Naveen Chandramohan, Founder & Fund Manager of ITUS Capital expects more volatility in the market in the second half of CY21 but sees the broad trend to be bullish.
Benchmark indices reported nearly 11 percent gains in first half of CY21 so far, while the broader markets outpaced frontliners as the BSE Midcap and Smallcap indices gained 25 percent 38 percent, respectively.
The primary market was also active as number of IPOs and total fund raising in first half of CY21 was higher than entire CY20.
"The primary market always turns robust during bullish markets and we clearly are in one. The supply over the next 6 months should see record issuances in terms of volumes," said Chandramohan in an interview with Moneycontrol's Sunil Shankar Matkar.
According to him, the public issue of food delivery company Zomato will receive the highest-ever oversubscription, much ahead of Coal India IPO in 2010.
Edited Excerpts:
Q: The market gained more than 10 percent in the first half of CY21. Do you think benchmark indices will add another 10 percent in the second half of CY21 and what are drivers behind the same?
Humans like to extrapolate returns (both on the positive and negative). This is the primary reason for fear and greed cycles we experience in the market. I believe the growth in the company earnings will be healthier than the 10 percent growth rate (base case) over the second half of CY21. However when that translates into equity returns in the next 6 months is harder to say.
For example, for the period between March 2020-2021, the cash flow growth of Nifty companies was 96 percent, however, the returns of Nifty over the same period was 72 percent. The returns will follow the cash flow growth but the path can always be different.
Q: BSE Midcap and Smallcap indices gained more than 25 percent and 38 percent in first half of CY21, outshining benchmark indices. Do you think the broader markets will continue to outperform in the second half of CY21 as well?
As the valuations normalise across sectors, it's important to start focussing on individual businesses than on the indices. There are specific businesses within midcap and smallcap indices which should continue on the same performance but this would be harder to say on the index at large. One must expect more volatility in the second half (that what we were used to in the first half) but the broad trend being bullish.
Q: The primary market turned active again in June after a few quiet weeks. Number of IPOs and fund raising in first half of CY21 already crossed number of IPOs and fund raising in 2020?
Not surprising is it! The primary market always turns robust during bullish markets and we clearly are in one. The supply over the next 6 months should see record issuances in terms of volumes. I believe the Zomato IPO should see the largest oversubscription (beating the Coal India IPO). There would be many more consumer-focussed businesses accessing the primary markets over the next 1 year.
Note: Food delivery company Zomato filed draft red herring prospectus with capital markets regulator Sebi in April 2021, to raise Rs 8,250 crore through initial public offering.
Q: Metal was the leading sector in terms of returns, followed by power, PSU, IT, capital goods, banks and auto, in the first half of CY21. What could be the leading sectors in terms of returns in the second half of CY21 and what could be underperformers?
Cyclicals have given the best returns over the last 6 months, goes without saying. It's important to realise that investing cannot be about rotating into new sectors every 6 months with a view on which sector will give the best returns. It has to be around a process.
Let's look at it another way. Would an investor buy and sell houses depending on which geography or area will appreciate based on the flavour of the season? One looks at the location and takes a longer term view. The same mindset has to move towards equities too – one has to have a process and be disciplined around capital allocation.
We are bottom up investors as analysts, and look for cash flow growth – we would move towards businesses we understand where we understand the management and the culture they have built.
Q: What is your view on the telecom space. Do you think there could be one more tariff hike before the end of 2021?
If you take any sector in India, and I tell you that this is a duopolistic market from tomorrow, the market will re-rate the two companies as this significantly changes the dynamics of the industry, profitability and cash flow generation dynamics. However there are two sectors that are duopolistic today but wealth creation towards the long-term has been hard to come by – telecom and airlines. The nature of the industry is such that, the expansion of the businesses is funded by debt and the return on capital is hard to beat the cost of capital over long periods.
With the ARPU increase, this should give a filip to the topline growth but converting this to Free cash flow has been hard. This does not fit our framework of investing and we would stay away from the space. You could always make money trading, but that does not interest us as a firm, as we would not have any edge in this.
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