Moneycontrol
Nov 27, 2017 04:31 PM IST | Source: CNBC-TV18

Bet on infra, cement and corp banks to lead next rally; eco performing well: Sundaram MF

In such an environment, experts such as S Krishna Kumar, CIO-Equity, Sundaram Mutual Fund look to rejig portfolios toward s better opportunities.

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Equity benchmarks started off the week on a negative note on Monday, weighed by banks after the S&P retained its India’s rating at BBB- and outlook stable. Weak Asian cues also weighed on sentiment.

In such an environment, experts such as S Krishna Kumar, CIO-Equity, Sundaram Mutual Fund look to rejig portfolios towards better opportunities.

Kumar said that the economy is growing well across multiple sectors. The economy is leaving behind sluggishness and taking off now, he told CNBC-TV18 in an interview.

Going forward, he expects infra, cement & corporate banks to lead the next market rally. “The government is definitely working on improving roadways space and other levers of growth have also been unleashed,” he told the channel.

Meanwhile, in the real estate space, he highlighted that companies that own land should benefit going forward.

Below is the verbatim transcript of the interview. 

Anuj: Thoughts on the market, are you still going about your business as usual, selecting midcaps and buying at current levels or are you looking at raising some cash levels at these levels?

A: I think business is as usual. As you said, we do not take too much of aggressive cash calls at any point in markets. So, what we try to do is to try to rejig portfolios to reflect relative better risk return opportunities as much as possible. I think that is what we have been doing. No doubt the business has become quite difficult with markets doing so well and you have a lot of stocks doing extremely well. I think that has become a real challenge. However, I think we need to be on the wall and get a risk adjusted good return for the investors.

Latha: How would you rejig, I guess the NBFCs made a lot of money for you, now what will be the next big flagship sector in the midcap space?

A: I think while NBFCs are under some amount of pressure given rising rates and also banks which will get recapitalised and can kind of come back into lending aggressively, so that is playing out right now. At this point in time, my thoughts are that the economy is doing very well across multiple sectors and services and so I believe that while one would like to get a sector right, but I think it is a lot more important at this point in time to be able to spot winners across different sectors.

So this is quite a diversified rally that we are having at this point in time. So, I think it is going to be a lot more stock specific but I think one important thing at this point here is that the economy is basically leaving behind its sluggishness and taking off. So, at this point in time, a lot of sectors like infrastructure, and the industrials do appear promising given that they are coming off a low base in terms of revenue and order books and they are seeing fair amount of accretion to that and the governments push in the next five years is going to be very aggressive over there. So I think infrastructure, cement, and corporate banks would lead the next round of rally at this point in time.

Surabhi: When you say infrastructure, which part of infrastructure? Are you looking at primarily EPC plays, road contractors, are you looking at companies that do work for railways, construction? Where do you see the bulk of the orders coming in from, where are these green shoots, what part of infrastructure?

A: I think the good thing about this government has been that it is definitely working on de-bottling the roadway space which is admirably done. However, at the same time, the other levers of growth have also been unleashed in terms of the railways space, port space, and also on the social infrastructure in terms of metro, water supply, etc. So there is a well-rounded projects that are there and the biggest of them all which has been launched recently is the affordable housing piece where I think in the next 5-10 years this could be the one which could drive a lot of activity and also pull other sectors up.

So what we are right now, the first leg of playing is the infrastructure EPC contractors basically, those who have seen orders books as well, they would be the ones who will do well in the first phase of this Bull Run. The second space that we are incrementally excited and adding its weight are on the short cycle capital goods machinery players who are suppliers into these EPC contractors, etc. be it engines, pumps, compressors, construction equipment, and the likes and those who probably also work on the ancillaries and finance and tools. So, that is the way we are playing it.

Of course cement is a kind of industry which will benefit from housing and from infrastructure. So that is another area that we continuously have been optimistic and continue to be overweight there. The developers who own the assets would become more interesting in the next two years. As we see, a lot of opportunities on the M&A front that is opening up now, many of the assets are stressed and we see a lot of ownership changes that could come through in the next one to two years and that is when things get lot more exciting for the asset developers basically.

Anuj: Lot of auto ancillary stocks in your portfolio, there is Wabco, Fag Bearings, Sundaram Clayton, of course there is a TVS Motor story as well - the holding company of TVS Motor but what are the triggers here after the kind of rally that we have already seen in the auto ancillary space?

A: I think, clearly, the auto component industry has matured itself very well in terms of risk management, so it is no longer dependent upon a particular sector in the domestic market like a commercial vehicle (CV) or a car or a two-wheeler. So, many companies have become lot more diversified and have also extended product ranges beyond what they used to do earlier, so it is a great story from that perspective. Also from the market perspective, I think last 10 years the efforts made by the industry in developing itself to high levels of reliability and quality of supply and delivery have come to help the industry. So, we are seeing that many Indian companies becoming global plays at this point in time and you have examples already in front of us which are multi-billion dollar kind of companies and we see lot more of them coming through.

I think electric vehicles do pose a challenge, but that is a story for the long-term. I think it is going to take a decade or more for that to challenge existing players and transformation is going to be lot more slow and at the same time provide new opportunities for Indian companies for further growth. I think the key things are diversification on product range, product markets and also clear emphasis on quality and cost control. I think these are something that the auto component sector has learnt very nicely and that is what is playing out. There are good vehicles of 20-25 percent kind of earnings growth compound annual growth rate (CAGR) and that is why we believe that we should own lot of that.

Latha: Which part of the NBFCs space do you like now?

A: I think the retail consumer finance bit is still quite interesting. I think the banks would not be able to really -I mean the PSU banks, they are trying to increase retail exposure, but on the personal retail credit I think that is going to be not possible for them so that is the interesting space that will continue to be interesting. Also on the commercial vehicle front, I think the PSU banks which will come back again will not have strings there to aggressively get into those markets, so they will remain the domain of NBFCs at large.
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