Edited excerpts:
The Indian market appears to be on a sticky wicket suddenly. What is causing this sudden doubt among investors over the market’s prospects? We have had five international brokerages downgrade India, whereas Blackrock says it will be trimming its India exposure. Do you feel Indian markets will become more volatile and move sideways in 2022?
Equities have rebounded sharply post the bottom of March 2020 and that is causing some apprehensions in the mind of investors around the viability of equity investment at this point in time. However, it is worth noting that despite the sharp rally in 2020 and 2021, Nifty50 returns over the past 10 years and 15 years are around 11-13 per cent CAGR, which is largely in line with nominal GDP growth. Investors must note that going forward, markets should be driven by profit growth prospects and one can expect returns from equities, over medium to long term, to be in line with overall economic growth.
We have seen a one-way rally in the market since June 2020, driven by liquidity, sharp earnings upgrade and PE expansion. Going forth, do you feel investors’ expectations from the market will change? Will we see more focus on delivery of expectations or do you see the market continuing to reward potential instead of results?
Going forward, while there could be limited scope for PE expansion in certain segments of the economy, markets could largely be driven by profit growth prospects. Consequently, investors can expect medium to long term returns to be in line with overall economic growth. Post Covid-19, the corporate earnings cycle turned and the market witnessed strong results and upgrades for FY22 and FY23. The upgrades have been broad based and driven by revival in profitability of corporate banks, materials, industrials and healthcare.
Expected increase in profitability in FY24 over FY21 is around 73% (absolute) compared to 70% during FY11-21. Consequently, the profit growth outlook looks robust at this point in time and that bodes well for equities over medium to long term.
You have recently launched an NFO for a multicap fund. How do you feel your fund will stand out in comparison to the flood of multicap schemes that we have seen over the past six months?
In terms of the mandate, all schemes in the category have a minimum allocation of 25% of total assets each to largecaps, midcaps and smallcaps. Our differentiation in the category will be driven by our stock selection, sector rotation and tactical allocation of the residual 25% of the portfolio. HDFC MF has a long term track record of managing diversified mutual fund schemes.
At HDFC AMC, we largely focus on medium to long term play to minimise inherent risks in the operating environment arising out of volatility in businesses and economies around the world. HDFC Multi Cap Fund (“the Scheme”) will invest without a style bias and aims to capture opportunities across value, growth and turnaround companies.
We will be benchmark aware with respect to sector weights and we will aim to have a wide representation of sectors across market cap. The scheme will focus on companies which are likely to witness a steady and secular growth or see a turnaround in profitability and have the potential of being re-rated. The scheme will also aim to invest in companies which are market leaders and, or, are gaining market share due to superior execution, scale, better adoption of technology etc.
Some of the funds managed by you have taken exposure to new-age tech companies. Given the criticism these companies have faced over their valuations, could you explain to us your thesis for the investment?
New age platform-based businesses are in nascent stage, the opportunity or total available market is very large for them. The company which will emerge as the leader in respective categories is likely to have a material market share, pricing power and profitability over time. In this journey, many start-ups could fail too. However, we consider the risks and opportunities ahead, before taking exposure to any stocks in a Scheme.
In some of the funds managed by you, few of your top picks happen to be banks. Why is that?
Over the last few years, profitability of corporate banks was impacted by higher provisioning on NPAs due to significant stress in steel, power etc. However, we believe that the corporate NPA cycle is largely behind us and strong capital adequacy of these banks bode well for credit growth. Further, improvement in corporate profitability and deleveraging of corporate balance sheets too augur well for corporate banks. With falling slippages and increasing resolution of NPAs, provisioning costs are expected to fall significantly, resulting in an increase in profitability of corporate banks.
