There are a lot of positive developments happening in rural areas and the 16-17 crore households in rural India are going to benefit from host of measures that government has taken to improve income, said S Krishna Kumar, CIO-Equity, Sundaram Mutual Fund, told CNBC-TV 18.
There are a bunch of reasons why the markets are in strong hands. There is the global tailwind shorts have been covered. Do you think the market has legs to run more now or will resistance has come in?
It’s a million dollar question to call the short-term trend in the market. As you mentioned, there have been a lot of positive developments in terms of global issues such as Iran sanctions, signing of peace between the Koreans. There has been also a fair bit of swing in terms of mindshare on Karnataka more positive.
So these are few things which have come and more fundamentally, the earning season has done extremely well in the first month. We have had lot more positive takeaways from the results and except the usual suspects; the corporate lenders, we have seen a very nice and rising earnings trajectory across various sectors in the economy.
So this along with going into the monsoon season, where the predictions are things to be normal. I think we probably have a lot of tailwinds at this point in time with double digit earnings growth into the next 24 months.
So this is where fundamentally the market looks good from a medium to long-term perspective. However, some of these macro things we mentioned and the election issues could again move the other way and create some volatility in the next 15-30 days which is something which we cannot rule out.
Taking the monsoon theme forward, a lot of the rural focused stocks in your portfolio such as Mahindra and Mahindra, M&M Financial Services, a lot of the non-banking financial companies (NBFCs) such as Cholamandalam Investment and Finance Company have been doing quite well. What do you see as the growth story here? Have we peaked out in terms of growth or do you think it’s still nascent in the cycle?
The rural economy is coming back into upswing after three-four years. Last six-eight months we have seen some of the initial greenshoots of recovery in demand on the fast moving consumer goods (FMCG) side, there has been some amount of pickup on the tractor side for some time, two-wheelers sales are pretty much larger growth in terms of rural areas and urban.
Look at the car sales; it’s not just the metros selling doing well, but semi-urban and other tier-III and tier-IV markets in FY18. So there are a lot of positive developments there and we think 16-17 crore household in rural India are going to benefit from host of measures that government has taken to improve income from agriculture and other sources of income such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme, targets towards wages, improve jobs on construction sites and also create a lot more connectivity and network.
So all these have positive rub-off and this will drive the consumption story in India over the next ten years. So we are very clear that the rural thematic is a decadal story and very similar to what we saw in urban India over the last 15 years in terms of the drivers of consumption and demand for various articles.
The space which is running away right now is midcap IT and also midcap pharmaceuticals. Your thoughts on how to approach these two?
Midcap IT is one space where the performance have been good because on many of these small projects on digital transformation, the initial pilots etc. These guys were able to compete and take a lot of business share.
At this point in time the momentum has changed into a large ticket deals on digital and digital transformation. So the biggies are coming back into the fray and taking a lot of projects, as we have seen in the concalls of TCS, Infosys and other; the percentage of revenues coming from digital is going up quite sharply and growing at about 30-40% per annum. So still the IT midcaps are also growing well and getting into more niches basically.
Therefore, at this point in time we are little circumspect in terms of midcap names from valuation perspective. I think you had all the good things playing out in terms of growth, the currency is down about 5% this year. So a lot of positives are pricing themselves in and they are getting into an expensive zone. So that is the view on midcap IT. We are selective there.
On midcap pharma or generally pharma, we have always been very selective about the stories playing niches rather than playing the generic story. We find that the time consolidation gives a lot more comfort to a lot of investors at this point in time and could be a big contra if one has a patience of two years. Having said that I would still wait for some more signs in terms of their ability to get into more generic opportunities, get that plants clear and have a good pipeline ahead of them which is little murky at this point in time.
So we remain quite cautious here and are playing the niche plays that you might find in our portfolios.
Latha: I want you to react to this they can raise external commercial borrowings (ECBs) housing finance companies as well end use restrictions have been much smaller, now there is only a small negative list and I think a bond rally which the market can register only on Wednesday?
The government and the RBI are very proactive. If you look at the host of measures that the Ministry of Finance and the RBI have been going through the last six months very clearly, the regulator also understands the kind of capital flows needed for the growth in the country.
We also understand clearly the kind of liquidity situation with the banks and the capital situation, so we need a lot of foreign capital be it debt or equity to further the next leg of growth and this has to come through at a reasonable cost to the company and also the fact that we need to manage our deficits and keep the currency in check and the inflation also fairly controlled.
I think the wholesome set of policies that both the government and the RBI are kind of going into so I think it is very positive while some of the risks to inflation could still make yields tend to push up. But I think this is a very strong measure like you mention the short end of the market will also go down pretty sharply more than the longer end of the market and this basically would mean a lot of companies also are able to raise capital again at more competitive market rate. So, would benefit a lot of the NBFCs as you go ahead from even local markets.
Sonia: A quick word from your end on some of the cement names because you have been very bullish on names such as Ramco Cement, JK Cement etc. Shree Cement came out of a descent set of numbers, more to go here?
The cement story is kind of yet to pan out from a fundamental perspective. I think initial checks with the cement community and the dealership indicates that lot of them are sold for the first quarter in terms of capacities more so in the south-west regions and in the eastern side, so I think it is a very healthy start to the year.
All the big improvements in the order books and the execution of the companies on the construction and the road sector and the other infra projects etc. clearly indicate that the cement demand would be able to grow at double digit into next 24 months.
So, this would give enormous pricing power and also operating leverage to the cement companies which should go a long way in driving these companies in terms of their own returns to their investors. So we remain quite positive in terms of the cement story and we do believe that earnings will be driving the stock and valuations. Valuations have already caught up significantly, so it is the time of earnings to move the stocks.