Smallcap companies will be the ones to watch out for in manufacturing, said S Krishna Kumar of Sundaram Mutual Fund, adding that the Modi government is bullish on the sector.
Speaking to CNBC-TV18, S Krishna Kumar of Sundaram Mutual Fund, said the rural economy is going to fire soon and that signs are everywhere. Infrastructure is also starting to rev up, and we should be in a position to move ahead in earnings growth," he said.
The government's power-packed reforms will also help, he added.
Smallcap companies will be the ones to watch out for in manufacturing, he said, adding that the Modi government is bullish on the sector.
Among infrastructure companies, he is of the view that more consolidation and deals will have to happen before they can turn more valuable.
He spoke on infrastructure spends by various states. He mentioned Andhra Pradesh and Telangana as two states which are spending over Rs 25,000 crore on infrastructure. Karnataka is spending on road projects and Uttar Pradesh and Madhya Pradesh are putting their backs behind tate highways projects.
There are 15 metro projects which are in various stages of being awarded, he said. The Namami Gange Project, whose mission is to clean up the Ganges, will see progress, he said, adding that it is not only road and rail projects but social infrastructure is also getting a bulk of government attention.
Auto and auto financers have made a lot of money for the fund, adds Kumar.
The growth potential is decent, he said. The government is focussing on new schemes to scrap old vehicles and incentivise modernisation of fleet.
The vehicle financiers will see a fair bit of growth in the next three-five years. They have diversified interests, he said.
The fund house has increased exposure to the rural theme. Investors and distributors are warming up to the idea of India doing well, he said, adding that the rural theme is coming back ino focus as a secular story.
Below is the verbatim transcript of S Krishna Kumar’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: Just start off by telling us where the potential lies now is it more in the midcaps? Some of your midcap funds have been doing brilliantly well or do you see that the frontliners could continue to outperform going ahead?
A: Definitely, India is moving into the next phase of growth. Clearly we are going to leave behind the years of sluggish growth. We do see that clear momentum in terms of lead indicators coming through and with a good monsoon backing us the rural economy is also going to fire. So, which serves us doing well, rural doing well and the infrastructure sector also starting to rev up we should be in position to move ahead in terms of better earnings growth.
The government is clearly now moving into a higher gear in terms of the next set of reforms particularly in labour job creating sectors like textiles, small and medium-sized enterprises (SME) and micro SME. I think manufacturing clearly is a big area where the Modi government is focused on to alleviate the pain, create more jobs and that is where even the Make in India program over the long-term is focused on.
So, we probably will move into a growth phase where multiple sectors, which are probably smaller and where probably you will find that more midcap and smallcap see a far sharper growth going forward.
Latha: You do have a sharp eye for midcap stocks. Tell us which are the sectors that have now moved in? You spoke about even infrastructure showing signs of growth. Let us start with that because that perhaps is the dog sector for so long where valuations are likely to be attractive. But there are also bombs, ambushes, booby trap with a lot of debt so what would you pick in this vast area of infrastructure?
A: If you look at infrastructure, while we refer to probably higher growth and better prospects in terms of the companies operating in that space, we believe that there could be only a handful of companies which could be investible in the infrastructure space in terms of the engineering, procurement, and construction (EPC) companies which have swelling order book now and many of them have a book to bill ratio of 3X and 4X. So, we believe that the cash contracting model will be the one which could take off in the first phase.
The developers phase within the infra is still having its set of its own problems and the leverage there definitely has to be owned down and more consolidation and merger & acquisition (M&A) has to happen there to make some of these companies look more valuable. If somebody has a very risk appetite then the developers space would be very attractive from a three to five year perspective in terms of airport companies and road companies, which won lot of assets.
When I refer to the infra space doing well, I think it has a huge benefit across others spaces like the kind of cement demand that it can create as most of the state governments also move into higher gear on spending. Also, the benefits that come from a widespread job creation of the bottom of the pyramid would mean that that would have a salutary effect in terms of improved income levels and more spending across the consumption space too. I think that is a cycle that will play and we should look at indirect beneficiaries rather than just look at the infra sector alone for investments.
Latha: Where are the state governments spending, they are not even clearing their distribution companies (DISCOM) debts. Are you referring to specific states like Andhra Pradesh (AP), Telangana which been new born states are showing. Which states are showing infra investment?
A: The well known names are Andhra Pradesh and Telangana because of reasons like Andhra creation of a new city and capital there and for Telangana to invest in irrigation and water supply projects in a big way. Each of them are looking at more than Rs 25,000 crore of spend in this point in time. Orders have been issued and work is in progress.
On the other states, if you look at Karnataka, they are spending fair amount of money in terms of road projects. It is not only Karnataka, Uttar Pradesh (UP) and Madhya Pradesh (MP) are also following suite with fair amount of spend on these state highway projects.
The whole emphasis of the Modi government has been to push more money into the state governments through the central allocation and get them on boarded to developmental projects because Central Government alone cannot take it up.
Roads is one side but if you look at the metros, there are about 15 metro projects in different cities, which have been identified and which are in different state of status of award specifically.
If you look at the other social infrastructure projects each of the cities are working on them. Not to mention all the 20 smart cities, which have been taken up for development, so we see a broad-brush, lot of activity are happening at this point in time. Even the Namami Gange project -- there has been progress there and by end of FY17 you will have fair amount of awards there. The build–operate–transfer (BOT) kind of a model or a cash contracting model is being ironed out at this point in time by a few companies and consultants and we will see progress there in.
So, it is just not only about roads or railways orders, but it is all also about several other types of projects on social infrastructure that has been worked on at this point in time by many states. I forget to mention the North Eastern parts of India where there is again a lot of focus to push projects and improve the standards of living.
Sonia: The other space that you are very bullish on and you have in a lot of your funds is the auto and the auto financers so whether it is Ashok Leyland, Bajaj Finance, M&M Finance but this space has made you a lot of money and it has now become a bit of crowded trade. How do you approach it here on?
A: There has been lot of money made in this space and probably lot of investors are already there. The growth potential still continues to be fairly decent there. The government is focusing on new schemes in terms of scrapping old vehicles and incentivising modernisation of fleets etc. We do hear that in the current year, we should see the announcement coming through in terms of the program. So, this can keep the momentum in the commercial vehicle (CV) space high.
So, also if you look at the passenger vehicles there are projects on to look at how we can reduce the vehicle age, so that the environmental issues are addressed. So, the space remains to be of continued interest for us. We believe that also on the vehicle financing space the momentum is still yet to pick out. We do believe that these vehicle financials have a fair bit of growth over the next three to five years.
If you see most of these companies you mentioned are not particular to any one space but are diversified with some niche. So, they would do well to keep diversifying and opening up new segments of financing and that would give them the kind of the growth that they have seen in past many years also. So, they remain a quite a bit of secular growth stories for investors.
Latha: How would you play the agri theme, is it a tractor theme, is it agri chemicals theme, is it rural consumption theme?
A: One of the things that we have been doing over the last three-four months is that we have increased exposures to the rural thematic. We also have a specific rural India fund, which has been seeing good inflows over the last three months. Investors and distributors have been warming up to the idea of rural India doing well. So, the sentiment was what was impacted with successive failures of monsoons and we did have the industry going through a bad phase.
So three-four direct plays that we see in the rural thematic is the farmer automation products basically. You have said it right tractors, the rural segment has under invested in tractors for the last two to three years. We had significant negative growth so we see that segment definitely coming back very strongly. Also other automation products like tillers, harvest harvesters and cane planters etc also are areas where the farmers have to invest in to automate and fastrack the growth.
We also see other farm inputs like seed companies, fertilisers companies, agro chemicals pesticides companies also doing well in the next two years. These have been going through very sluggish phase of growth given that huge inventories have been held at a distributor level. There have been lot of inventory returns and companies have been suffering from high inventory and working capital. So, we see next two years to be quite buoyant for the space.
The third area of rural thematic would be companies on the agri output chain be it rice companies, sugar companies or cotton related companies in the textile space. There is a lot of activity on the sugar side, rice companies and textile and also coffee and tea. That would be the third big thematic that one could look at to play and be selective about that.
The other one is clearly huge amount of focus on the dairy sector and the animal husbandry. Even on the foreign direct investment (FDI) side there has been some relaxation on the FDI limits in this space and that should probably help. So, given India’s rising per capita income etc, this is going to be huge demand for dairy products and proteins in terms of meat etc. So, listed companies in space would be good beneficiaries in the medium-term.
Lastly, clearly the small finance banks, the non banking finance companies (NBFCs) which are more rural oriented, rural housing the gold loan companies and micro finance companies would definitely see far more traction in the next three to five years in the space. So, we see rural again coming back in focus as a secular story and the monsoon status has been pretty decent till now and this should improve the sentiment over the next three months on the space.