MFs gaining more traction; positive on B2C sectors: BNP Paribas MF

He is underweight on IT sector. Problems in the sector started even before Donald Trump-led government came to power. Margin expansion in the companies have not happened in the last two years despite rupee depreciation and higher utilisation.

Below is the verbatim transcript of Anand Shah’s interview to Prashant Nair and Ekta Batra.

Prashant: Could you talk to us a little bit about your business, what is the size of the equity fund as far as BNP Paribas is concerned, what kind of traction have you seen because the industry as such has been receiving a flood of money from retail investors over the last one and a half years or so. What is it looking like for you?

A: I think there are good times as we have been consistently maintaining that things have changed particularly in India since 2013 when we have moved to a positive real rate of interest environment. To that extent, there is going to be a shift in the Indian savings of the household from physical assets to financial assets. What demonetisation has done is further made -- the FD rates having come down makes even the investments into the value added instruments like mutual funds much more attractive than a plain vanilla FD and to that extent we are going to see two trends in the markets.

One is the savings moving from physical assets to financial assets and within financial assets we will see more of money flowing into mutual funds. Likely even in our industry, in our company also, we are benefitting from the same trends. We have two piece of the businesses, we have a very large offshore business which is more than USD 1 billion for us at this point of time and also the domestic piece which is more than USD 1.2 billion. Overall it has been good going for the company and for the sector as such.

Ekta: How would you be approaching the entire IT space? Today we do have the headwind of a stronger rupee, but there are other headwinds in the form of tighter immigration as well which the US might be facing and overall digitisation. What is your sense in terms of these two or three headwinds that the IT space might be facing and your approach towards it?

A: The IT has been facing headwinds much before the new government in US, new presidency because of very rapid commoditisation of the old business. To that extent we have been seeing a lot of pricing pressure on that old traditional business and that has also not been growing great. So, we already had a margin pressure. So, if you see over years, despite of a rupee depreciation and high utilisation levels, we have not seen the margin expansion in IT industry for almost two years.

So, that is the first that we had issues in the sector much before that. Yes, what the two new things do is actually further put pressure on the margins, both the rupee appreciation as well as what would be the new cost involved if there are some regulatory changes in US.

So, we have been underweight on IT sector for some time now, we have been maintaining that stance of staying underweight on IT sector till we see revival in either the IT tax spending generally globally which we are not seeing yet or we see any other triggers for margins to expand.

Prashant: What do you like?

A: We have consistently for years now been very overweight on B2C businesses in India. We believe one segment in India which is in the bull market for last 20-30 years is the Indian middle class household and over years the company is dealing with household across the sectors. So, if you see in 90s it was consumers, then it was auto, at some point of time when the private sector banks and the private sector NBFCs were the beneficiaries of rising credit growth rate in the Indian household.

So, today as we speak, I think a lot of B2C business is which predominantly also is financials, which has also a benefit of a macro positive, so, private sector banks, private sector NBFCs we are positive on, we are positive on entertainment industry which is also beneficiary of the same, positive on auto, positive on airline sector also to some extent, so these are the general industries which have been key beneficiaries of the rapidly increased income in the Indian middle class.