Buy IT on dip, fixed income attractive than equity: IDFC MF

Below is the verbatim transcript of the interview:

Latha: How good will the New Year be to the Indian indices after having done the 30-31 percent last year? Can we repeat the feet?

A: If I look at the markets at on a longer-term and sustainable basis things are falling into place over a longer-term structure. However, if I look at it from a near term basis you will continue to get some kind of volatility into 2015. While you have liquidity support that is there what is absent in this calendar year is valuation support.

At least in the near term for a next couple of quarters we do not see earnings accelerate to justify some part of where Corporate India actually trades from. So, to repeat 2014 it will be a tall task it will depend upon how liquidity comes into this entire market.

We would have to have a sustainable re-rating of the Indian equity markets. Which may not show up on the near term earnings so, expectations should remain a little muted in 2015. Longer-term, these structure of balance sheets of corporate India are falling into place. It is a gradual repair process and it will take its time.

Sonia: When you say that the structural issues are falling into place can you highlight for us what have been the big positive take away in your mind? How do you approach it from a markets point of view?

A: The way we have been looking at Corporate India is essentially looking at how balance sheets are falling into place. If you have an environment where corporate balance sheets are completely unleveraged and are extremely profitable that essentially is the starting of a real capex phase in the economy.

Right now from a top down basis even from a government point of view and corporate point of view the environment continues to remain reasonably leveraged. You have got enough of capacity which is existing on the ground some of them have been productive some of them are not productive which can be utilised if demands actually kicks in.

So the first element of all of this happening is that you have to stimulate demand in some way for existing capacities to get used. That will be bring to cash flows on the system and higher capacity utilisation and that would transition towards next round of capex growth. What is changed on the ground is there is been a capex phase across the environment and that is good because existing capacities can price themselves into the environment.

You got a lot of help coming in from the policy side and that is thanks to stable government that is a there. We still have reasonable amount of easy liquidity and low cost of liquidity which is essentially a part of what the global environment is all about. So we can use this policy environment which is changing and also the global liquidity that is there and stimulate demand in the domestic environment. India can puts its act together in the next year or two and you should see a higher take up in earnings in 2016-2017 and there onwards.

Latha: At the moment things do not seem to be really picking up at any decent clip, We just had reports from CLSA downgrading Hero Motocorp and Bajaj because the sales numbers are not moving that is what they are getting from the retail trade. These are very ominous tell tale evidence of lack of growth. What are you working with in terms of earnings growth this year FY16?

A: This year it will be fairly muted so if I just move into 2015 and some part of 2016 I just put it in between 11-14 percent growth rate over the next two years that is reasonably good enough.

Latha: In that case for a person looking for one year returns is fixed income a better place just for this year calendar year 2015?

A: I do not think there is a very big arbitrage between the two asset classes at this point in time. Equities will do well because you have reasonable amount of liquidity and balance sheets are not growing so capital will get efficient out there. On the other hand and when I say balance sheets are not growing that effectively fits over to whether fixed income side also works. Demand of credit also will come off the cliff will also fall off the cliff. That is where the fixed income will actually come through.

So, give the arbitrage six months and you have to play it very finely. Opportunity exists for both these assets classes in this calendar year. To say that fixed income will do better than equities or equities will do better than fixed income, I am not sure we can get a handle on how liquidity will play out. In fixed income it seems to be a better place to be at this point in time. Equities will give you the volatility.

Sonia: I was just going through your IDFC equity opportunity fund and in the sector allocation you have increased exposure for the technology sector. What is the expectation from earnings season this time around in technology? We have Infosys reporting numbers tomorrow and since Q3 is a seasonally weak quarter if there is a dip would you advise buying into these heavy weights?

A: This is an industry which is, it generates cash flows, and they have got very robust balance sheets. They continue to get market share internationally and in to a quarter or two they will be reasonable amount of challenges. So we are not really looking at this industry from probably a quarter or two quarter point of view.

Over a longer-term period they have created reasonable amount of reasonable sized businesses on the ground and I can not see any reason given the advantages that these companies have they can not continue to do the same over a period of time. Now you will have to take into account the valuations of where these companies trade at. Q3 actually gives you opportunity or a dip in the valuation parameters. You should be more forthcoming to add this to the portfolio which is what we will be on the look out for.

Latha: This year how would the incremental gains be distributed sectorally? Would it be banks like last year? Who would be the top gainers this year?

A: If we look at even last year across the four quarters you had four different industries that actually led the markets. Starting with capital goods and ending with banking system I would expect 2015 to be very similar. The only difference is that it might just crop up towards the end of calendar year 2015 is that you might just get a sector leader which would lead into next coupe of years.

It is too early to call what that sectoral leader could be. So 2015 it should be a mix and match. I would rather go bottoms up at this point in time. I would rather look at companies and businesses and probably industries that have bottomed out in their entire cycle and look at if there are gaps in valuations that exist in the market which is reasonably hard to capture at this point in time.