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Last Updated : Jul 07, 2016 04:13 PM IST | Source: CNBC-TV18

Rural India can thank good monsoon for its recovery: Sundaram MF

S Krishna Kumar, CIO-Equity at Sundaram Mutual Fund, in an interview to CNBC-TV18 says the tactical shift in the portfolios of many asset manager has moved towards the rural India and income level has also shown an uptrend in rural areas.

S Krishna Kumar, CIO-Equity at Sundaram Mutual Fund, in an interview to CNBC-TV18 said that post Brexit, the tactical shift in the portfolios of many asset managers has moved towards rural India, adding that the government has also refocused on the rural economy and its growth by allocating more towards the rural sector.

"The rural India has seen recovery due to good monsoons, and we have observed that the income level has also shown an uptrend in rural areas," he added.

He maintained in order for farmers to achieve productivity, they have reinvested in better quality tractors, tillers, seeds, fertilizers and sprays.   

Two of Kumar's favourite portfolio investments are: Insecticides India and Ujjivan Finance.

Sandeep Aggarwal, the CFO at Insecticides India, who was also a part of the conversation said, "The whole agro sector will grow in double-digits, and we target a growth of 15-20 percent in FY17."

Samit Ghosh of Ujjivan Financial maintained that he expects the company to grow at 65 percent in next 2-3 years.  

Kumar is bullish on micro finance space, and sees a growth potential of 25-30 percent CAGR for the next 3-5 years.

Below is the verbatim transcript of S Krishna Kumar, Samit Ghosh and Sandeep Aggarwal's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Anuj: I was just looking at your rural India fund and some of these stocks have of course done well. But, do you think this space is going to return a lot of alpha from here on as well if we have decent monsoon this time, something that we heard from the India Meteorological Department (IMD) as well?

Kumar: Post the Brexit, a tactical shift in terms of portfolios of many asset managers has been to move towards more domestic stories which have a lot more drivers internal than external to India. And taking the cue from that, clearly the rural fund is well positioned being clearly a domestic story for the long-term. Having said that, the government has refocused on the rural economy and in the last Budget, clearly a lot of time was spent on explaining the initiatives of the government and the higher budgetary allocations for various schemes and targeted committees to take up certain programmes on an accelerated front.

So, with recovery in terms of the sector based, driven from more the monsoon that you talked about that is more a factor which is affecting sentiment at this point in time, given that we have had a couple of bad monsoons. It is very important to talk about monsoon, but I would think that rural is a more structural story in the longer run, given that the income levels in rural areas have been going up steadily over the last 20 years and they seem to be really moving ahead on the consumption front and driving a lot many sectors.

Sonia: Despite drought for two years, your fund has performed extremely well. In the last three years the returns from the fund are 25 percent and in five years it is 15 percent. So, one can only imagine what the performance will be with a good monsoon. But, do you not think this space has become a bit crowded now? I mean anyone and everyone is buying names like UPL, Insecticides India, some of the other plays like Mahindra and Mahindra (M&M) are hitting new highs. Is there still scope for someone who has not gotten into this space or do you think the returns could be limited?

Kumar: The performance of the fund basically, over the last 2-3 years would be more attributed to being away from some of the globally linked sectors which are not part of the theme. For example, the upstream oil, the metals space, probably the infotech space, the PSU banking space. So the fund is clearly straightaway from most of these sectors I talked about which have being underperforming significantly in the last two years. So, that is one reason for the fund to do well in spite of a couple of droughts. So, that is the broad portfolio characteristic that helped the fund to do well.

And to take on the other part of the question in terms of whether there could be a lot more upside going forward, particularly a fund like rural India which is trying to capture the entire value chain across the rural economy is well positioned. While a diversified fund like our midcap fund or product of any other peers or even a largecap fund would try to increase allocation tactically to rural places at this point in time. This fund basically provides you a near 100 percent exposure to all the stories around rural India. So, just to give you a sense of the portfolio bias, we believe that there is a fair amount of reinvestment and productivity enhancement that will achieved by farmers by replacing their old tractors. And tractor industry has seen a big degrowth in the last 2-3 years.

So, farm automation including tractors, tillers, harvesters is a big space that will see growth. Similarly when the farmer sees a higher potential to get a better yield in the per hectare of land, he will start using better quality seeds of hybrids, better use of agrochemicals and he will not miss a spray, he will use a better micronutrient and complex fertilisers than urea. So, there is a clear demand growth on these sectors that will happen and a fair bit of value upgrading that also happens.

Anuj: Two of your holdings have been both Ujjivan Financial Services and Equitas Holdings. Of course, they have done well for you, but in this space, do you think there is still valuation comfort?

Kumar: I would not talk about specific stocks, but just to give you a perspective, India, the financial inclusion bit is just really taking off with more of the rural households getting into the organised banking system and last year, about Rs 51,000 crore has been of the direct benefit transfers have been through these accounts. So, there has been a huge amount of people moving into the organised space and they would be the ones which will be able to avail of the banking services, financial services of whatever kind. And we now have a fair bit of track record of the use of their accounts in terms of finances, the money that comes in and the expenditure pattern which will give a lot of intermediaries, non-banking finance institutions (NBFC), small finance banks, etc. who will penetrate those markets and offer them loan products, etc.

So, the growth potential is enormous. These companies in the small finance bank space or the microfinance space could continue to grow around 25-30 percent compounded annual growth rate (CAGR) for the next foreseeable future which is over 3-5 years. And very few sectors afford that kind of growth opotential.

Sonia: Fr a sector like yours, a lot depends on the rains, and as we have seen, in the last two years, because of a weak monsoon, you have jut had about 2-4 percent growth in your revenues on an average. Because the monsoons were good this year, what kind of growth do you see for the sector and for your company?

Aggarwal: Very right, for the last two years, due to the bad monsoons we were not doing well, but this year, as the monsoon has already spread across the country and the rains are coming fairly good, we are hoping that the whole agrochemicals sector should grow in double digits and we are also targeting a growth of around 15-20 percent this year.

Anuj: Your stock has taken the market by storm of course. More than doubled since the issue price and even after listing we have seen strong gains. What kind of assets under management (AUM) growth and disbursement growth are factoring in now, especially if we have a good monsoon?

Ghosh: As far as growth is concerned, we will continue to grow as we have grown last year, last financial year and this year, but as you know, we are also preoccupied with the convergence to a small finance bank. So, till we convert to a small finance bank, the growth levels we have had in the last year, we will maintain that kind of a growth level in our AUM.

Krishna: To take it further for the benefit of the viewers, you could just talk a little bit about the challenges if any, that face as you move from being a microfinance company to a small finance bank. And its implications from a 3-year perspective, that would help views to understand it better.

Ghosh: We have been given 18 months time to convert to small finance bank and we are planning to convert to the small finance bank by the first quarter of next year. We need a fairly extended period of time to complete the conversion for two reasons. One is we had to obviously go through the initial public offering (IPO) process mainly to reduce our foreign shareholding to meet the regulatory requirements which we have done successfully so far. And then, at the same time, we are in the process of the conversion of our business as such, which is our technology backbone has to be upgraded to meet the requirements of a full service bank. Our branch network infrastructure has to change. We are required to open 25 percent of our branches in unbanked rural areas. So those would be new branches opening and apart from upgrading our present branches.

And at the same time, we have 8,000 people in the microfinance institution who have to upgrade their skills, change their mindset and move from a single product microfinance business to a multiproduct company or a bank where we will not only be giving loans, but we will be offering deposit services, remittances, etc. So, extensive upgrade of our training and upgrading of employees is also required. So, all this requires a fair amount of time and that is why we want to take this time and convert only in the first quarter of next year.

In the first two years or 18 months, after we start the bank, our focus will be stabilising our bank itself while we will be growing in a sort of reasonable rate and then after 18 months once we have stabilised the bank, we can again expect to grow at a significant rate.
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First Published on Jul 7, 2016 10:54 am
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