There could be huge growth potential in specialty chemicals and capital allocation in specialty chemical companies will be under lens, says S Krishna Kumar, CIO-Equity at Sundaram Mutual Fund.
With four out of every six companies posting good earnings, the fourth quarter has been full of positive surprises, says S Krishna Kumar, CIO-Equity at Sundaram Mutual Fund.
In an interview to CNBC-TV18, Kumar said he sees huge growth potential in specialty chemicals and will closely watch capital allocation in specialty chemical companies.
He continues to be positive on stocks like SRF and Navine Fluorine and sees huge growth for Hitachi in the years to come.
He believes while investing one has to take a three-five year perspective when buying into smaller companies.
Kumar is of the view that structural stories will play out in the white goods space even though valuations may look rich.
Below is the transcript of S Krishna Kumar’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.
Latha: It looks like a day you will like when the midcaps are outperforming. You have a keen eye to ferret out the best of midcaps. But, just tell me, starting now, is it that midcaps are going to outperform? We were just discussing with our head of research and he was saying that the extent of good company results in the midcap space is out-numbering the bad results.
A: It has been a very positive trend that we have seen in the fourth quarter results that have come by. Across sectors and sub-segments, we are seeing positive surprises on results, particularly in sectors like on the consumer side, durables, the media entertainment on the automobile side and if you just pan into rate sensitive sectors and economy sectors, cement is doing very well. There is a fair amount of pick up on the construction space too, in terms of numbers looking better. The consumer lenders also doing well and broadly, if you were to look at a ratio, you have something like 6:4 in terms of surprises on the positive side to shocks basically. And this number is fairly better across the midcaps.
Sonia: You specialise in picking up multi baggers in the midcap space. And I noticed in some of your midcap funds, you have some great wealth creators like SRF, Navin Fluorine International, etc. but for some of these companies like SRF, the going has been very good up until now, but now the company has guided for a slower growth in some of their segments. What do you do at a time like this? Do you still hold on to these names or do you look to switch into other higher growth stories?
A: While, I cannot make specific stock comments, but broadly, some of these stocks that you mentioned, ideas that we populate the midcap and smallcap funds, these are all 3-5 year to 10 year stories basically, and the names you mentioned like SRF have been held for over five years. It is a very structural transformation that the company has gone through and it is still playing out and we do see that there are huge growth opportunities in the speciality chemicals and contract manufacturing space and fluoro chemistry that they are into. All these companies have great potential to continue to grow fast, faster than market as we speak.
The allocation of capital is something that we closely watch in these companies and probably that is one of the reasons that markets have reacted a little on another side, post the results. But, very clearly, the Chairman and Managing Director have come across and talked about the overall capital allocation strategy and definitely, increasing allocation and focus on the fluoro chemistry bit and chemicals bit is really there. So, we continue to be positive on names like these which have a long term potential even though short-term they could see some weakness. This is a good opportunity that we try and re-look at adding to our stocks.
Latha: For stocks like Navin Fluorine for instance, some of that have outperformed so brilliantly. Valuation is not a concern for the midcaps?
A: When we look at buying these small companies, one has to take a 3-5 year perspective to understand the broader picture in terms of what the company is trying to do, where is the capital going towards, what are the assets that are created and what is the competitive advantage that the company is deriving from them. So, if you look at these factors basically, you will find that both the companies that you talked about, very clearly, there was a lot of money which is going into niche areas like contract manufacturing and speciality chemicals and that basically, along with business tie-ups that they have managed to do are clearly meant that the earnings would move 5x over 3-4 years. That kind of potential appeared and that is why those stocks may look expensive on a near-term basis, but if one had a little longer-term view, these would be good compounding stories that we can hold in our funds.
Sonia: The other gem that you have picked up in your fund is Hitachi Home & Life Solutions. That stock has gone from Rs 130 to Rs 1,300 in two years. With this sweltering heat we can only imagine business for makers like Hitachi Home. But, is there more value for somebody who has missed the bus in names like these?
A: In some of these multinational companies (MNC) who are increasing their focus on India, India being such a huge consumer market and the demographics improving so well in the next 10 years, there will be a huge amount of growth for Hitachi’s products, particularly on the consumer durable side. They have been essentially focused on just air conditioning market and they continue to be introducing other products on the refrigerator and other consumer durables. So, in addition to that, they are increasing manufacturing base in the country, by making capital allocations here. This shows a lot of commitment for these companies that they make in the country.
So, looking at the longer term picture and also the consumer durable boom that the country can go through in the next 10 years, this is all very structural stories which will play out even though valuations and stock returns may be a little back off. But if one has a longer term perspective, any corrections would be good entry points for the long-term investors.
Latha: I know you are a micro stock picker man, but I just wanted a macro trend. If there are so many midcaps and most of them are intermediate goods, they are not even end products, unlike Hitachi. You have a lot of intermediate chemical and bearings companies like FAG Bearings India in your list. Given that, do you think that we are going to see largely in the economy and in the bigger caps as well, earnings growth in probably the second half?
A: As we speak, the trends in the Q4 numbers are showing a healthy pace and we are seeing that, if you take a broader universe of stocks that we cover, we probably are looking at more than 7-8 percent kind of earnings growth. Even Q4, if you have to look at a broader spectrum than just the Nifty companies and if you also dissect and do an earnings growth, ex global cyclicals, probably you are already in double digits in this quarter. Even in the last nine months, Nifty ex global cyclicals had 9-10 percent earnings growth. It was more the global cyclicals like metals and oil which pulled down the earnings per se.
Sonia: You have had a great track record with some of your funds, especially the Sundaram Smile Fund which has given a return of 31 percent over the last three years. I have not seen too many funds give that kind of return. Do you believe that that same kind of return, you will be able to generate over the next three years as well?
A: Finally, our returns are linked to the market which is linked to the overall Indian economy and the macro factors. So, as we see it at this point in time, we do see that returns will moderate from these 30 percent levels and probably settle around about 20 percent levels on smallcaps. That is what an investor should look forward to in an economy where there is fair amount of growth that will come through. But still where the base effect is not there to catch up. So, we would see that the smaller midcaps could return about 20-25 percent over the next 2-3 years.
Latha: Very quickly, do you think the broad swathe of investors are keeping the faith?
A: From our own flows that we see, we do continue to see an improving trend towards systematic investment plans and there are also a lot of high net worth individuals (HNI) who have been coming into the funds. So, that has been a positive takeaway for us still in spite of markets being volatile in the last five months.The Great Diwali Discount!
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First Published on May 18, 2016 09:49 am