Bearish on FMCG, things improving for infra: Prashant Jain

Jain is bearish on FMCG shares, saying the growth was slowing, but investors were ignoring it. He saw enough for the PE multiples of FMCG companies to shrink in the coming days. He said PE multiples of IT and pharma were unlikely to expand much from here on. He saw scope for PEs of state-owned banks and infrastructure to expand.

He said the environment for infrastructure was improving because of the recent regulatory initiatives. He said some of the capital goods companies like ABB, he recently spoke to, also confirmed that view.

Below is the interview of Prashant Jain, ED & CIO of HDFC Asset Management with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Latha: What do you do now; the market seems to have assumed certainty in governance after elections. Should one ride this hope rally now or wait for that certainty?

A: We think elections are very hard to forecast but in my opinion one year from today markets will not be determined by the elections outcome. There could be some short-term ups and downs immediately after the elections but one year from today I don't think it will make much of a difference.

This government to its credit has done lot of things in the last six-nine months which were bothering the core sectors of the economy. Current account deficit (CAD) has been fixed, fiscal deficit, diesel prices continue to go up, inflation interest rates have peaked – on how fast they fall, how much they fall time will tell but it is safe to say they have peaked out.

Also the key issues which were dogging sectors like power, State Electricity Boards (SEBs), gas, coal, mining - lot of things have been done and lot of the significant policy steps have been taken. However, it will take six-nine months for that to start showing in the economic growth rates but I hope eventually it will.

Sonia: For a mutual fund investor is this a good time to be redeeming, to be taking out some profits? Do you think that given we have been waiting for this kind of a breakout for almost six years now, is this a good time to be taking some profits home or is it a good time to be pumping in more money?

A: In our opinion it is very clear whenever you have invested in India below 15 price to earning multiples, over the next three and five years the returns have been extremely good. Even in a year like current year your nominal Gross domestic product (GDP) growth is around 14-15 percent. Real growth is 5 percent but inflation is 8-9 percent. So below 15 PE Indian markets become quite attractive.

And if you look at the retail investor behaviour unfortunately they have not been the best timers. So go back six year it was a record year for mutual funds when PEs were 25 and six years back the index was at the same levels, it was a record year for us. And today after six years we are at the same index but economy has doubled nearly. PE multiples have fallen by 40 percent and macro economy things are looking up. So I would say that this is actually on the contrary a good time to be adding to equities.

Latha: I am not refuting you, I am just trying to play devil's advocate. Nominal GDP is not growing by 14-15 percent. Last year it has grown actually by more then 11-12 percent. We are at 4.7 percent GDP; we cannot forget that and that could mean another 11-12 or even 11 percent in FY15.

A: 5 percent plus 8-9 percent inflation if you add, it adds up to about 13-14 percent.

Latha: The point is, as you also said it might take 3-9 months for growth to come back, while some of the NPLs are getting resolved because of the state electricity boards (SEB) reforms and probably power tariffs getting raised, gas is still not quite resolved those power plants have not yet been recognised as NPLs and there are whole host of sectors which only have to depend on growth. Trucks not being used, that money not coming back commercial vehicle (CV), construction sector (CE) sector. A lot of the poison could still come out, has not yet come out. Therefore would you say that there is growth nine months down the line? Are you buying too early?

A: Of all the list you said tell me one thing which the markets are not aware of. That is the nature of markets that they are looking forward always and that is why when the news flow is the most negative, the markets are more pessimistic and that is when markets bottom out.

Latha: We have already seen optimism coming in. So, what I am asking is 5120 I guess was horrible pessimism but at 6500?

A: It is extremely hard for us to forecast short-term market movements. We will have to accept that reality and someone who does that in my opinion – I respect the technical chartists but someone who respects that markets in short-term brings uncertainty, he in longer-term be winners in these markets. Go back in May 2012 Sensex was at 15,000 that was the peak of pessimism.

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Latha: What is the kind of one year return you can see at this point considering that so many correct steps also have been taken?

A: It is very hard to pin point one year returns but what we have seen is and you can go back and check the data, for last 20 years, whenever anyone has bought simply the Sensex below 15 price earning (PE), the next three and five year returns have been very healthy and double digits returns. Now, whether Sensex in one year is plus 20 percent or minus 10-20 percent, it is extremely hard to say.

Sonia: Are there serious signs of the investment cycle picking up, signs enough for an investor to put in money on an infrastructure based fund specifically.

A: Today if you ask me are their hard signs then the answer is no but the environment improving. You look at the number of projects that have been cleared; you look at the regulatory steps that have been taken in five-six areas; although more may need to be done but are we better off in terms of the environment from where we were six months back, one year back and this will show up in the results. ABB management said that things are improving and worst is behind. So, how much things will improve and how fast will have to be left to review later.

Sonia: So this is not a just a trading pop pro-Modi rally that you have seen in the capital goods space. You would advise even long-term investors to put in some money into cyclical names like the Larsen and Toubro (L&T), BHEL of the world despite some of them showcasing bad results?

A: I would not like to comment on individual names but they way we look at these markets is aggregate market multiples are below 15 times. We are sitting on near peak interest rates. We are sitting at near bottom economic growth. So, one year from today interest rate should be lower, growth rate should be higher. So, the PE multiples have to move up, the only segment which appears to be expensive to my mind are the consumer goods because there growth is slowing down but the market is still not pricing that in. Other than that, most of the sectors room for expansion in PE multiples also.

Latha: The more attractive exposure to the trend you are saying - interest rate should be lower and growth should be higher would be the banks. How would you play public sector undertakings (PSU) banks at this juncture?

A: Let us talk of just the corporate banks and PSU banks are part of that. There are two types of banks in India.

One are the retail banks where balance sheet is mainly in the retail asset and the other is the corporate banks. There certainly almost all PSU banks are in corporate banks. The bulk of the brunt of the economic slowdown has been borne by the companies, by the stuck projects, by the high leverage on their balance sheets and that is why the corporate asset quality is under stress. It is very hard to say whether the worst is behind us or not. Time will tell but I believe that if the interest rates start coming lower and if GDP growth picks up, over time the asset quality will certainly improve and that is what I would say.

Latha: So, you would buy them now?

A: We have reasonable investments already in our funds in the banks.

Latha: That is why I am asking, fresh money you will put in is that what you are saying or will you say that fund managers are advised to even churn now. Say move out of IT and pharma, your best trades of  2013 and bet on cyclicals because that is the best forward trade?

A: Let me put it this way, I think, there is room for PE multiples to come down in the consumer stocks. There is very limited room for PE multiples to go up in the IT and pharmaceuticals space. It will depend on the earnings growth and how the rupee behaves and in almost everything else, there is room for PE multiples to move up over time.

Sonia: The most interesting story this year could be the oil and gas space, so say many experts to us and I was just looking at your portfolio in HDFC 200 where you oil and gas percentage is the highest in the last one year, at about 14 percent. Is this a sector that you would advise incremental exposure into and if yes, are you looking at oil marketing?

A: As I said, everything other then those three sectors, there is room for multiples to go up and this is a part of that. It is true that the diesel subsidies are more likely to become zero now and markets are slowly pricing that in. These companies are trading at sharp discounts to their replacement cost, to their book values, even in terms of PE multiples. If subsidy burden is not there PE multiples would be quite low. So, I would say the entire both upstream and downstream look to my mind is undervalued.

Latha: I know you won’t talk individual stocks but how does one sift the men from the boys in the infra space, where if things go right, things can go damn right?

A: Leave it to the mutual funds.

Latha: But still a close ended infra fund types or a sector specific infra fund or would you still say it should be like the prudence fund?

A: I would say there are infra funds in this space and these are thematic funds, these are higher risk funds than the broad based equity funds. However, still we have if you look at three-four months back we have made a presentation, we have been mailing it to investors and what is an infra fund? Broadly it is a non consumer, non IT, non pharma fund. That's how we look at. So, it is avoiding the sectors which are more expensive. Banks are also strongly linked to the infrastructure space, construction companies are also linked.

Latha: So your infra funds will have even banks?

A: Yes, of course. Even oil companies we would say are part of infrastructure. Infra is not just the asset owners, it is banks which fund them, it is the companies which own the assets and it is also the companies which make those assets, construct those assets.

Sonia: For most of 2013, the key recommendations were get into balanced funds, get into debt funds, so lot of the hybrid funds were being talked about. Do you think now one should be aggressive and sort of get whole hearted into equities, have we sort of resumed that bull market cycle for Indian equities?

A: For six years, your index is flat. Then the next big move has to be on the way up if economy continues to do well and I am in the camp and we have been in that camp for sometime. In May 2012, we wrote a long note explaining why investors should buy more equities. So, I would say the key is asset allocation. Whether you achieve it through balance funds or through equity funds is not the key factor.

Sonia: What should be the ideal break up be for 2014?

A: It would depend on someone's risks needs. The way I would say is that equities they always bring in risk and uncertainty over short to medium periods. However, the beauty of equities is that as the holding period becomes longer, the risk in equities reduces. So, your long-term capital should be invested in equities. Long-term capital is that portion of your capital on which if you do not earn for two-three years, it is okay, on which if you fall 10-20 percent you can be able to handle it both financially and emotionally. So, that answer would vary from individual to individual.