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Larger companies used downturn to improve efficiencies of operation: Sunil Subramaniam

A lot of earnings growth due to the Nirmala effect in terms of the tax breaks that came in.

ET Now|
Updated: Nov 23, 2019, 01.59 PM IST
Sunil Subramaniam-Sundaram MF-1200
Second, a lot of the earnings growth was partly due to the Nirmala effect in terms of the tax breaks that came in.
Both banking sector smallcaps as well as the overall non-banking smallcaps have shown a de-growth in their earnings, says Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund. Excerpts from an interview with ETNOW.

ETNOW : What is the rationale behind launching a fund that is going to invest in international equities of global brands?

Sunil Subramaniam: After our tie-up with BNP Paribas for an AMC broke up, we applied for and got a licence in Singapore to set up an asset management company. for getting international investors into Indian equities. So, we launched a midcap fund investing in India. We thought with Sundaram’s retail network of 90 branches and more than 1.8 million investors, we could use the expertise available at our Singapore AMC to help Indian retail investors get a flavour of something they cannot do on their own. Now for buying equities internationally, the government has a liberalised remittance scheme of $250,000. HNIs are able to take advantage of it.

Many years ago in 2014-15, we launched this concept in a close-ended fund in India managed by the Singapore people and we collected about Rs 140-150 crore. A close-ended fund had a limited reach now in June 2015. We launched an open-ended fund in Singapore catering to the same asset class of brands and we have now built up a track record.

From a customer perspective, international equities is a very dangerous and risky place. You do not know which stocks, which country, the research to go and do it on your own. If you had to go to international equities, then you need to be sure that the stocks that you are buying have a sustainability and all that. Brands have competitive advantage and the ability to ride through downcycles and upcycles. By buying a brand, I am not buying a single country because many brands have multiple geographies in the world as part of their market and automatically you are buying world.

ETNOW: What is the ideal geographical mix that you are aiming to achieve?

Sunil Subramaniam: Let me explain the portfolio construction and that will answer this question. We are looking at various brand rating agencies of the world. Interbrand is the one which comes to mind, there are quite a few others. So let us take Interbrand. We are going to take the top 30 world brands as rated by Interbrand. One of the factors that Interbrand looks at is the geographic spread of that company. By very factor of it makes it into the top 30 in the world. That means this has a worldwide brand recall. So that is one way the geographic divestment gets achieved.

But the brand cannot make it to the top. I will give you an example. Tencent is such a big company in China but Tencent is not there in the top 30 brands of the world because it is very China centric units business. Going by the brand philosophy, we get geographic diversification. Now the fact that the US is a mother country for demand means that a lot of the big brand companies start off in the US. In terms of the current portfolio, on the Singapore global brand front, 60% of the stocks in it are listed in the US.

Talking about domestic markets, what is your take on the disinvestment announcement made by the finance minister? How exactly should these companies be approached hereafter?

It is very good from two perspectives. One, this family sliver is coming out into the market for the market to participate. Number two, hopefully this will lead to privatisation over the medium term. That means the efficiencies and economies of these companies will improve. Three, more short term, it is surgically going to help contain that fiscal deficit risk which after the corporate tax giveaways had suddenly loomed large. This comes as a cushion because you notice some rating agencies had put India a little bit on watch. So, this would be a cushioning factor to the risk factor on India equities from an FII perspective and should ease that concern a little bit.

ETNOW: What did you make of the earning season and which pockets of the market stood out for you?

Sunil Subramaniam: I look at the earning season from two different perspectives. The telecom provisions brought down the earnings of the market as a whole. Otherwise, banks are the one sector which have held up the markets earnings. Overall market earnings are about 20% without the telecom thing and if you take away banks, it comes down to about 16% for largecaps and 16% for midcaps. Smallcaps are the ones which have got hurt. Both the banking sector smallcaps as well as the overall non-banking smallcaps have shown a de-growth in their earnings.

Second, a lot of the earnings growth was partly due to the Nirmala effect in terms of the tax breaks that came in. Largecaps actually have shown a negative growth on top line, flattish on the EBITDA but sharp rise in the EPSes because of the taxation effect. But then taxation is a permanent effect, so why should we discount that? It is a permanent profit growth for these companies but the fact that they are able to post positive EBITDAs and negative top line growth indicates that larger and larger midcap companies are able to use this downturn to improve their efficiency of operation. This is a healthier longer term thing.

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