Rada Advisors bets on 18-20% growth for mid-caps

Despite the underperformance of the Indian markets with respect to global markets, Nitin Raheja, CIO, Rada Advisors, feels that it is holding well. The rupee too is trading at a 4-month low and Raheja believes the negative FII flows have affected it.

Meanwhile, clarifications on GAAR can bring about sustainability in the market for the shorter term, explains Raheja. Looking at the consistent performance of the mid-caps segment, Raheja in an interview with CNBC-TV18 hopes for a 18-20% growth for the segment in the year going ahead. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: What have you made of today’s underperformance compared to the rest of the global markets and do you expect this recent support of 5150 to breach now?
A: At least for the time being it seems to be holding pretty well. The support and the market seems to be using the 200 DMA – testing it quite well and holding it there. But, if you look at it incrementally, there is not too much of good news in terms of whether it’s the results or it’s the rupee and FII flows.
The only saving grace is technically, the market is so far holding. But, the question is how long, because these bands tend to get very narrow. When they break, they convincingly break on either side. In the absence of a clear signal to the contrary, we will continue to trade in this kind of a range in the shorter term. Q: It’s been a sharp depreciation in the rupee today, currently at a 4-month low, at 53.41. What do you think has led to this sharp depreciation for the rupee and where do you think is a sustainable level for it?
A: Clearly, if you track the rupee and you see the rupee strength that we saw in January and subsequent weaknesses, it’s all led by the flows that we are seeing. Specifically FII flows really have a direct correlation. But, we have seen negative flows as far as the FIIs are concerned.
We have seen the trade balance being a sharp deficit, at close to all time highs. It is not really helping the rupee from a sentiment perspective. The irony is that you would expect that given the fact that liquidity in the domestic market is tight, you would want to have steps to encourage foreign investment come into this.
But the lack of clarity on GAAR in terms of how it’s going to be applicable and also the fact that the FIIs as a collective whole have been one of the largest investor segments into the market. And creating uncertainty around their investment does not really help the rupee.
The rupee weakness is showing that post the sharp depreciation that we saw, there was a kind of a sympathetic correction. But it’s now getting back to those levels as such. We have to be mentally prepared now that the rupee will remain weak around these levels. Q: On 7 May, we are expected to get some amount of reprieve or clarity on GAAR. Going forward, there is an expectation that maybe the government will move on diesel prices by the end of May and we have seen some amount of incentives come in with regards to sugar and digitization. In your opinion, do you think that the government is now going to step on reforms, recognizing the uncertainty and the amount of fundamental pressure that the macro economy is facing?
A: Sensibly, I hope so because I don’t think we have too much of a choice. We are some way getting close to a tipping point. Everybody wanted interest rate reductions, you got that, RBI did it’s job. Now the ball is in the government’s court, in terms of coming up with sensible policy measures, at least to improve the whole business environment or the investment environment from a regulatory perspective.
I would hope that we do get some positive clarifications as far as GAAR is concerned by the 7 May and we see some momentum or sustainability as far as that is concerned. These are the only triggers, as far as the market is concerned in the shorter term. Q: If someone has to play the entire IT story because IT has outperformed for the past two weeks, would it be via the outperformance of a TCS or an underperformer like a Wipro or even perhaps the mid caps like Hexaware or a Mahindra Satyam, which is doing well off late?
A: Our own preference has been for the mid caps. The mid caps have had a huge valuation difference in comparison to the large caps. Their performance this quarter has been excellent. Whether you take a Hexaware or MindTree, KPIT and so forth, we see that valuation gap narrowing.
The kind of focus that they have developed on certain domains have actually built core competence and are seeing good traction as far as their numbers are concerned. On an average, we see these mid caps having growths anywhere between 18-20% in the year going ahead. Our own preference lies with some of the midcap names. Q: Just wanted to come to you with regards to HUL and Asian Paints. Both of them are sitting at 52-week highs. What would you do with the entire defensive space at this point?
A: You should stay invested in these companies primarily because there is a lot of uncertainty at this moment. You need to have a strategy, which we believe is a mix of playing pure bottom-up, high conviction ideas mixed with defensives as far as your portfolio construction is concerned.