Mohit Mirchandani, head of equity investments, Taurus Mutual Fund, believes that reading is a must for a professional in the investment business. Investment philosophy books, autobiographies of legendary investors form his usual fare. In an interview with DNA, Mirchandani explains how he identifies companies, where the markets take their cues from and the sectors he is bullish on. Excerpts:
What are the immediate triggers that you see for the market?
We are broadly positive on Indian equities in 2010. However, in the short term there are a few triggers that might provide us with a better buying opportunity.
The potential triggers among global factors could include sovereign debt issues.Today, we know only of Greece, Spain and Portugal.However, a large economy such as the UK is on the edge and recovery in other developed nations is still very feeble.That, in my opinion, is the single biggest risk to the global equity markets.
Domestically, inflation and the related RBI action might be a trigger that could lead to short-term moves. Also, valuations are a little stretched, but our economy weathered the downturn very well and to that extent we feel India will always trade at a premium to the other emerging markets.
Earnings are on track, consumption has been robust, and we now expect the investments to recover too, so our earnings momentum is firmly on track. It is only a matter of deciding valuations and favourable risk-reward investment ideas. A third domestic factor could be the fiscal situation, the government has projected 5.5% deficit based on certain revenue, expense and divestment assumptions — if these assumptions do not play out as expected, that could be a dampener.We view all corrections as an opportunity to buy.
Which sectors are you bullish on and why?
Thematically, we are optimistic on agri and agri inputs as we believe there is a structural imbalance here. With increasing industrialisation across the world, land available for farming is shrinking. We are also optimistic about the Indian consumption story, so we like auto, media, consumables due to the increasing prosperity of Indians and the favourable demographic profile of the population.
We also like healthcare, because we see a real thrust to increase generic penetration in the developed markets.Since we are at the start of the expansionary cycle, we like financials and of course Indian infrastructure is a real money spinning opportunity for investors.
How much of an effect does execution risk have on valuations in infrastructure?
Valuations are significantly affected due to execution capability, because that is the main differentiator between companies in this space.
Take, for example, the construction companies, they all have similar business models and dynamics…good order book positions and growing, 10-12% Ebidta margins, similar borrowing costs, similar technology. There is no differentiator in this space, other than execution capability and quality of their financials.
Skilled and unskilled labour in the infrastructure space is a problem, so we now believe company stock prices will track earnings growth and not order books as was the case in the past. Timely execution will result in better earnings.
Considering various advantages that PSU firms enjoy, how would you explain the low level of participation in their public issues?
Everything is good at a certain price.PSU issues have been too expensive, leaving very little on the table for investors.
Also, at the end of the day, many of these companies will not get re-rated just because there is greater free float. Companies will get re-rated based on management and execution capabilities of these firms.Well run organisations will always trade at a premium.
Do you believe there is value in looking beyond the index stocks while trying to find bargain buys?
Absolutely. The second half of calendar year 2009 was a stock picker’s market. We believe 2010 will also reward bottom-up stock picking. The frontline indices can be quite deceptive, because that gives the impression that the markets have only moved about 10-15% since July last year.
However, there are stocks that have doubled and trebled since then. We expect the markets to consolidate during the first 6 to 9 months of calendar year 2010.
But during this period, individual stocks will do well. There are many good companies with good financials, high quality managements and great business prospects that are available at reasonable valuations.
It requires a little more grunt work trying to find these ideas, but risk-reward is favourable in some of these investment opportunities.
Comments