‘It will be a multi-speed market for different sectors’

Sectors focussed on domestic consumption and cyclicals may continue to chug along

Our approach is essentially bottom-up and stock-specific. We use the broad trends that we see to avoid losses, says Rajeev Thakkar, CIO and Director, PPFAS Mutual Fund. Excerpts from an interview:

The Sensex has been on a roll this year. But you continue to remain almost fully invested. Can investors find value in this environment?

We are invested 90-93 per cent. There is a certain amount of liquidity though the cash and arbitrage positions are also in dollar terms for our overseas investments.

We would recommend people not to look at markets in terms of all-time highs, but look at valuation ratios as compared to historical averages. We are at above average levels when considering price to earnings, price to book, dividend yield and valuations are more than what we would have seen over the last decade or so. This is one side of the story.

The other side of the story is that the opportunity cost of money is very low all over the world. Over $13 trillion of securities are trading in negative yields globally. We are not even counting zero and small positives, if you add that the world is awash with money.

In effect that is what is happening, whether it’s a sovereign wealth fund or a pension fund, investors are not able to get returns from risk-free assets such as government bonds. This is resulting in yield chase across asset classes.

Which sectors have margin of safety?

In today’s environment, in the banking space, the overall sentiment is still not that great, given that most banks have not come out of the NPA cycle. As compared to PSU banks, private sector banks are valued at higher levels, but still, despite that, we think that the opportunity set for investment is huge. Even today about 65 per cent of the business is with the PSU banks and it’s one of the last areas of the ‘licence raj’ in India. People cannot just start a bank; RBI approvals are stringent and difficult to come by.

Given this scenario, private sector banks with scale and which do not have asset quality problems will be able to grab market share in a significant way.

What are the next triggers for the market?

The way we see it is that it will be a multi-speed market for different sectors. Sectors focussed on domestic consumption have not suffered much and are even right now chugging along and this could continue. The second would be cyclical focussed on domestic market such as cement. When demand picks up, improvement in capacity utilisation can push realisations higher. The last space that will take a lot of time to revive is cyclicals dependent on global factors. The overcapacity in sectors such as shipping and metals is too much to correct in a year or two.

What is your investment approach? How do you ensure that you do not succumb to value traps?

A value trap would be a stock where apparently the market price is much lower than the intrinsic value. But instead of market price moving up, intrinsic value will slide down and this is the risk that fund managers have to cope with.

In the Indian context, the biggest value traps are companies trading at low multiples whose capital allocation is sub-optimal. The core business is reasonably attractive, but is the money going to be spent on buying IPL teams or on some fancy airline operations? Unrelated diversification destroys value.

The other kind of value trap is when there is a lot of cash on the balance sheet but it is not used for the company’s own business or for sensible acquisitions. Neither does the company pay out dividends. This lowers overall return on capital and equity. We also look closely at the management quality.

Your overseas portfolio does not have Amazon or Facebook. Is it due to valuation concerns?

Amazon is a very interesting company. But the difficulty in valuing the company is that there are mature segments in its overall business that are making profits. At the same time, there are some growth avenues which are losing money. As investors, we only see the net result. The company has entered into new markets as well. We cannot, therefore, value it on a price-to-book or price-to-earnings basis. One proxy is price to sales, but even on this it’s expensive.

Facebook is more conventional and is reporting profits and good revenue growth. It is one of the two dominant advertising plays globally, with Alphabet being the other. Currently, valuations are on the higher side and we have therefore not taken exposure to this stock.

“In the Indian context, the biggest value traps are companies trading at low multiples whose capital allocation is sub-optimal”



















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