S Krishnakumar, currently serving as the Chief Investment Officer of Equity and the Vice President at Sundaram Asset Management Company, has been with the company since 2004. He has been its Equity Fund Manager since May 2005. Prior to that, he served as a Senior Research Analyst at the company from December 2003 to March 2004.
Krishnakumar has also served as a Vice President at Anush Shares and Securities and Senior Engineer at Lucas TVS.
In an interview with CNBC-TV18, he said that the worst is behind for auto companies and that the production was coming back on track.
Here are the edited excerpts:
Q: The market is at new all-time high but the broader market is still some distance away, even though it has started to participate lately. Your thoughts on whether it is a matter of time before the broader market also catches up or is this going to be essentially large-cap driven market.
A: I think when you have this kind of a correction and you come off it, the large-caps attract the initial flows particularly, the passive flows and then the flows get more choosey and selective in terms of identifying better stocks for alpha. So as the risk appetite gets better and better, broader markets tend to participate and tend to move ahead in terms of return generation. So into this calendar year, we will see that as you get better data coming through over the next six months, the rally would get more broad-based. Also, the election that is happening at this point in time will probably keep investors a little bit more cautious.
However, we are seeing that the earnings visibility, which was lacking earlier is stronger at this point in time with the financial space getting a lot better and clearly that is driving earnings across on a broader market and also on a large-cap index basis. So, I think we will see the breadth of the market incrementally getting better and better as we have seen over the last two months.
Q: The breadth of the market is good. Even if the mid-cap index is only up 0.1 percent, the number of stocks in the green is fairly substantial. So it is about 2.5 stocks in the green for one in the red. So the market is in a fine spot you will have to say. You alluded to earnings growth but then you stop at financials, are you seeing it or will you see it in other stocks especially this quarter?
A: I think the slowdown that we saw in the last quarter -- and more given the credit tightness in the economy -- has impacted the consumer discretionary space broadly, be it the automobile, auto-components or the other durable goods, which also, in turn, has some impact in terms of the suppliers to these industries. So there has been a manufacturing weakness that you are seeing in Q4 as the companies re-adjust the stock levels, etc., that has also reflected clearly in the index of industrial production (IIP) numbers.
So the earnings recovery in Q4 is not going to be broad-based, essentially driven more by the financials. So excluding financials you would see Nifty still reporting a 12-15 percent growth but including financials, the number could be upwards of 25 percent in Q4. So it is definitely financial heavy in terms of quarterly numbers and also into the next quarter too.
However, we should look forward, look at the purchasing managers’ index (PMI) data that is coming through. PMI is clearly 53 and that is how probably you will have to look forward in terms of how the orders are happening, how the purchasing managers are behaving and there when you speak to companies, there is this all-round optimism that comes. June-July things will be a lot better on the ground and also the efforts of the government and the Reserve Bank of India (RBI) overall will improve the situation on liquidity and also the foreign flows that are coming in are definitely going to have an impact on the liquidity and enable transmission of rates and better earnings trajectory across the industries.
Q: We have seen a lot of the cost pressures ease in the cement sector. I mean pet coke prices, for example, have fallen 20 percent from the peak that we saw in August, how much of this is already factored in your prices of these stocks or do you see more upsides both in earnings as well as in prices?
A: The analysts have been quite to speed on estimating the cost benefits, basically some of which flow into the third quarter and some happening in Q4 and now into Q1. While those are factored into, what could be the surprise for the market is the strength in prices that are visible across the country even though that could be the election time. I think prices are up quite sharply over the last few months and are sticky also. The second thing that is also happening is cement demand in the Q4 has been very good. Speaking to various companies, one does understand that there is hardly any clinker available in the market at this point in time which gives you an idea of the tightness in terms of the market here. So we do see that we could be in for a year or two of strong demand-supply mismatch regionally and that could have a telling effect in terms of price. This could be the upside that the street is missing at this point in time. So we remain quite optimistic on the cement space given the various capacity constraints that are there in different parts of India and also the prices of the plinth that the manufacturers have been able to maintain in certain parts where utilisation levels are lower.
Q: Your thoughts on autos. That is clearly one space which is showing signs that it has bottomed out, maybe not be backed by numbers yet but in terms of sales numbers. But stock prices are moving up. Your thoughts on what is the market building in right now?
A: You have only heard the bad news from August. So that has had a fairly sharp impact from a price perspective, be it the OEMs or the good suppliers to the auto industry or auto component companies - they have all been big drags on several investors portfolio. The OEMs have been smart enough and resorted to the inventory management in the fourth quarter. Right now as we speak the inventory levels are far better and in near normal in the channels, so we see that going forward. The primary sales will also pick up the pace and our interactions with several automotive companies do indicate that the worst is definitely behind them. The production schedules which were being cut in March - now we are seeing normalisation at this point in time. There are some clouds over the horizon in terms of BS VI transition at the end of this year probably from December and also the cost pressures are therein. Also on two-wheelers, you have the braking system changes which are also push up prices so these things are basically getting absorbed into the market at this point in time.
A: Let us not just look at the indices alone. I think if you look at how the overall profits of companies have moved over the last two years since it has touched the last high and also if you look at the market cap to GDP, etc., you would still find that broadly we still have a lot of stream left and also from a growth perspective you are clearly looking at a good 20 percent kind of compound annual growth rate (CAGR) over 24 months... I think investors should continue to allocate money into equities and benefit from the long term growth in the economy at this point in time rather than just looking at fresh highs in the market.
Q: You will continue to buy even at all-time highs?