Last Updated : Aug 13, 2018 10:38 AM IST | Source:

MF inflows expected to remain strong; HDFC Standard Life among top 5 bets

Prashanth Tapse of Mehta Group is optimistic about sectors like insurance, banking and FMCG and bearish on sectors like pharma.

Sunil Shankar Matkar
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Expressing optimism about the inflows into mutual funds, Prashanth Tapse, Associate VP, Mehta Group, in an interview to Moneycontrol said that he also expects flows from B30 cities to remain robust.

Excerpts from the interview:

"We are confident that mutual funds will continue to see strong overall inflows, despite the recent volatility in first half of 2018. Inflows through the Systematic Investment Plan route (SIP) from retail investors and flows from B30 cities continue to remain robust," Prashanth Tapse, Associate VP, Mehta Group said in an interview to Moneycontrol's Sunil Shankar Matkar.

Overall MF flows seem stable but mutual fund flows into equity schemes (down 49 percent from life high) as well as balanced funds (nearly 97 percent from life high) slowed down drastically on monthly basis in July. Do you think the flows have peaked?

We have been watching a drastical shift between financial assets allocation versus traditional assets class in last 5 years. When we look at the asset base of mutual funds as a percentage of GDP is just around 11 percent, against the world average 62 percent which shows the gap of growth which can be expected going forward.

Now country's mutual fund industry is expecting to touch target of Rs 100 lakh Cr mark by 2025 as per Top AMC vision vs actual Rs 23 lakh crore as on June 2018, compared to Rs 5 lakh crore as on March 2008, which is about four-and-half-fold jump in a span of 10 years.

We are confident that mutual funds will continue to see strong overall inflows, despite the recent volatility in first half of 2018. Inflows through the Systematic Investment Plan route (SIP) from retail investors and flows from B30 cities continue to remain robust.

SIPs will continue to be strong contributor with the monthly SIP numbers currently standing around Rs 7,300 Cr per month July 2018 vs Rs 3,500 Cr per month last FY and Rs 1,500 Cr in late 2014. We expect this trend to continue going forward as investors are starting to acknowledge the long-term wealth creation potential of equities.

On balanced funds, we have always been advising investors not to compare balanced funds with FD which was a trend few years back. This product was marketed as low-risk product pushed by most of the distributors against FD returns.

We believe that investing in balanced mutual funds is riskier than equity funds as majority of balanced funds take high mid-cap exposure for better returns and this increased mid-cap exposure is another reason for their higher fall from life time high. It is seen that balance funds chase for higher returns and also opt to invest in riskier sectors as well. Increased exposure to cyclical sectors rather than to defensive sectors is one of the reasons for their fall in return as well as fund flow in balanced funds.

FII flows improved in July (net buying of Rs 491 crore) compared to outflow in previous three consecutive months. Do you expect that to improve further?

Improvement in macro front, Encouraging quarterly earnings by large caps and bottomed out valuation in midcap space are driving FII back in action and taking markets towards newer highs.

Overall sectors like banking, pharma, IT and consumption stocks have outperformed earnings expectations and expects earnings growth of around 20 percent for FY19E and 18-19 percent for FY20E driving FII to relook India as the best place to park money among EM.

The market reached new highs - the Nifty surpassed 11,400 levels and the Sensex marching towards 38,000. Is the more steam left in the market or could it be range bound from now onwards to next one year?

On overall basis markets are on right track discounting all the bigger concerns could be faced by India in next 6-12 months like State elections and mainstream Lok Shaba elections due next years.

While we are also witnessing constructive result outcomes from reforms made in last 1-3 years like implementing GST, DEMO and banking recapitalisations exercise which is resulting in better than expected corporate earnings and growth in CAPEX cycle witnessed in Q1FY2019.

Technically after a steady bullish up move Nifty is now near its gold Fibonacci ratio (161.8 percent). We believe that Nifty will retrace or consolidate before giving another bullish rally. Even the RSI is in over bought zone. Key support levels for Nifty are 11,170 and 10,929 & resistance will be 11,900 & 12,500 in next one year.


What are the major reasons that are driving the market higher? And also what are key risks and concerns for the market domestically and globally?The major reasons driving markets are stable domestic inflows, improvement in macro front, banking, IT and consumption stocks  outperformin earnings expectations and quality midcap valuations available on historic averages.

The key risks and concerns are state & General Elections hangover, volatile crude & dollar levels effecting local economics, trade wars concerns and geopolitical tensions.

Midcap and smallcaps also recovered from their 2018 lows but are still down 9-12 percent in 2018? Do you expect it to turn positive or remain volatile in next one year?

Last quarter, it was the midcaps and smallcaps space which witnessed majority of mayhem due to two major factors one was categorisation of mutual funds and Additional Surveillance Measure (ASM) which weighed additional pressure on Midcaps and Smallcaps sell off.

After the re-classification of MF scheme, now the quality Midcaps are available on the historic low valuations which triggers buying opportunity for long term. We are positive on the Quality Midcaps which were bitten down due to above factors mentioned.

As brokerages are saying Q1 earnings are in line or better-than-expected and that was the main reason for recovery in the market, what is your view on it and what are your expectations for earnings growth going forward? Also, your advice for buying and avoiding right now after Q1 earnings?

Yes, Q1 earnings are better-than-expected and that was the main reason for recovery in the market lead by sectors like FMGC where Dabur, HUL reported outstanding results more than expected followed by rally in PSU banks and the IT space.

We expect earnings growth would be around 20 percent for FY19E and 18-19 percent for FY20E which will keep markets upbeat going forward.

We are optimistic about sectors like Insurance, Banking and FMCG and bearish on sectors like Pharma due to global pricing pressure and sectors which are depending on global commodities.

Recently, RBI hiked repo rate by 25bps for the second time in a row to 6.5 percent due to inflation concerns. Do you expect more rate hikes in FY19?Yes, we do expect yet another rate hike in the next half of FY2019 due to rise in retail inflation posing a threat to RBI’s 4 percent target. Core inflation, excluding food and fuel, is likely to stay above 6 percent until October.

While global crude prices have declined, they are still above $70 a barrel, posing a threat to current account deficit and inflation outlook. While RBI remains confident of a rebound in the economy with a pick-up in investment activity, rising capacity utilisation and increased consumer spending.

Q: As we are near the fag end of earnings season, what are top five picks that can still deliver more than 100% returns over next 2-3 years (explain with rationale in maximum 75-100 words with target?

HDFC Standard Life | CMP: Rs 462 | Target: Rs 672+ | Return: 45%

We believe Insurance space is the next rising sector, driven by structural factors such pick-up in the economy, increasing share of insurance products within financial assets, increasing working population and growing urbanisation will be key to the growth of insurance sector. Considering optimal scale of operations, efficient use of distribution channels (bank support), healthy persistency ratios and higher new business mix from protection business drives future growth.

On valuation per se, it is trading 6x MCap/EV and trading in premium valuations to its listed peers while we expect this to sustain and the stock to deliver steady returns over the medium term to long term. Investor looking for a high quality business with consistent earnings growth HDFCLIFE offers the best in class investment opportunity to buy at the current levels.

Radico Khaitan | CMP: 429 | Target: 600+ | Return: 40%

We like Radico Khaitan Ltd (RKL) as it is one of the largest manufacturers of Indian Made Foreign Liquor Ltd (IMFL) in India and RKL is one of the few companies who have developed its entire brand portfolio organically. RKL’s brand portfolio includes Magic moments vodka which leads the vodka industry with more than 50 percent market share followed by Morpheus Brandy which has 60 percent share and others brands are like After Dark whisky, 8PM whisky, Contessa Rum.

RKL Q1FY19 results were ahead of estimates in terms of revenue as well as earnings driven by robust volume growth of 19 percent on YoY, improvement in EBITDA margins and lower interest expenses. We expect the company would go debt free in next 2-3 years, hence stocks looks attractive at current levels with Target price of Rs 600, upside 40 percent.

Zen Technologies | CMP: Rs 87 | Target: Rs 160+ | Return: 84%

We believe Zen being an indigenous and R&D driven company, will be the biggest beneficiary of ‘Make in India’ concept. Although, ZEN may face competition from foreign players, it can be a preferred supplier under the offset policy. The focus of going global, we feel this as the next growth theme for Zentech. We also expect more export repeat orders with higher ticket size in coming quarters posing to healthy earning visibility for FY18-21E.

We have assumed ZenTech to grow at a CAGR of 35 percent over next 3 years led by order book of Rs 3.6bn, expecting more tender of Rs 3-4bn from domestic as well as global defence for simulators. On valuation perse Zentech is available price to earnings at 11x based on FY20 EPS Rs 11.91 on conservative basis. Hence we recommend Investors to accumulate on dips with Target price of Rs 160, upside 84 percent expected on medium to long term long term investment horizon.

Kolte-Patil Developers | CMP: Rs 292 | Target: Rs 400+ | Return: 37%

We like Kolte-Patil Developers (KPDL) which is one of the leading real estate developers considering strong presence in Pune followed by Bengaluru and Mumbai. Strong momentum in Bengaluru continues which contributes 12.9 percent of sales volume against 3.6 percent in FY17. KPDL’s Mumbai and Bengaluru biz is expected to grow around 25 percent of sales by 2020. There are significant launches in pipeline this year that will result in significant uptick in sales volumes in H2 FY19.

KPDL delivered strong 4QFY18 revenue growth of 43.3 percent YoY to Rs 478 Cr which is also their record highest ever quarterly revenue. This was driven by first time recognition in R1 sector of Life Republic, Western Avenue, Ivy Estate and Mumbai projects. KPDL’s major revenue 72 percent is derived from MIG housing. KPDL also has a ROCE of 18.4 percent in FY18 which is highest in the industry. Hence we recommend Investors to accumulate on dips with Target price of Rs 400, upside 37 percent expected on medium to long term long term investment horizon.

Rain Industries | CMP: Rs 203 | Target: Rs 290+ | Return: 43%

We like Rain Industries Limited (RAIN) which is one of the world's leading producers of calcined petroleum coke, coal tar pitch and other high-quality basic and specialty chemicals. The group continues to grow through capacity expansions, and mergers and acquisitions across the world. Over the last couple of years, Rain Industries top-line expansion has outpaced earnings.

Expansion projects completed over the past two years and improved capacity utilisations are contributing to revenue and EBITDA growth. Functional integration across all three geographies has improved efficiencies and enabled cost reductions. The Company believes the new business segments will allow management to increase focus on newly developed products that offer environmental benefits to its customers as well as those that are servicing the needs of certain high growth areas. Hence we are positive with a medium term Target of Rs 290+.

(Disclaimer: The author is Associate VP at Mehta Group: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions)
First Published on Aug 13, 2018 10:38 am
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