Like Page Industries, Hawkins, Agro-Tech: SBI MF

Year 2012 has been great for midcap stocks. The midcap index is up almost about 38 percent in 2012. It has been a great year for mutual funds.

In an interview to CNBC-TV18, R Srinivasan, head-equities of SBI Mutual Fund says the mutual fund’s midcap style of investing is bottom-up.

He further says the consumer theme has played out. "We are still very bullish on it. When I say consumers, they are not the heavyweight consumer staple names like HUL, ITC and Nestle. We have been holding niche names like Page, Hawkins and Agro-Tech for quite sometime. You will find them in our funds. I think that story is still very much on. That is a long-term secular story. Valuations are still not as expensive as you see in the heavyweight consumer names," he elaborates.

He has been selective in banking. "We have been playing the private sector much more than the public sector banks. We have seen some volatility in the midcap public sector banks," he asserts.

In the NBFC space, he likes Shriram City Union Finance and Muthoot Finance. He also likes Amara Raja.

Check out: Prabhudas Lilladher's stock bets for 2013

Below is the edited transcript of his interview on CNBC-TV18.

Q: How are you approaching the year 2013? Do you think we could, in any way, replicate the gains that we saw in 2012 or do you expect it to be a year of consolidation?

A: At the beginning of 2012, I would not have expected the market to be up 30 percent odd and our fund to be up 50 percent. So, I guess we are taking it the same way like we were at the start of 2012. I hope it is a good year.

Q: Even though many funds including yours have had spectacular performances and in many cases beaten the benchmark indices, the flows or the redemptions have just been unrelenting through this year. What has your own experience been particularly on some of the midcap funds? Are you facing a lot of redemption pressure or is interest beginning to pick on midcap categories now?

A: We are having a problem of plenty, especially with the Magnum Emerging Businesses Fund. We have seen the size grow upto almost Rs 1,100 crore. We have been largely into smallcap and midcaps. Smallcaps has been almost 40-45 percent of the fund. So, we have seen flows. That has kind of diluted the way we manage the fund, so we have got much more largecaps there. But I guess what you say is definitely true for the mutual fund industry as a whole.

Q: You do have a couple of non-banking financial companies (NBFCs) like Muthoot Finance in both these funds. What is the story that you like about NBFCs? Are there any concerns about valuations as many have pointed out?

A: Not really. These are specific stories. They aren’t a top down kind of NBFC investing. Muthoot has been beaten down. It is out of favour. I think they are in a business that generates very significant return-on-equity (ROE) and they have been doing well in terms of growth.

There was the Reserve Bank of India (RBI) regulation against gold loans companies.  That probably raised concerns on growth, but I think that is in the price. That stock has done pretty well for us.

We like Shriram City Union Finance. We like the customer access that they have, the growth potential, they have been generating significantly higher return-on-equity consistently for the last many years. Muthoot, definitely, I do not think there is a valuation concern at all. The stock is inexpensive.

Shriram is trading close to two times. That is okay for the kind of consistency it has delivered. They have done 23 percent ROEs. There is no reason to feel that it would fall short there.

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Q: Within the midcap funds, banks and consumers seems have done quite well in 2012. If you had to look ahead to 2013, where do you see the good performance coming in from with respect to individual sectors?

A: Our midcap style of investing is bottom-up. So, we have played out this consumer theme. We are still very bullish on it. When I say consumers, they are not the heavyweight consumer staple names, where we underweight, like HUL, ITC and Nestle.

We have been holding niche names like Page, Hawkins and Agro-Tech for quite sometime. You will find them in our funds. I think that story is still very much on. That is a long-term secular story. Valuations are still not as expensive as you see in the heavyweight consumer names.

Banking is something where we have been selective. We have been playing the private sector much more than the public sector banks. We have seen some volatility in the midcap public sector banks, the stocks have come off, they have gone up too, but we have not been in that roller-coaster.

Q: You have a pick in the aviation space as well. You top holding is SpiceJet, but the one that has kicked it out of the fence this year has been Jet Airways, would you churn your portfolio in the aviation space, perhaps take a risk with Kingfisher Airlines or do you think holding on to SpiceJet is a good thing to do?

A: I think SpiceJet makes a lot more sense. If you look at Jet, it is trading at more than almost a billion dollars. Kingfisher’s debt itself is a couple of billion dollars. SpiceJet, even after the run up, it has almost doubled, is still at half a billion dollars. It is not like the market shares are very different. Kingfisher obviously, right now, has hardly any market share.

But between Jet and SpiceJet, SpiceJet still has 18-17 percent market share. So, SpiceJet, for the kind of market share that it has and the kind of valuations that you are getting it at, it definitely seems the cheapest of the lot. We have not gone in detail on Jet Airways and Kingfisher. KFA is something that is too speculative right now. We have to figure out how much of a hair cut the banks will take. Otherwise, the stock itself fundamentally is not worth anything.

Q: You have also got Amara Raja. What is the story there?

A: That stock has done phenomenally well. So, they have done well, they have gained market share, they have consistently performed for the last many years, they enjoy a very high ROE, but the stock has been kind of undervalued. So, even today relative to an Exide or relative to companies who generate that kind of profitability, it is probably still undervalued, but there is some bit of a rerating. I think it has come on the back of strong earnings growth in the market share gains. So, we continue to like that stock. We own quite a bit of it.

Q: You were talking about inflows into the Global Fund than the Emerging Businesses Fund, has your AUM increased on both of these? What exactly has the experience been through the last two months, which is when the market has begun to pick up? What kind of inflows have you seen?

A: We haven’t seen inflows in Magnum Global. We have only seen inflows in Magnum Emerging Businesses Fund. I presume that is on the back of the fund performance. So, I do not think it is specific or I do not think you should read investor behaviour based on that.