In the financials space, Adrian Lim of Aberdeen Asset Management likes private sector banks. He says a bank like ICICI Bank has been troubled because of the asset quality that it has been delivering.
With cleaner fiscal position and improving macroeconomic situation, India is relatively attractive among other emerging markets, says Adrian Lim, investment manager for Asian equities at Aberdeen Asset Management. Though, he adds that there are still a few issues and blocks along the way.
Aberdeen Asset Management has been rather bullish on the Indian IT and financials space. In the IT sector, it holds companies such as TCS and Infosys. However, he says that the age old services business may not be enough for these companies and they need to move up the value-chain. He is not looking to add new IT companies to the portfolio right now. According to him, the sector needs "innovation and value addition to overcome hurdles". But TCS and Infosys features in his top five picks in India.
In the financials space, Lim likes private sector banks. But the sector has been under considerable stress due to asset quality woes for some time now. He says a bank like ICICI Bank has been troubled because of the asset quality that it has been delivering. He, however, will consider buying ICICI Bank post correction.
He says Aberdeen's time frame for investing in India is 3-5 years. His top holdings in India include ITC, HUL and Godrej Consumer Products. He also holds Sun Pharma, Lupin, GSK Pharma and Sanofi within the pharma space here.
Below is the verbatim transcript of Adrian Lim's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: The view that we get from a lot of emerging market experts is that India continues to be relatively the cleanest shirt in an otherwise dirty laundry basket, is that your sense as well and have you in the recent past increased your allocation to India?
A: I think the emerging markets, as you say, is a dirty laundry basket but that is perhaps slightly unfair. I think not just in India but in every emerging market there are always companies that are interesting to us. From a top-down perspective, you are right, India is relatively clean, valuations are not cheap but the fiscal position is clean, the macro position is improving and the issues and some of the steps and blocks are there for an extended recovery that people with a medium-term view can take advantage of. So that is not always a very attractive way of putting it but India is relatively attractive in the emerging market space.
Latha: I am glad you said top-down is not what you want to look at, you will always find bottom-up stories so I straightaway want to get to that. The big bottom-up story which you have always betted on are IT stocks in India and the Cognizant numbers should warm your heart I think, what have you made of those numbers and therefore what will be your approach to the IT holdings you already have and intend to have?
A: We don’t hold Cognizant, it is a strong company as well. We hold Tata Consultancy Services (TCS) and we hold Infosys but many people would consider those three to be leaders in terms of scale and reach and technical ability and marketing and track record as well especially over the last five years or so. I think what is interesting is that those three have got a challenge over the medium-term. You are talking about scale, they have effectively scaled up very well but you are talking about an environment where IT service growth levels aren’t what they used to be in the past.
Many of these companies need to look at new value added propositions, it is not just a matter of getting a software engineers hours in the developed world replaced by the software engineers hours in the developing world. They do need to add value, they do need to consult and they do need to move on from the value chain. We think those three are excellent examples of companies that are well resourced and well aware of the challenges that they face. In the medium-term some of these quarters -- this quarter looks okay but we expect short-term volatility but we think medium-term the prospects in the IT space for some of the Indian companies continue to be attractive, we are not looking at adding new names to the IT space currently but the balance sheet as well as the valuations of these major companies continue to be relatively attractive in the Indian universe.
Latha: What I wanted to ask was looking at the result of Cognizant are you impressed enough to increase your existing holdings in the Tata Consultancy Services (TCS) and Infosys’s?
A: We have quite a lot at this juncture. If you look at our main Indian fund or main Indian single country fund you would see that the both TCS and Infosys are large positions, they are at top 5 positions within our funds so we have quite enough of those stocks at this current time. We don’t usually look at another stock and say - that stock is doing well and something in the same peer group should be doing well too. That is an assumption or projection too far. We focus specifically on what that particular stock has delivered in terms of results and then we make our decisions from that.
Sonia: Financials has the highest percentage allocation in your sectoral holdings, more than 21 percent and within that, you have for a very long been positive on private sector banks, but this year was interesting because the stock like ICICI Bank has lost 12 percent of its value in 2015 so far and it forms a part of your top holding, what would you do at a time like this, do you think that the pace of growth for private sector banks will moderate or do you still expect private banks to outperform the market?
A: I think it depends on your timeframe, we take a very considered approach so our timeframe is three-five years out and I think what you have with the short-term volatility is due to the fact that there is credit stress within the Indian market and that stress is not completely contained because the system is pretty open and there is going to be some stress that will hit all balance sheets to some extent. ICICI Bank has been slightly troubled given the asset quality that it has been delivering over the last couple of quarters or so and what we see is that at a time like this, we would evaluate beyond just the asset quality of its balancesheet we look at the brand position, we look at its reach, we look at its scale, we look at the capital structure and there ICICI Bank has got quite strong levels of capital if you measure by ratio for example and at times like this when we think that perhaps it has underperformed, we will consider topping up or buying more of that stock.
We don’t take a short-term view so if we just see short-term fluctuations in share price, it is buying or selling opportunity of an incremental amount. We won't substantially change our position within the stock itself.
Latha: The more important sector I wanted to discuss with you is your views on the consumer staples sector. You have quite a few holdings in that space as well. You have Godrej Consumer for sure and some others as well. What was the key take away you got from the various consumer staples stocks both that you own and that you don’t own. Is there an improvement in demand? Would you add to that kitty?
A: You are right. We do have quite a lot in consumer staples and what we do see is that you can’t say that it is an easy operating environment and even when you look at categories it can be quite mixed. You see resilience in certain products and you see softness in certain products. What we try to do is identify the companies that have a decent chance of performing their peer group. Now if a categories is hit and a category is important to consumer company it is difficult for it t be totally sensitive to what happens within the categories itself.
A good company will be able to mitigate some of these risks so we do see a mixed environment. It is got to do with the relatively muted level on GDP growth compared to what India has been delivering over the last five-eight years has got to do with the monsoons as well. It has got to do with the rural economy as well as the urban economy and how much of the money or cash earned in the urban economy moves down to the rural family members and so it is still an environment that is challenging so what we do is really important for us to pick the stocks that we think will punch above its weight. So we have quite a bit in ITC, quite a bit in Lever’s we have quite a bit in Godrej as you as well. We do think that these companies will do well in the long-term regardless of their short-term challenges.
Sonia: One stock that has punched way above its weight for you guys has been Bosch. In the last two years that stock has gone from Rs 8,000 and now it is almost at Rs 25,000. What do you do with some of these high value stocks that have become expensive for regular retail investors to buy and a lot of the audience right now is retail in nature? Do you continue to stay invested in these companies despite higher valuations?
A: The Indian market is not a cheap market. If you look across the Asia-Pacific region, if you look across the emerging market space India have very rarely been trading at a discount to average. It is usually trading at a premium to average as a basket of stocks. It is important that although we are mindful of valuations the important thing for us is the quality of the operations and the quality of the companies and the businesses that they run. So, a stock like Bosch which has technology, which has a brand which has very focused promoters is valuable to us.
At some point in time there is price that you would take some money off the table but I don’t see given the stage of development in India’s auto space as well as the technology requirements that are coming through and the environmental requirements that are coming through I can’t see us exiting Bosch completely.
Latha: I have a more macro question for you. Do you think flows will start picking up or increase to India from foreign investors? Crude is a natural advantage if it stays the way it is as well lower gold means more Indian’s save less in gold and more in financial instruments? Are the macros giving you a sense at all that flows will increase to India?
A: That is my soft underbelly; I do a very poor job about predicting flows. The reason is it is very difficult to predict flows are that it is not related to only to the attraction of India. It is also related to how unattractive equity market outside India are, is related to how attractive the fixed income space is compared to the equity space as well as the direct investments on a cash base as well.The Great Diwali Discount!
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