One measure that shows we're not facing 2008-like crash: DSPBR

How should investors then position themselves for an upturn in the market? Here, Maheshwari has a bit of a contrarian stance, saying commodity stocks look attractive from a valuation perspective.Below is the transcript of Anup Maheshwari’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: First, if I could get this technical story out of the way. The Securities and Exchange Board of India (SEBI) is saying that overall exposure of mutual funds to non-banking finance companies (NBFC) plus housing finance companies should be 30 percent and not 40 percent. Have you done the industry math? Is the industry over-invested much more than 30 percent in these two papers?A: It is more for the fixed income team to figure those things out, but at the end of the day, what it does mean is the NBFC sector has been one of the biggest borrowers in the market. So, what it will mean is there will be surplus liquidity in mutual funds that they will have to look at other rated papers, maybe go down the curve a little bit. But, it is a critical large component of most funds and this is some sort of a risk control measure. So, funds will have to look at alternate ways of deployment, so it will create room for more paper in other areas.Latha: We have some math that at the moment, the commercial papers (CP) of NBFC and housing finance companies account for just about 14.5 percent of the total Rs 9.3 lakh crore, which is with the fixed income category. Can you give us some confirmation of that figure? That is what we picked up.A: I do not know the exact numbers on that, but I do know that at the end of the day, it is one of the largest single sector exposures that mutual funds do have. Now, for the NBFCs, they have got other avenues of raising money including external commercial borrowing (ECB) and forms of capital. So, I do not think it changes things too much, because they will find other ways of raising money and funds will find alternate sectors to deploy money in.Sonia: How have you been reading into the complete global mayhem that we have seen lately? Does this in any way, resemble the crash that we saw in 2008?A: Yes, a lot of people are drawing some parallels to it, but I have got to say, we are very differently positioned today than we were in 2008. In 2008, all markets were at all-time highs pretty much. If you use market cap to gross domestic product (GDP) ratio as an indicator of overvaluation, most markets were in the 140-150 percent range of market cap to GDP in 2007-2008. But, over the last 7-8 years, there has been massive divergence. So, while the US is still pretty high on market cap to GDP, we have come down to about 80 percent. A lot of other emerging markets are way below that as well.So, the effects that some sort of global correction would defer from market to market, I do not think it is the same degree of negativity across the board as we saw in 2008 that all markets will experience, because they have already been very big divergent trends.So, it is a bit different from 2008 in that sense. However, it is concerning, obviously when you see such global sentiment being so poor and there are rub-off effects in the short-run in terms of market sentiment. These things invariably -- huge negative sentiment in one direction always offers some degree of an opportunity on hindsight, we have seen this time and again. So, over a period of time, for a slightly longer-term investor, these present pretty interesting opportunities to invest.Latha: What do you make of the Indian markets itself? We are distance away from the kind of highs we saw one year ago in March, but, also a distance away even from one month ago levels. Would you consider these attractive or is the Nifty not at all the place to buy? At least in 2015, it did not give us much.A: The problem is people have been attributing a lot to the government and all sorts of thing and just a general slowdown, but the fact is if you look at it from December quarter, last year which is 2014 onwards, we have had consecutive quarters of degrowth as far as corporate earnings is concerned. That has been the biggest issue, corporate earnings have just not grown to the expectations of the market. Last year, we had around 2 percent growth in FY15, this year it is looking somewhat similar at an index level. So, it is almost two lost years of earnings growth and that is what is keeping the market under check because you cannot have the market going up without earnings growth support.As you go deeper down the chain, if you look at a broader set of companies, we have seen higher growth. So, even this quarter, we are looking at 8-9 percent growth overall or 10 percent growth overall across a wider range of companies but when you narrow it down to the index, it only comes down to about 3 percent growth. So, this is the dichotomy, which is what we are experiencing anyway in terms of market performance as well. But the broader market trend requires earnings to come back.Now, it is a golden question, nobody knows exactly, when earnings pick up, but you do not know that after many years of sub-optimal earnings growth. In the last two years we have been almost flat but at some point you will get that pick up. You are definitely forming a fairly low base as far as earnings are concerned. So, you will get that pick up. It normally tends to come through interest rate falls, operating margin leverage, cost reduction and then eventually, sales tends to pick up and that results in decent profitability. So, that is the thing that we have to look for.If we had to take a call, our view is that it will come sometime in the next few years and whenever it does come, the markets will respond to corporate earnings as well and this will seem like a bit of distant memory, the current phase we are going through.So, it is really a function of just being patient enough to wait for the corporate earnings improvement to come through.Sonia: You were pointing out that this was a good opportunity to invest in the market, this turmoil. I was going through some of the top holdings in your microcap fund, which has given very good returns in the last couple of years and you have some solid businesses there, names like SRF, Atul Limited, Eveready Industries, a lot of these companies do not have any exposure or vulnerability to the global markets as well. Do you continue to stick with some of these domestic led stories?A: Absolutely, that is a very bottom up driven fund. We are looking at these ideas in terms of their own earnings growth and they have not been necessarily directly influenced by the overall macro picture or the global picture. These are the smaller companies that have the ability to grow. As you go down the chain, you invariably find companies in different parts of their business cycle, which present interesting opportunities.These are names we have held for a while. Good managements, good businesses, good economics, and as time has passed, obviously the valuation in this segment has increased substantially, so we are very wary of that.As you are aware, we had shut this fund for subscriptions some time back with the view that the rerating phase is over. What we would like to explain to investors is that the performance of such funds will depend more on the underlying earnings growth of the companies we hold. However, do not expect price to earnings ratio (P/E) rerating to happen as it has happened in the last three years, because it cannot keep repeating itself.So, we have to have more moderate expectations, but these were all good businesses and over time they continue to grow._PAGEBREAK_Latha: There was another fund manager who was making the argument that typically in midcap funds, more than microcap, there is only that many good bets and as the popularity of midcaps increases and more money comes it then there is a problem of outperformance. So, you cannot have two-three years of midcap fund outperformance, simply because of the availability of stocks. Is that an argument that 2016 therefore will be a tough year for funds like these to give out-sized returns?A: There is credit to the argument that the larger these funds become, it actually becomes self-defeating. The larger a midcap fund you own, the tougher it gets to invest into midcaps and you go away from your universe. So, I agree with that, I mean these funds have to be controlled in size at some point to optimise in their performance, which is partly the reason why we shut the microcap fund. However, if you pick and choose your stocks well, over time you can deliver returns. It is not a blanket phenomenon where all midcaps have to underperform.Latha: You will be able to control your fund like you have perhaps very wisely did with your microcap and didn’t take more but you cannot do much about the industry floating more funds. So therefore, this year, would midcaps outperform largecaps in the manner in which they did in 2015?A: In that magnitude, we are definitely not expecting as we start -- there has been a lot of rerating in midcaps and we are not expecting to keep repeating itself. The earnings growth in a lot of these names is still higher than what the index is as I mentioned earlier. So to that extent, they have earnings growth support but further P/E rerating -- at a generic level for midcaps -- is a whole category we are not anticipating at least not building into our expectations. You could still see some degree of performance on the segment. It doesn’t mean automatically that the whole segment has to underperform largecaps.The point is in this market, lot of investors are attracted towards growth in a fairly low growth environment globally as well as here, growth is getting a very strong premium because there is liquidity on one hand and there are small pockets of growth and that liquidity is chasing growth and rerating. So whenever you find growth whether it is largecaps, midcaps, smallcaps, it doesn’t matter.The idea is you are looking for growth opportunities and if you have them in your portfolio, you can deliver results.Sonia: I noticed that in both your midcap and smallcap funds as well as in your equity fund, you have oil marketing companies, so Bharat Petroleum Corporation Ltd (BPCL) features in both these funds, we are expecting sharp improvement into the profitability of oil marketing companies because of the strength and refining margins but how much of that story do you think has already played out?A: We have been holding these positions for quite a while now about a year and a half on more in terms of BPCL for a much longer period but some of the more other positions in that sector and we are fairly overweight, we still continue to be.Our view is we haven’t seen this play out fully yet. What we have seen in the first phase is just that the debt that these companies had in their balance sheet has reduced dramatically and that has converted into shareholder value. So the enterprise value has not changed as much. So we haven’t seen a core rerating of the profits in that sense and we are still very bullish on Hindustan Petroleum Corporation Ltd (HPCL), BPCL, that whole oil marketing company (OMC) range and the energy sector and gas utilities. That is very evident from our portfolio positioning right now.Latha: When according to you is that earnings growth quarter? You spoke about the broader markets still giving you 8 to 9, I assume you were speaking of earnings and not revenues, when is the earnings growth quarter for the larger boys, do you see it in Q1 of next year FY17?A: I wish I knew but right now it doesn’t seem right around the corner but the sales growth continues to be extremely weak. As I said, the broader earnings growth presents a better picture than the narrow earnings growth of the index. The hope generally is that we will see that somewhere in FY17, one of the quarters maybe the fag end of it perhaps but I think it will come at some stage.After two years of virtually zero earnings growth, you have to have pick up. We have seen commodities -- for instance commodity profits this quarter have collapsed from something like Rs 7,000 crore in December quarter 2014 to about Rs 400 crore in this quarter is what we are expecting. So this is a very low base for a lot of companies and hopefully next year we get some pick up somewhere.Sonia: On one of the stocks that you hold in your equity fund, which is Ashok Leyland, that stock has been hitting fresh highs but I wanted to know from you, at what stage of the CV cycle recovery are we in right now and how much more of an upside do you think we could see?A: On CVs generally, they have had a very rough patch for four-five years till the start of 2014. It has only been a year and a bit for them in terms of a recovery, we think it will sustain. As we see some degree of activity back in terms of core sector activity picking up, we think CV demand will further increase. There is a lot of legislation also now coming into the picture, which may result in better demand for CVs. So we are optimistic that we are definitely not at the end of the CV growth cycle but we are still somewhere in the middle and going through that phase right now.Latha: What will be the big themes you will play since you touched on this crash in commodity margins or commodity earnings? Would you play that a mild recovery or a restocking in those commodity materials, will you play capex story because even the Larsen and Toubro (L&T) varieties have been beaten down a lot or will you persist with the urban consumption theme, what will be the themes and what will be the priority of the themes in 2016?A: I think the consumption theme to our mind seems more durable both near-term and long-term. So that is definitely an overweight position as far as our funds are concerned. Private sector capex are not counting on for quite some time -- it is government capex that has to lead the charge. Private sector capex will come a lot later. Companies in the private sector are more focused on deleveraging than investing.Commodity cycle -- it is a bit tempting from a valuation point but they can seriously test your patience because we have no idea when an economic cycle will improve. So to that extent, it is very small positions almost option like positions that one can take but you need incredible amount of patience to see the returns coming through on these names. So I would put it as consumption first as the dominant theme.Latha: Finally, you don’t see any disturbance to the flow of investor funds into mutual funds, do you? At times when the stock market gives you that gut-wrenching fall, one wonders whether domestic institutional investors (DIIs) who have been the main stay of the market in 2015 will be able to deliver as much in 2016, do you doubt that flow?A: It is natural for the flow to be driven by momentum. That is a very natural phenomenon that we have seen enough times now. So what tends to happen is when the market falls, flows do reduce and now having seen virtually no returns for a one year period or negative returns, there is some degree of reduction in flow or more managing of expectations happening at an investor level. So flows are -- they will naturally not be as strong. However, having said that, at least incremental flows into financial assets do seem to be a theme that should continue over a while because lack of other options. So net-net we will get flows but it might be little more modest than we saw last year.