It is probably time for small and midcaps to perform: Kunj Bansal
Within commodities, I would be more positive on cement instead of metals, say Bansal.
What do you think the markets would want to see from NDA-2.0?
What the market wants to see going forward from here is the improvement in macro and micro numbers. While the uncertainty is over, the fear that in case of a change in government, the policies will change and the growth period may get lengthened is over.
But let us keep in mind that now it is time to go back to basics. Our macro and micro situation probably is not as great. There seems to be a risk of fiscal deficit slipping out of the target. Tax collections have been lower than the target and the growth is not reflecting in the earnings of the corporates. So I think that is where we have to be back to. Thankfully the oil price globally continues to support us so that will be a positive factor if it remains that way. And so does the currency movement. So net-net, it is back to basics, uncertainty and the risk of policy changes not being there anymore. Now focus has to come back to improving macro and micro.
Too many coincidences, yes from the same village also. That is another coincidence, I always tell people.
Yes. Its like this filmy dialogue, aap kuch karna chaho toh puri kaynaat aapko karne ke liye jut jati hai (If you truly want to do something, the universe conspires to help you), So, probably something similar has happened to this government and all the global factors have helped it.
If we look at the monsoon track record of last five years, that has also been reasonably friendly. Let us see what happens going forward. But yes, the oil price will continue to remain a challenge, especially if it moves up with this news flow of Iran and Syria war and the US again is going strict on sanctions. So, that will be a challenge.
We are coming close to monsoon that is something that will have to consider. Net-net, the Indian equity market story has not been as much about growth, especially in last few years. It has been a case of more asset re-allocation. After talking for last 10-15-20 years, Indian equity penetration is not there. The money invested in equity from Indian savings shows that change has happened in the last three years. We could assign the reason to demonetisation or maybe it would have happened otherwise if demonetisation was not there. I do not know.
So the money which was going to the non-productive physical asset classes like gold and real estate has significantly come down in the last three years. So, coming back has been the story and that is what the story will continue to be.
As I said, growth is not there, macroeconomic numbers are not there, corporate earnings are not there. But that does not mean equity market will not give returns. The equity market will give returns but that will come from money inflow that will continue to come in. The re-allocation of the asset class from real estate -- physical assets to financial assets will continue. Within that, we have seen the phases wherein last one year, largecaps sharply outperformed the mid and smallcaps.
Is it time for small and midcaps to perform? Probably yes. Those kind of changes will keep happening wherever the result support is there.
Where are you deploying money within the engineering and capital goods space?
Surprisingly, I continue to remain doubtful on this whole engineering and capital goods space. In last five year also, while it is well known fact that a significantly high amount of investment has gone into road construction and if I juxtapose that with the stock performance or even the financial performance of the road companies, road EPC, road owners, other than one or two exceptions, probably none of those have given any return to shareholders for three, four, five years.
So let us keep in mind that we are not talking here of a short-term return. So, that was a surprise. We saw so much of investment, so much of focus by the government in infrastructure investment especially in road and yet not a single stock has given return to shareholders! The reason is that most of these companies own multiple projects.
As a result of this government focus, the number of projects under them went up, but there continue to remain problems with one project on acquisition, another on financial closure and yet, another on less than projected traffic growth with one project on debt equity ratio having gone skewed. As a whole, the holding company or the main ownership company of these projects did not improve its financials as much as it could.
Of course, there has been a significant reduction in the overall debt by all these companies, but that resulted in no return coming to the shareholders. That is why I continue to remain doubtful on returns coming in from infrastructure or investment related sectors or stocks.
The only space where I think the return can continue to come in is cement. We have already seen the performance coming in in terms of financial performance as well as stock performance especially the large cap companies. It is time for the midcap investments in the overall as a strategy. Within that midcap cement is something which is where I think the return can come in going forward.
What is the outlook on pharma?
I have been finding it difficult to be able to predict the developments in the pharma space. After continued up down, the sector has been an underperformer for almost close to four years now. It will continue to remain that way. There are a lot of variables, a lot of factors affecting it, we all know USFDA continues to be an issue that will be the way the life will be with the pharma sector and pharma companies going forward. Again the growth challenges, especially in the US market (which used to be a major market), continues to be there and so has become the case in the domestic market as well.
It is difficult now with the government having come back, will it focus on its earlier policy of focussing on generics and all that which had reduced in the last two years of the previous regime? If yes, that can be the other challenge.
Again unlike a lot of other sectors, en-block outperformance or underperformance has not been the case with the pharma. So, it is all the more difficult to take a call. There are some specific companies which sharply outperformed over the last one, one and a half years and the others sharply underperformed.
It will continue to be difficult for me to be able to predict and as a result I would probably stay away. But at the same time, there are other investment opportunities available. Were they not available, I would have probably tried to apply my mind more into the pharma sector.
Purely from an election standpoint, do you concur that power utilities like NTPC, Power Grid and some of the quality banks are spaces to remain invested in?
Both are completely different sectors in terms of their approach and financial parameters and so I will talk about them separately. The power utilities like NHPC and Power Grid have been massive underperformers over the years. I am not talking about over 10-year period. Some other utilities like Tata Power have also been massive underperformers but these are the best traders’ friends.
For long-term investors, it is a destruction of value, the stocks have not given any return and will not give any return. Also from the point of view of the fact that the government policies regarding that keep changing depending on the larger need of the populace and that’s how it should be. When it comes to investments, I do not think utilities is a space to invest in for medium or long- term investors.
Moving on to banks, that is where we will continue to see good growth coming in, going forward based on all the developments that have been happening over the last few years.
The NPA challenges, the NCLTs, the insolvency code and all that because of government continuity, will continue to take shape going forward and will give a lot of support. In addition because the NPA issue has been tackled by the banks, they have been able to focus on growth for the last three or four quarters. As a result, we will continue to see some good numbers coming in from there.
Also if we continue to see inflows, particularly from overseas, those will first go to the largecap spaces, liquid spaces, liquid and high float norm assets and that is where these private sector corporate banks will come in again.
Within banks, although we have seen a good rally coming in public sector banks after the exit poll and then yesterday’s results, I do not think that is going to be sustainable.
The government is rightly on its way to restructure the whole public sector banking space, we already saw them clubbing three banks and I think that is a trend that will continue as the government has got a second term. As a result, the investors, are not likely to get any return in the public sector banks. Private sector banks both large as well as mid sized is the space that will continue to give returns.
What about the metal space as a whole? There has been quite a bit of news flow and being a cyclical sector, how do you place your bets within metals?
I would avoid it for now. I would prefer to play safe because there is a lack of clarity in terms of the future price movements of the commodities going forward. Also, there are individual issues with a lot of companies in terms of some acquisitions they are trying to do, in terms of some getting sold but the process is not getting concluded.
Within commodities, cement is one commodity that probably will do well and looks like a good investment opportunity to me. For the last two, three quarters, despite the so-called stress in the economy, cement companies have been reporting a reasonably decent volume growth towards the high single to low double digit that is a trend that will continue. So within commodities, cement is something I will be more positive on instead of metals.