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Jul 10, 2017 06:20 PM IST | Source:

HDFC MF bets on capital goods, corporate banks, metals; underweight on FMCG, pharma

Profit growth is now improving and earnings growth for next 2-3 years is expected to be strong

Himadri Buch @himadribuch

HDFC Mutual Fund is betting on capital goods, corporate banks, and metal sectors, while they are running an underweight position on fast-moving consumer goods and pharmaceutical sectors, said Srinivas Rao Ravuri, Senior Fund Manager, Equities, HDFC Mutual Fund.

He further said that macroeconomic conditions in India have improved significantly in the last few years, which is likely to support faster profit growth in sectors that were laggards in the last cycle.

High valuations along with muted volume growth in the FMCG sector has prompted the fund house to remain underweight on the FMCG sector, HDFC MF told Moneycontrol in an e-mail interview.

The fund house is also running an underweight position in the pharmaceutical sector because of regulatory headwinds which are likely to put pressure on the margins and also the valuations are not in an attractive zone, according to Ravuri.

Below are the verbatim excerpts from the interview:

What is your assessment on the equity market? Where do you think markets will be panning out in the near term? Are you fearing a correction in the market?

The Indian economy is headed for a steady sustained growth. Conservative people can assume a 6 percent GDP growth and optimistically one can assume 8-9 percent GDP growth. In both the scenarios, India would be amongst the fastest growing economy and will continue to attract global investors and companies. This along with sustained inflows from domestic markets makes Indian markets promising from a medium to long-term view.

Which are the other sectors that you are betting on at this point in time? Why?

Macroeconomic conditions in India have improved significantly in the last few years. Inflation has halved; the rupee is stable, the current-account deficit is low, the foreign direct investment has doubled and metal prices have stabilised at reasonable levels. This is likely to support faster profit growth in sectors that were laggards in the last cycle – capital goods, corporate banks, metals.etc. This once again has created a conducive environment for a new cycle in markets in our opinion.

Which sectors are you avoiding or underweight on?

We are currently underweight on FMCG because of high valuations in the sector and muted volume growth and pharma sector as we believe that regulatory headwinds are likely to put pressure on the margins and valuations are still not in the attractive zone.

Do you think infra sector is coming back in vogue?

With the governments thrust on infra and infra related sectors like road, railways, defence, renewable energy and affordable housing, there is a strong case for being overweight in these sectors. Our call on the infra sector has worked well for us and we believe there is more room for value unlocking and PE re-rating in the sector as significant improvement in macroeconomic conditions is likely to support the earnings growth in the sector. With public spending already happening in roads, railways, etc., we may see a significant uptick in the housing sector in the next phase. The measures announced by the government in the budget for affordable housing has made the sector more attractive for both, investors and developers.

What are your expectations from corporate earnings?

Profit growth is now improving and earnings growth for the next 2-3 years is expected to be strong (Bloomberg consensus NIFTY EPS growth – 16 percent in FY18 and 20 percent in FY19). NIFTY is currently trading at ~16.7xFY19E EPS which is reasonable in a low interest rate and strong earnings growth environment.

Tell us about your equity opportunities fund. Where does it invest and what is the tenure of the fund?

HDFC Equity Opportunities Fund is a 3-year close-ended equity fund that aims to invest a predominant portion in equities to capture the market upside while offering downside protection through a put option on NIFTY50 Index. The equity portion will invest broadly in 3 themes:

Corporate Banks – we believe that the NPAs have peaked out and going forward with the passage of bankruptcy code, sale of corporate assets, faster process of NPA resolution, etc. corporate banks are likely to benefit. Further, in terms of valuations, corporate banks are available at attractive valuations compared to retail banks.

Recovery in Capex cycle – The governments thrust on roads, railways, defence, renewable energy and affordable housing is likely to benefit these sectors and industries that are allied to these sectors as we may see large order flows.

Unorganized to Organized – With implementation of GST and growth in digitalization, the disadvantage organized companies earlier had will reduce as unorganized companies will fall under the tax purview and will have to bear the burden of higher compliance cost. This will lead to a level playing field and organized players are likely to gain market share. This should lead to higher earnings growth in the organized space.

Why is it a close-ended fund?

The funds structure of investing a predominant portion in diversified equity and a marginal portion into 3-year NIFTY50 put option warrants a close-ended format. As the fund will have a differentiated strategy of buying long-dated 3-year NIFTY50 put option to limit the downside, it will be difficult to run this strategy in open-ended structure where there are frequent inflows and outflows.

Do you think the timing of the launch is right?

Despite equity markets trading at all-time high, valuations are reasonable and with investor’s sentiment remaining positive, market has the potential to do well in medium to long term. However, local and global events can create some volatility and it has always been difficult to forecast such events. There is also a large section of investors who believe in the India growth story; however, they are currently not investing and waiting on the sidelines for a correction. Hence, considering the above, we believe this is the apt time for the launch of this product.

What are the cash levels in your funds? Are you sitting on a huge cash pile-up expecting a correction in the market?

As a strategy, we do not take large cash calls. It is hard to predict short term price movements.
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