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    Don’t call it a bear market, there has simply been a slowdown: Prashant Jain, HDFC AMC

    Story outline

    • Businesses are doing reasonably well and equity markets are offering good value.
    • We reduced automobiles in portfolio mainly due to valuations.
    • Value investing works but it does test your patience.

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    As long as you do not overpay when you are investing over three, five years, you should do reasonably well. And I think in that sense it is a great market, says Prashant Jain, ED & CIO, HDFC Asset Management Co. Ltd. Excerpts from an interview with ETNOW.

    Even though it feels like a bear market in mid and smallcap stocks, your view is that it is not a bear market for the economy and the earnings.
    What has happened is very simply growth has slowed down. Bear market is not the correct way to describe it. I would say there is a slowdown in the economy; consumer discretionary is particularly impacted; other segments are not impacted. The equity markets are offering good value. When largecaps start offering good value, you are unlikely to get things wrong because these are large businesses with low leverage. Corporate leverage in India has come down. Most of the businesses which were in deep pain have either been sold or they are in a state where it does not really matter. The businesses are doing reasonably well and things are okay.

    In last five years, we have seen one event after the other -- demonetisation, GST, election cycle, IBC. The way Indian corporates have done business has changed in the last couple of years and will change. The transition is causing pain. When do you think the pain will get over and real resilience in earnings come?
    This is a very tough question to answer but we know what is missing in the economy and what needs to be done. What needs to be done is that private capex has to revive and when private capex revives with a six month lag consumption will automatically and sustainably revive. All questions that we need to ask is what can be done to revive private capex which has been so weak for so long. The answers are lower interest rates, resolving the IBC cases ASAP and moderating the supply by the government in primary markets, so that there is room for the private sector to raise capital.

    The supply of primary capital in the economy is limited. It is 20 billion which is 1% of GDP roughly that is not a lot. If that also we start impounding, then how will the capex revive? Please remember the leverage ratio in core sectors in the private sector are much higher than in public sector firms. Who needs to raise primary capital are the private sector core companies. Unless they get that capital, I do not think we will see a sustained revival in private capex.

    You have shied away from autos. Maruti was part of your portfolio in 2014-15. I do not see mention of Maruti in your declared portfolio. Did you sell out of autos? Do you think we may not see again the kind of PE multiples autos commanded -- Maruti went to 40 times, Eicher went to some 40-50 times?
    We sold automobiles or at least I reduced automobiles in my portfolio mainly driven by valuations.

    It was not a call on disruption?
    It was at the back of the mind that it will create challenges but in the passenger vehicle market we think the electric disruption will come in the last. It will happen first in two- wheelers, three-wheelers and public transport. So, it was there at the back of your mind but the primary reason were the valuations. At the peak, some of these companies were trading close to 40 times and we are also aware that a reasonable part of the growth has been sustained due to increased household leverage and that is telling you that when you are borrowing and spending and if income growth is not there, you will hit a roadblock. We were not so optimistic on sustained growth in this space despite the low penetration levels. But valuation is the primary reason.

    But now that pain is also reflecting in the stock prices, If you are confident of investment and consumption recovering first, do you think there is merit in revisiting autos?
    The prices have come down but the multiples have not come down because earnings will also degrow sharply. First investment has to revive, salaries have to go up and then we can make a case for sustained revival in consumer discretionary . There are a lot of factors at play here because if you look at the way the passenger car market is evolving, the UV space is growing much faster. The scooters gained share massively in the two-wheeler market, the sedans are losing share and the market share in the UV space are very different from the SUV space. The UV space is a reasonably open market with three-four players and each have 20-25% share.

    You have a large exposure to utilities. Typically utilities do well when interest rates are on their way down. Interest rates have come down, 8.5% has become 6.5%. Why are utility stocks not going high?
    Value investing works but it does test your patience and that is why it is difficult and challenging. In some places, it took three, five years for stocks to correct and in some cases it took two, three years for them to go up also. Look at what happened to NBFCs, pharmaceuticals, automobiles and auto ancillaries, they did not correct or go up overnight. It took a few years. So in utilities, in India, value is on our side. If you look at the price to book values of these companies, they are at lifetime lows, dividend yields are good. These are good large, dominant businesses. They are not going away anywhere and interest rates are low so the room for price to book value is to go up is actually significant. The challenge here again has been that there has been continuous supply at every price point and we have to wait either for that supply to get absorbed or for it to get curtailed. But in the end, because the business values are not at risk and are growing, lower interest rates means more value for the same profits. What we are debating is when will stock prices go up? It is the nature of the animal that there is uncertainty over that but if value is there, we will realise it one day.

    You made this point on this show in 2015 about pharma that prices had come down but PE multiples did not contract. But now PE multiples have also contracted. I have been told that globally generic prices have also bottomed out. You were bearish on pharma. Have you turned bullish now?
    Pharma is reasonably valued. It is not deep value but risk is also limited and Indian companies are very competitive globally just like in IT and I think profits should grow from here.

    But please remember, two things are happening; one your share in US markets is pretty large and as I said earlier, export growth for a country like India, 80% export growth comes by way of market share gains and not by market gains itself.

    When you are a large part of the market, you can see the Indian business in US generics and IT exports both are growing in single digits. So, you cannot lose sight of that fact.

    Number two, if you look at the local markets for a variety of reasons, the growth rates in local markets in pharmaceutical industry has come down to close to single digits. Earlier, this industry used to grow in mid to high double digits but those times have changed. It could be because of Jan Aushadhi. It could be because of new players, it could be because of one or two new e-commerce websites which are doing business. It could also be because of low inflation. I feel the sector is close to fairly valued.

    You have owned largecap IT for a reasonable amount of time. What did trick for largecap IT was the fact that America did much better than what we thought. BFSI businesses have stabilised and the buyback kicker has kicked in. Post budget, the entire romance of a buyback is gone thanks to a tax. What happens to IT stocks then?
    As shareholders, we are and we should be indifferent to dividends or buybacks.

    You buy the business you do not buy it for...
    No, whether you share cash by way of dividends or by way of buybacks, we are indifferent but to the extent that buybacks are being taxed, it will not make a difference whether you share cash with by-- but the payout ratios of IT companies are 80-90%. That is a great business which can keep on growing and share 80-90% of profits or free cash flow as dividends or buybacks. It tells you about the fundamental strength of that.

    Do you think for a long term investor, the differentiating factor would be patience and time?
    Equities need more patience than intelligence and that is time tested. Anyone who has held equities for long periods in a reasonably disciplined and diversified way has done well. It should not be different anytime around, if at all there is any correlation between your returns over three, five years and investments it is only with valuations. Forget about the economy, forget everything. As long as you do not overpay when you are investing over three, five years, you should do reasonably well. And I think in that sense it is a great market.
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    10 Comments on this Story

    Basdeo Tiwari339 days ago
    good analysis
    Sundarv 418 days ago
    Call it a bear market or just a slowdown, what matters is the fact that no trend reversal can be seen over the horizon.
    raaj419 days ago
    It is not bear it is correction of over heated market and cooling who thought loot is their birth right .. launch investigation in to competition commission memebers their assets they over looked cartel evident in their cash mountain
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