Sunil Singhania, CIO-Equity, Investment at Reliance Mutual Fund feels this is a good time for the mutual fund industry. Growth in mutual fund industry will be healthy & robust.
Investors have started diversifying to financial assets from physical assets, he said.
Majority of analysts feel the markets are currently highly valued, especially after 18 percent rally since the beginning of 2017. Earnings have to recover and economic growth has to be over 7 percent in current financial year (given expectations of normal monsoon) to match current market valuations, according to them.
According to Singhania, the markets are never fairly valued, whether it’s undervalued or mildly overvalued.
"We have had corrections in recent past but it hasn't been that long. Inflows from retail investors in mutual fund will continue despite market correction," he said.
He is seeing euphoria in some sectors of the market.
He likes PSU banks having adequate capital & better placed to raise capital. Insolvency & Bankruptcy Code can be a near-term pain but a good initiative to resolve non-performing assets (NPAs), he feels.
Last month, the RBI received more powers through Insolvency & Bankruptcy Code, the bankruptcy law introduced by the government to resolve NPA issues. The RBI identified 12 NPA accounts, which have debts of more than Rs 5,000 crore, under Insolvency & Bankruptcy Code.
Among PSU banks, he prefers largecap ones. Retail banks will continue to have good potential, Singhania feels.
"We have been building positions in large corporate banks as these might have peaked in terms of NPA recognition," he said.
He feels housing is a great theme but one needs to be cautious on valuation front. The mutual fund house has a couple of listed life insurance companies in its portfolio.
He sees decent growth in financial savings going forward. Financial savings is a multi-year theme, he believes. Hence he is positive on wealth management and insurance companies.
Singhania said getting back to 20-30 percent growth rate would be tough for pharma companies as competition has increased in the US for pharma companies but mid-teen profit growth is possible for pharma companies.
So far in current calendar year, the pharma sector underperformed the market as the Nifty Pharma index fell 6.5 percent while Nifty50 surged 18 percent.
Below is the verbatim transcript of the interview.
Anuj: What next for Reliance Mutual Fund, Rs 5 lakh crore asset under management (AUM), do you think that is happening over the next three or four years the way we are seeing the kind of SIPs and lump sum investments?
A: You rightly said that we are seeing good times for the mutual fund industry, but I think it was long overdue. Even now if you look at the overall mutual fund size, it is around USD 250 billion of which maybe equity would be just around USD 100 billion. Then if you look at the total wealth in the country which is by estimates over USD 20 trillion and the yearly savings which are in upwards of USD 0.5 trillion which is USD 500 billion, I think there is still a long way to go.
The other thing is that investors have finally realised that it makes sense to have a good diversification of assets between physical assets and financial assets and I think that is what you are seeing and this is a good shift in the sense that it is a matured shift. Money is coming in gradually and it is coming in both fixed income as well as equity. So, I think we are quite positive and we do believe that we have just started up the hockey curve and from here on in fact the growth in the mutual fund industry would be more robust and more healthy.
Surabhi: When you talk to the retail part of the market, a lot of the people who are just new to the market are getting in with the idea of SIPs, what is the advice right now, should there be some sort of part profit booking as we continue to stare at all-time highs or is this the kind of market where you just need to be in a fund and go in for the growth option as they say and keep riding the curve, what is your sense?
A: Markets are never fairly valued, they would either be undervalued or slightly overvalued. I think we agree that in some quarters there is euphoria, specifically in untested, unresearched or underresearched smallcaps, there is definitely a case of euphoria and that is where we are advising caution. At the same time, we do believe that yes the markets are slightly above fair value, but if you are an investor for three to six months, maybe you would want to wait.
However, if you are looking at India, a changed India, an India which is structurally going into a very different direction in a positive way, then maybe from a three to four years perspective there is still good opportunity. I think if your return expectations are reasonable, if you expect a low to mid teen kind of returns, then there is still enough scope for making returns.
Anuj: Your AUMs have doubled in last three years and you are saying it is just the start of the hockey curve, then what kind of CAGR are you looking at once you move towards the top end of the hockey stick?
A: In mutual fund we say that past is past performance, it is not reflection of future performance and at the same time it is very difficult to hazard a guess as far as the future is concerned.
Anuj: The question I am essentially is asking is that is there enough maturity now in retail investors, we have seen that at the time of demonetisation, to add more and invest more when the market gives you corrections, so far the market hasn’t given you any correction, but the test would be if we have a decent correction. So, in that case, would we see withdrawals or do you think we have enough conviction now that more money will be added on corrections?
A: I don’t agree that there have been no corrections. Yes, there have been short corrections. So, you had major correction during Brexit, though it did not last long in terms of time. Then we had the same during the US elections, we had the same during demonetisation. Only 15-20 days back you had a very healthy correction specifically in the mid and smallcaps, so, I think we have had corrections. You can be right in the sense that these have not been long in terms of duration.
At the same time, I think what has happened over the past few years is that earlier we used to get huge sums of money in a lump sum manner when the market was very buoyant. This time it has been different. For the last three or four years investors are coming in gradually month after month and that makes them a bit more you can say comfortable and confident because even if the correction comes, they know that they have still additional investments to make and I think that is what has changed.
So, our view is that even if there is a correction, one, our view is that the corrections are going to be short and swift and second is we do believe that even during corrections you will continue to see the SIPs particularly which we have been seeing for the last three to four years. So, we remain quite positive even as far as inflows from retail investors are concerned.
Surabhi: Are you keeping the faith on banks, particularly PSU banks? We were just talking to the management of Punjab National Bank (PNB) a while back, as they go through the motions of this resolution, Insolvency and Bankruptcy Code (IBC) and non-IBC, all the S4A and other accounts.
A: We are banking on a few PSU banks particularly banks which have adequate capital or are in a position to raise capital. You are right that there are still little bit of uncertainties. We are not unduly worried about IBC because that is a good medium to long term solution, it will weed away all the NPAs and find a resolution in a time bound manner.
I think what we are worried about specifically in some of the other PSU banks is consolidation and that is where we don’t have too much colour and there is a lot of uncertainty. So, I think more than IBC which we believe can be near term pain, but a great initiative from a resolution perspective and structural sort of scenario where it will dissuade such kind of NPA building up in future, I think more we are worried about banks not being able to raise capital and also the consolidation which the government is talking about.
Anuj: How to play this theme, buy the three largest ones, State Bank of India (SBI), Bank of Baroda (BoB), and Punjab National Bank (PNB) or do you go down the value curve and the likes of Oriental Bank of Commerce (OBC) or Syndicate Bank, I am sure you will not take names, but you will get the gist, basically the midcaps and smallcaps in the PSU space where the price to book in certain cases is 0.3-0.4, maybe less than that.
A: Our preference is for the larger ones, particularly because as I mentioned earlier, they have the capability and as in the case of the largest public sector bank, they have been able to raise significant capital. So, I think capital is necessary and our view is that only the larger banks would be able to raise significant capital. So, our preference would be towards the larger PSU banks.
Anuj: In terms of private banks, we have seen some bit of comeback for corporate facing banks but do you think the erstwhile favourite, the retail facing banks will continue to dominate or can you look at investing in the corporate facing ones as well?
A: I think the retail banks continue to be having good potential. We all talk about consumption as a theme in India. Banking is the biggest consumption whether it is ordinary banking or even through some of the other ancillary activities like wealth management and so on and so forth. At the same time, over the last one year in particular, we have started to also build position in some of the larger corporate banks.
So, right now our portfolio is a mix between retail banks because we believe that that is a structural long term story and some larger corporate banking names largely because we believe that we are now at the peak as far as NPA recognition is concerned and from here on it will be only recognition. So, you might have one or two quarters where the NPA provision might be a little bit front-ended because of the government policies.
However, by and large, those names are already known and factored in. So from hereon we would also be quite optimistic on some of the larger corporate banks.
Surabhi: Let us now extend this conversation to the NBFC universe, the haloed part of this market. Off late we have started seeing this debate whether the best is behind housing finance companies because now banks are offering you home loans at 8.3 percent thereabouts. What is your sense and beyond housing finance what is that you would still back within the NBFC universe?
A: I think housing as theme is a great theme. We are obviously a country which is quite short on housing. The government policies are quite conducive, housing for all, affordable housing has come up as a new theme, but at the same time, we also have to be careful. I think anything which is housing finance in name does not mean that name should start getting 4-6 times book.
So, I think we are very valuation conscious and we would avoid housing finance companies trading at 5-7 times book because as you rightly said, the competition is increasing, there is a squeeze, banks are getting little bit more aggressive. So, at least in terms of the very good assets or very good borrowers, the margins are becoming thinner and thinner. So, we remain positive on the segment but we would be quite value conscious there and we would avoid housing finance companies trading at 5-6 times book.
Anuj: What about companies where clearly we are seeing the story of savings moving into financial assets playing out, I am talking about the likes of Edelweiss, Motilal, and IIFL. Of course your own company is there, you can’t invest there, but this space has also seen a bit of a rerating. Do you see more to go here?
A: Very clearly the last one year, we have repeatedly shared that in financials also we would move to niche financials and companies which would benefit from the shift from physical savings to financial savings. So, we have a couple of life insurance companies which are listed; I think they have done quite well also.
There will be asset management companies which would be available for investments soon. Already three to four asset management companies have indicated their intention to be listed and then there are quasi plays whether it is some of these conglomerate broking companies or even through some banks who have subsidiaries which are quite large and market leaders in the respective field as far as insurance and asset management companies are concerned.
So, I agree with you that this is a theme which is a multi-year theme and we do believe that we are just on the cusp of quite decent growth for a long period of time as far as financial savings are concerned. So, we would be positive on wealth management, asset management, as well as life insurance companies.
Anuj: As a fund house, you have made a lot of money in pharmaceutical stocks. We have seen a bit of pain over the last two or three years. Do you get a sense that things are turning around, especially in the larger pharmaceuticals?
A: From a price point, I would agree that there is obviously a trade. At the same time, our view is that, I am now talking about the overall sector, there might be some companies which might be exceptions. However, overall for the sector to go back to that 20-30 percent growth rate is going to tough, not because opportunities don’t exist, but for the simple reason that earlier the competition was less as far as the US market was concerned. Now the competition has increased, so, there is going to be heatened pricing pressure as more and more companies vie for the same products.
So our view is that it is a decent sector from a price point, but we have to be now more moderate as far as our return expectations are concerned and our earnings expectations are concerned. We do believe that mid teen kind of profit growth is now possible. We are behind that 25-30 percent year after year profit growth which some of these pharmaceutical companies were reporting from say 2008-2009 to 2015-2016.