Proposed board can boost infra, breathe life into investment cycle

Saravana Kumar, chief investment officer, Tata AIA Life Insurance Company, believes that a person can become a better investor only with time as one gets a hang of the art and science of investing. In an interview with Sachin P Mampatta, he says Indian equity markets are likely to benefit from unlimited global liquidity and that he remains overweight on sectors that are beneficiaries of the Indian consumption story. Edited excerpts:

Do you remember your first multi-bagger? How did it come about?
In 1995, the Indian information technology sector was less known and under-researched sector. That time, India’s total software export was approximately Rs1,000 crore per annum. In 1995, we were managing Unit Trust of India’s equity funds like Master Equity Plan (MEP) 1993, MEP 1994 and the like. We had taken a call to buy Wipro at `50 per share for my Funds. Wipro within 5 years had given more than 80 times return. In 2001, Bharti Airtel which we had purchased for equity schemes of SBI Mutual Fund had given 40 times return in a matter of 6-7 years.

How would you say your investment philosophy has evolved since then... what has changed, and what remains the same about how you approach investments?
Over the years, I believe that some things never change and do remain a constant. They form the pillars of the investment philosophy and provide a firm anchor while taking the investment decisions. These broadly are the business model, quality of management, ability of business to generate free cash flows, scale up without guzzling capital as well as the attitude of the management towards the minority shareholder.

However, one needs to evolve and learn by keeping an open mind to the possibilities regarding the endless opportunities thrown up by the high growth Indian economy. As you get a hang of the art and science of investing as well as have the humility to accept errors in judgment, one becomes a better investor with time.

With the US presidential elections out of the way, on what would the market next focus?
Though the uncertainties surrounding the results have disappeared, there are clearly headwinds pertaining to the Greek austerity plan and the subsequent funding of the next instalment of its bailout package. The other global concerns are pertaining to an impending fiscal cliff in the US as well as a possibility of a soft landing in China.

On the domestic front, with the government of India signaling its commitment to reforms, the market is expecting an acceleration of the reforms process, especially speeding up big-ticket infrastructure projects, kick-starting capex cycle with the PSUs taking the lead and de-bottlenecking supply constraints to tame inflation and revive growth.

Some market experts believe that a breakthrough on the key Goods and Services Tax (GST) Bill is on the anvil as there are increasing signs of a meeting ground between the Centre and the states on the contentious issues. GST would be a key enabler to raise the trajectory of the GDP growth and shore up the tax to GDP ratio.

Any immediate impact of the US election results on emerging markets, especially India?
In the short term, there is a possibility of a further strengthening of the dollar as a knee-jerk reaction on the back of reduced uncertainty in the US, post the presidential elections. However, in the medium term, the global liquidity due to the unlimited Quantitative Easing (QE) III from the US Federal Reserve will find its way into asset classes, including emerging market equities, and it is likely that India could be a disproportionate beneficiary of the same, extending the robust $17.8 billion of FII inflows seen in this calendar year till October 2012.

Any concerns on earnings so far?
The companies in the BSE Sensex that have declared the second quarter results thus far have registered a sales growth broadly in line with the consensus. There has also been a positive surprise on the earnings growth so far, which has been above consensus.
Going forward, we could see the stabilisation of both operating margins and interest costs as a percentage of earnings. The earnings downward revisions have played out over the past two years and we may be nearing the end of the downgrade cycle.
On the ground, the positive sentiment due to the government’s reform agenda could improve the environment for raising capital for mid-tier corporates, and this could act as a key growth enabler. However, the positive impact of the reforms announced as well as the improved sentiment would take some time to reflect in order inflows — and hence earnings — on the back of an expected revival in capital investment plans of India Inc.

Domestic institutional investors have been net sellers for some time. When do you expect the tide to change?
The domestic institutional investors have consistently been net sellers this calendar year to the tune of almost $8 billion. We could see the trend changing over the next few quarters on the back of stable equity markets as retail investors feel comfortable to invest once again in financial instruments. There has been some buzz about a concerted effort needed to enable the retail investor to get back into financial products and in line with this, we could see simpler financial products, faster approvals from the regulator, more flexibility in investments to generate more returns for the investor and possibly more investor friendly tax treatment, going forward.

What kind of cash levels are you sitting on, are you making any changes to your portfolio stance?
We have trimmed our cash positions from around 10% levels to around 5% levels over the past few months, but we have broadly maintained our overweight stance on those sectors which would benefit from the Indian consumption story. We believe that the sectors relatively insulated from global uncertainties would continue to deliver returns to investors.

Which sectors are you bullish on, and why?
We remain overweight in FMCG, cement, private sector banking and pharma. We believe that the Indian consumption story would be a structural theme, given the demographic dividend play. In the past few years, the rural consumption has surged due to better terms of trade for agriculture through higher minimum support prices and an increasing allocation to rural economy through employment generation and infrastructure schemes. The FMCG sector, though at rich valuations at current levels, does offer a proxy to play the multi-year consumption theme for a long-term investor. However, one needs to be stock-specific as the companies within the same sector can have very different profiles.

Which sectors would you rather avoid?
We are under weight on infrastructure, power utilities, telecom and capital goods and we generally tend to avoid the real estate space. We see muted order visibility in the capital goods space and implementation challenges in the infrastructure space. There are still coal availability issues affecting the power sector, which are yet to be sorted out and this would keep the power sector under pressure. That said, we do believe that the proposed National Investment Board could be a key enabler in speeding up large ticket infrastructure projects and revive the investment cycle.