoughtobetonthem?Doyouseethemgrowing?Whatdriversareyou
countingon?
Thereisgoodvalueincorporatebanks.Valueisthebiggestdriverofstockpriceovertime.
Ifmostindustriesareoperatingatlessthan70%capacity,whereisthe
questionofexpansion?
Iexpectrecoverytobevisiblewithin12months.Capexrecoverywillbeledbyinfracapex
comingfromsectorssuchasroads,railways,powertransmissionanddistribution,mining
andsoon.Manufacturingcapexwilltaketimebecauseofovercapacity.Butoverthenext
fewyears,capexshouldleadeconomicgrowth.
Whatistherisktoyouranalysis?
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16/06/2016
Riskeithercomesfromflawedanalysisorfromlackofpatiencetostaythecoursewhenthe
marketisnotsupportive,notfromacontrarianview.Wehavetakencontrarianbetsinthe
pastandwehavebeenprovedrightovertime.Timewillonceagaintellifouranalysisis
right
IssizebecominganimpedimentforHDFCEquityFund?Doyouhavetotime
yourentrymuchaheadorexitmuchbefore?
Inmyopinion,thisthoughtisanillusionthatkeepsoncomingbackforaslongasIcan
remember.Inauniverseof,say,100funds,therewillbelargefundsandtherewillbesmall
funds.Whenalargefundunderperforms,itisnoticedalotmoreandtheeasiestconclusion
isthatsizeistoblamewhenasmallfundunderperforms,itissimplynoticedlessandsize
cannotbeblamed.
Reality,inmyopinion,isthatthereisnocorrelationbetweensizeandperformanceanyone
whofeelsthiswayshouldarrangeallfundseitherinorderofsizeorperformanceandthe
picturewillbeclear.ActuallytherearenolargefundsinIndiathelargestfundislessthan
0.2%ofthemarketcapitalisation!
Howdoyouexpecttheeconomytoperformoverthenextfiveyears?
TheIndianeconomyhasexperiencedsteadygrowthforthelastseveraldecadesirrespective
ofchangingglobalandlocalconditions.Seculargrowthdriverslikeattractive
demographics,risingpurchasingpower,lowpenetrationofconsumerdurables,skilledand
competitivemanpowerhavefuelledthisgrowth.Whiletheselongtermdriverscontinueto
beinplace,theoutlookforthenextfewyearsisbetterduetoacyclicalrecoverythatis
firmlyunderway.
Unlikemostemergingmarkets,Indiaisalargecommoditiesimporter.Thesharpfallinoil
priceshasledtosavingsof2.5%ofGDP.ThishasloweredCADfrom4.3%ofGDPinFY12
to0.8%inFY16,asperCitiResearchestimatesfiscaldeficitinonasteadydeclinefrom
~5.8%ofGDPinFY12to4.1%inFY15(isprojectedat3%inFY18).Inflationhasfallen
sharplyfrom10.2%inFY13to5.9%inFY15(latestreadingis5.7%inJanuary2016).
Interestratesarealsosteadilycomingoff.
Improvingmacroeconomicindicatorsandacyclicalrecoverythatisunderwayincapital
spendingpointtoafastereconomicgrowthinthefuture.Thecurrentyearsgrowthis
projectedat7.5%comparedwith5.1%inFY13andthisshouldgocloserto89%intwo
years.
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16/06/2016
Indiawillmostlikelybethe5thlargesteconomyby2020,behindUS,China,Japan,and
Germany.Itisalsolikelytobefastestgrowing.
WhatistheoutlookforIndianequities?
ThecorrectioninIndianequitiesatatimewhentheeconomyisimprovingonnearlyall
parametersoffersgoodopportunitiesforthediscerninginvestor.Thereisaclearevidence
offallingcommoditypricesworkingtoIndiasadvantage.
Thepolicydirectionisrightandtheeconomyismakinggoodprogressonmostfronts.Both
theeconomyandequitymarketsappeartobetransitioningfromconsumptiontocapex.
Improvingmarginoutlookofcorporates,likelylowerinterestrates,softcommodityprices
andreasonablevaluationspointtoapositiveoutlook.
Here'syourchancetoreadthelatestissueofOutlookBusinessforfree!Downloadthe
OutlookMagazinesappnow.AvailableonPlayStoreandAppStore
PRASHANTJAIN
EQUITIES
WARRENBUFFETT
HDFCMF
BANKS
CAPEX
SBI
ICICI
RISK
INDIA
6/12
16/06/2016
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16/06/2016

THE BIG STORY

from a long-term perspective?

performance. Only, large funds are more noticeable

Learning from the masters

Slow but steady

Tracking the stars

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