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Last Updated : Feb 13, 2020 08:08 PM IST | Source: Moneycontrol.com

India on the cusp of a recovery, but coronavirus a risk to country's economy: Sundaram MF CIO S Krishnakumar

According to him, the measures taken by the government on the demand side can be enablers for an investment cycle to kickstart.


Although India is battling a prolonged slowdown, Sundaram Mutual Fund's Chief Investment Officer S Krishnakumar feels India is soon going to come out of this slump.

"We have seen NBFCs are getting funded in a big way, banks have also started to give them credit. Hence there is a push for growth which is very important for the economy. So, availability of funds, lower cost of funds are two prime drivers of why we are believing that we are the cusp for recovery," he told Moneycontrol.

Krishnakumar said that while the fund house is conscious of the slowdown, they are seeing opportunities for growth ‘slowly getting better’ and improvement in the liquidity conditions.

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According to him, the measures taken by the government on the demand side can be enablers for an investment cycle to kickstart.

"Inviting MNCs (multinational companies) to come and participate by investing in manufacturing in India, making policy measures which are very favorable for sovereign wealth funds to come to the country to invest in infra in the next three years.

"These are some of the enablers for the investments cycle to kick off and so we are at just the cusp of big wave of foreign capital to come into the country both from foreign portfolio investors and foreign direct investors and also sovereign wealth funds, which have a great appetite for long term investments in India," he said.

He expects India’s nominal GDP to get back to a 10-12 percent run rate in the next three-five years. This will, in turn, help Sensex companies to grow and improve efficiencies helping them to deliver growth of 14-15 percent in the next three-five years.

Further, he pointed out that actively managed portfolios, with higher exposure to mid and small caps, can deliver another 200 basis points, excess returns.

The only negative point India’s growth rate can go off track if Corona Virus outbreak is sustained for a longer-term, Krishnakumar said.

Coronavirus is a deadly respiratory virus that originated in China's Wuhan, has killed more than 1300 people and has infected more than 60,000 in the country.

So far two deaths have been reported outside China, one in Hong Kong and another in the Philippines.

At least 25 countries have reported confirmed cases of the virus, including the US, India, Japan, and the UK. Major airlines have suspended flights to and from China in an attempt to stop the spread of the virus

Krishnakumar recommended investments in mid and small-cap stocks given the attractive valuations after a sharp correction.

"In the last two years, the mid-cap and small-cap have been giving negative returns as the valuations were at a euphoric high in 2017, trading at 25 percent premium to the larger companies which have now corrected down almost 20 percent discount," Krishnakumar said.

He further pointed out that on a forward basis, the valuations of mid and small cap companies are cheaper by 10-15 percent compared to its large-cap counterparts at this point and time making them an attractive buy.

Krishnakumar envisages midcaps and smallcaps to deliver robust returns given the improvement in earnings and revival in the economy.

Typically, when the economy recovers into the growth rate supported by lower cost of capital, lower interest rates, it's a double whammy positive for the mid and small-cap companies.

“There is an operating leverage which kicks in for these companies, there is a financial benefit coming in from lower rates, and better balance sheet as a result. So, we believe that the earnings growth of the mid-, and small-caps can surprise positively and deliver good growth,” Krishnakumar said.

Operating leverage is a cost-accounting formula that measures the degree to which a firm can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.

Since the fund house is envisaging a full-fledged economic recovery so Krishnakumar is betting big on banks, NBFCs, and also consumer discretionary sectors including companies within the retail, apparel, footwear, accessories, jewelry, hotels, restaurants, and grocery space.

“We do believe that for the next 12 months, the consumer discretionary sector will improve and deliver higher growth. The Indian consumer has a long way to go as consumption patterns and are gradually increasing and moving higher on the value chain,” Krishnakumar said.

Agreeing that NBFCs may never be able to see a big run-up witnessed in 2015-18, he added, “While the liquidity available for them has improved the banks and other corporate-owned firms have started to loosen the strings on these companies. The cost of funding has come down for even AA plus companies. It is not available for many of the companies in the same extent and quantum like earlier."

The fund house is holding cash levels in the range of 5-7 percent across all its equity schemes.

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First Published on Feb 13, 2020 07:08 pm
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