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Jul 25, 2012 03:57 PM IST | Source: CNBC-TV18

Muted earnings growth key risk for markets: HDFC MF

Srinivas Rao Ravuri, Senior Fund Manager - Equities, HDFC Mutual Fund feels the short term outlook for the markets are challenging. He expects further disappointment in the first quarter earnings and the muted earnings growth remains a key risk for markets, believes Ravuri. However, he is optimistic about earnings growth picking up in FY14.

Srinivas Rao Ravuri, Senior Fund Manager - Equities, HDFC Mutual Fund feels the short term outlook for the markets are challenging. He expects further disappointment in the first quarter earnings and the muted earnings growth remains a key risk for markets, believes Ravuri. However, he is optimistic about earnings growth picking up in FY14.

Inflows into mutual funds are also primarily coming through SIPs and outflows in infrastructure funds have also been noticed, added Ravuri. He went on to say that there is no significant churn in diversified equity funds.
Besides, looking at the present market conditions, HDFC MF has reduced exposure to FMCG due to its valuations and prefer exposure to banking, where valuations are attractive.

Here is the edited transcript of the interview on CNBC-TV18.

Q: How is it looking for the market given the various cues that you are picking up from earnings to monsoon, does it look like the markets have much upside given the environment that we are trading in today?

A: Yes, short term definitely looks challenging given the factors that you outlined. Also, the fact that government activity or we have been waiting for diesel deregulation and it looks like it will get delayed again. There are quite a few factors which look challenging at this point of time.

Though expectations have been low, the results we have seen till now have been mixed. I think the bad numbers will actually come in by August 15 or so. But, I think this is also an opportunity if you have an 18-24 months view. So in the short term, things look uncertain and challenging.

Q: How have your retail or HNI clients been approaching this? Are you seeing steady redemptions because of this environment or have you seen any kind of in flows over the last couple of months?

A: Yes, ofcourse we have seen inflows but they were much lower than what we have seen in the past. Typically, we have two sets of investors. One set of investors come into equity funds with a one month or one quarter to one year view and the other set of investors come in with a much longer term view as a way to build their wealth.

We continue to see money coming, especially through the SIP route. But, people who are trying to time the market have definitely turned more cautious now.


Q: What tops you're list of risks at this point, which might make it challenging to get returns from equities because in the last five years, equities as an asset class and mutual funds have not delivered returns or returns which investors would have wanted. To your mind what is the most restricted factor as you look forward into the next 12-24 months?

A: It's essentially earnings growth. We have started the year with 15% kind of growth, now we have brought it down. People are talking about single digit growth. I would see that as a key risk.

Talking about your point on returns being weak in the last three to five years, yes I completely agree with you on that. Returns are much lower than what we expected. I think the at the same time, if you look at mutual fund returns versus market returns during this timeframe, our funds returns have been much better than the market returns.

That is what we are there for, we are there to give risk adjusted returns. I think that part is being done. But, people would like to see market being in one way, then it is easy to make money. However, that has not been the case in the recent past.

Q: You also manage the HDFC Infra Fund, are you seeing any redemption for that space because that's been out in the doldrums for the last two, two and a half years?

A: That's true, the funds have actually come down. It essentially means that we have seen some outflows there. Though, I would say this is the best time to invest in infra, unfortunately the overall pessimism that you see in newspapers, people are worried and are actually taking some money out. Whereas, people were buying in the same companies, at five times price to book. Today, they are available at below book and people don't want to invest.

Q: Are you staying with your long term bluechip holdings in big funds like HDFC Growth Fund because I can see names like Infosys, etc there or have you had to churn your portfolio significantly over the last few months?

A: No we haven't churned much. We continue to stay invested in the way we were. It is essentially a diversified equity fund, so we have a good mix up of large cap and midcap stocks.

Our view is that over the next 18-24 months, Indian economy will come back and companies would deliver better. So our portfolio consists of stocks. We have a mix of IT, pharma, energy and there is not much change in the last few months.

Q: A lot of funds have skewed their portfolio dramatically towards defenses like FMCG or pharmaceuticals because that has been delivering returns for the last few quarters and moved away from some of the higher risk or higher beta categories, have you adopted such a stance at HDFC Mutual Fund?

A: Not really. In fact we have done the other way. We have reduced our exposure to FMCG in recent months. We understand, earnings are much more stable in case of FMCG and pharma but, the second important thing is what price are you paying. So when we look at FMCG stocks, quite a few of them are richly valued. We have actually reduced our exposure to FMCG in the recent months.


Q: Would you say the same for pharmaceuticals as well?

A: Pharma is more stock picking or bottom-up approach. There we have reduced exposure but, at the same time added a few stocks. It will be more a stock specific rather than sectoral call.

Q: What about banking, how have you approached that space?

A: On banking our call is more. Banking is a proxy to Indian economic growth and they are available at a very good valuation. We are not trying to play on whether interest rates will go down or not, we are saying that structurally if economy is going to grow at 7-8%, banks are likely to see very good growth. They are also available at a very good price. We have been investors in financials for quite some time and we continue to like banks at this point of time.

Q: A lot of people have been staying away from equities because they just cannot see how and when earnings will turn around and get to 15-17% growth once again? What is your expectation on that front? By when do you see earnings starting to accelerate once again?

A: I think next year onwards. We have seen that last year was weak and this year is also likely to be weak. I think we should see things picking up next year, that is FY14. For investors, if earnings growth today is 20%, you can see 20%; I don't think markets should be where they are today.

I don't think one can time it to perfection in terms of saying I can see 20% earnings growth and I can go and buy it now. But, at that point of time you won't be getting these kinds of prices.

So we would like to believe that short-term timing is impossible. We don't look too much on the overall macro, we are taking a company specific approach. Even though the markets are flat in the last five years, 20% lower than its peak in March 2008, there are stocks that have delivered 50% and 100%. One should spend time on studying stocks rather than looking at only macro.

Last three years have been bad or extremely challenging but, at the same time if you look at last 10-15 years, we have had a similarly challenging environment. But, for example if I look at returns, our funds have delivered. In the last 16 years our flagship fund is up 25 times and others have also delivered very good returns.

Hence, one view is to look at short-term and get carried away. The other is to look at a slightly longer term view. Are we saying that India will not grow at 6-7% percent over a period of time? No. So if it is going to grow, which are the companies that will benefit most from it? Try and invest in those companies. That has been our approach.

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