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DAILY VOICE | Market willing to give higher multiple to firms that can deliver higher growth: Srinivas Rao Ravuri of PGIM India MF

We believe investors have become wiser from last year’s experience and are not panic selling. In the short run, markets are driven by liquidity and sentiment, said Ravuri.

May 05, 2021 / 08:55 AM IST

Srinivas Rao Ravuri, CIO-Equities, PGIM India Mutual Fund said that the market is willing to give higher multiple (P/E, EV/EBIDTA) to companies that have the potential to report higher growth rates for a sustainable period.

Ravuri has over 24 years of experience in Indian financial markets. In the past, he has worked with HDFC Asset Management Company, Motilal Oswal Securities, Edelweiss Capital and Securities Capital Investment.

In an interview with Moneycontrol's Kshitij Anand, Ravuri said investors have become wiser from last years’ experience and are not panic selling. In the short run, markets are driven by liquidity and sentiment. Edited excerpts:-

Q) Partial lockdown in various parts of the country, vaccine shortage, as well as increasing number of death, is likely to impact economic activity as well as corporate earnings. What is the kind of impact you see on markets? And, what should investors do?

A) Before the second wave of COVID-19 stuck, most experts looked at GDP growth of 11% to 13% for FY22. Similarly, Sensex earnings were expected to grow by about 35% for the year.

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However, it is clear that both need to be revised downwards as the health crisis has crippled economic activity in recent weeks.

For example, daily air traffic is now down to 152,000 passengers from 280,000 in February. It is too early to predict the exact impact, that would be a function of how & when we contain the health crisis.

The stock market has corrected about 7% from February levels. Many people are wondering why markets are not falling more.

We believe investors have become wiser from last years’ experience and not panic selling. In the short run, the market is driven by liquidity and sentiment.

Though the situation is terrible in India and few other countries like Brazil, developed countries seem to be under control on the virus front as more than 50% of the population is already vaccinated.

In India also it is only a matter of few months before things start getting better -- so investors with a medium to long term view should stay invested in good quality stocks and mutual funds

Q) The government has opened vaccine for all above 18 years. Do you this could turnaround sentiment on D-Street? Or stock-specific action will continue?

A) This is a positive development on the sentiment front. More than the announcement, the government outlined concrete steps aimed at the wider availability of vaccines. So vaccine and eventual herd immunity are the only way to fight the virus.

Q) Small & midcaps outperformed in the recent fall, but if the economy takes a hit, the excess in the broader market space might also flee. What is your view on the small & midcaps pace?

A) While it is true that volatility is higher in mid & small caps versus largecaps at aggregate levels, but the primary risk is from company-specific risk in terms of the quality of business, leverage, quality of promoters.

And these risks apply to largecap and smallcap. So, investors should spend more time evaluating these risks. While I agree that if the economy takes a hit, the broader market may correct more, I don't want to miss out on the greater growth opportunities that small & mid-cap space offers.

Q) Pharma space is buzzing and most stocks have already outperformed even though the benchmark indices are trading flat to lower. How should one pick stocks in the pharma space?

A) The market is willing to give higher multiple (P/E, EV/EBIDTA) to companies that have the potential to report higher growth rates for a sustainable period.

Indian Pharma companies have four distinct and sustainable growth opportunities - domestic market, US generic market, contract research/manufacturing, and emerging markets (EMs).

One needs to evaluate how a company is positioned to capitalize on these opportunities and what are the valuations. Sustainable higher earnings growth is the key factor to identify

Q) Is the smart money moving towards Corona proof sectors? MFs increased allocation towards IT, Healthcare, Chemicals, and cement on an MoM basis in March while banks, Oil & Gas, utilities, and capital goods saw decrease in allocation.

A) I don't think one can come to such conclusions based on one month or few months of data. As an active fund manager, our job is to constantly evaluate stocks, sectoral positioning, and relative risk-return proposition and make changes accordingly to the portfolios.

Looking at the sharp recovery in economic activity after September 2020, one was expecting economy-sensitive sectors like Banks, Auto, and capital goods to do well and acted accordingly.

However, the sudden increase in COVID-19 cases impacted this positive momentum, as a result, we see an increase in exposure to defensive names.

Q) FIIs turned net sellers so far in April after 6 months. Do you think with rupee weakening, rise in covid cases, lockdown – the pressure on D-Street may well continue?

A) This is a major variable to watch out for. In the last few quarters, we have seen outflows from developed markets and inflows into emerging markets. India is a beneficiary of this trend.

However, increasing interest rates and the ability to manage the COVID crisis have resulted in positive sentiment towards developed countries. If this trend continues, it will have a negative impact on the stock market and currency.

Q) Robinhood investing picked up in 2020 – do you think this is just a short-term phenomenon and DIY approach will not last long as new investors may well fail to generate alpha as markets turn choppy?

A) The sharp increase in retail participation in stock markets has become a phenomenon across multiple countries and has a positive self-fulfilling impact.

But, one needs to understand and accept that money-making can't be as easy as it seems in recent times. We have to make a distinction between saving, investing, and speculating.

It is absolutely fine to see investors doing proper due diligence and investing in companies but investing based on tips and looking at the flavour of the season will end badly.

While an increasing DIY approach is probably structural given the convenience of technology, investment outcomes are likely to be better where one engages a qualified, experienced and trusted advisor to help plan around goals and coach them through behavioural biases too.

Q) View on metals, commodity-linked stocks in 2021?

A) We don't go overboard on metals or commodity-linked stocks as the primary driver for these stocks is global commodity prices. It is impossible to predict these prices.

Q) How did your MF perform in FY21? What was your strategy to beat the COVID stress?

A) FY21 has been an exceptional year for us - our first full year as PGIM India Mutual Fund. Our funds have done well and have been topping the performance charts. We believe this is a result of the robust investment process that we followed and our GARP (Growth At Reasonable Price) investment style.

We continued to believe in the structural long-term growth story of India. We remained fully invested at the peak of the COVID-19 crisis but with a clear preference for companies with better growth visibility and lower leverage.

For most of the last year, we have been operating from home to avoid the commute and focus on staying healthy and contributing productively.

Disclaimer: The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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