‘A large correction from current levels is unlikely in the near term’

Manish Kumar, senior vice-president and head - investments at ICICI Prudential Life Insurance, believes that markets are in fair value zone and we may not see large downside from here on. With more than 16 years of experience, he oversees a huge corpus of Rs62,303 crore with equity assets forming nearly 62% of overall assets. He told DNA in an interview that earnings growth is likely to be decent despite some moderation. Excerpts:

What do you make out of the current market valuations? Have markets factored in all the possible bad news or will we see some more downside?
The market appears to be hovering around the fair value zone. In the near term it appears that market participants have factored in quite a lot of the bad news. It is unlikely that we will see a large correction from the current levels in the near term barring any unforeseen external shock or any dramatic development on the domestic political front.

What are the major concerns on the domestic side that may lead to further downside for the markets?
Inflation is one of the big concerns on the domestic side. Primary inflation is particularly high due to elevated prices of soft commodities. Also, global energy and metal & mineral prices have been rising, leading to further price pressure. As a result of these factors, together with high capacity utilisation rates in many sectors domestically, there could be upward pressure on core inflation.

This raises the risk of decelerating demand growth in the economy. However, the government and the RBI are very cognisant of this and are working hard to ensure a balance between growth and inflation. It is important for the government to create a conducive atmosphere for investment in capacity creation in the country across sectors, including agriculture. This would be the ideal policy response to what is essentially a supply-side problem.

What do you make out of the Reserve Bank of India’s move on interest rates? Do you feel we have reached the peak of interest rate cycle?
The RBI has once again walked the path of moderation with a modest dose of tightening. The central bank’s bias appears to be anti-inflationary, while keeping a keen eye on growth momentum. We believe the RBI will continue to tighten if core inflation accelerates from here and there is a risk of slowdown in the economy as a result. However, if domestic primary inflation decelerates and global energy and commodity prices cool off, then we will probably hit the peak of the rate increase cycle in a few months’ time.

With events happening thick and fast around the globe, what impact do you see on Indian markets and flows?
Events have been unfolding at a breathtaking pace over the past few months. Oil prices have been rising sharply due to the problems in the Middle East. Any further large increase in international energy prices —particularly as a result of any escalating tensions in Saudi Arabia would cause financial markets to remain subdued.

In terms of economic impact on a country like India,  the Japanese disaster may not be very significant as Japan accounts for only 2% of our external trade. In the short-term, however, there could be some companies whose supply chain or terms of trade could get affected.

However, it is important to note that Japanese capital flows form a substantial proportion of global capital flows. As such, any move to repatriate large sums of money back to Japan from overseas for the purpose of reconstruction and asset re-building could potentially cause volatility in asset prices across the world.

The Q4 advance tax numbers have been decent. How do you see corporate earnings in the coming quarter and for next fiscal considering the current headwinds?
We expect fourth-quarter profit margins to be fairly healthy, driven by petrochemicals, refining, banks, and steel. There may be some margin pressure in a few sectors such as auto, while order inflow and execution at some EPC (engineering, procurement and construction) companies may miss expectations.

Even though the outlook for corporate earnings growth in FY12 has moderated a bit in view of recent developments, we believe earnings growth in the mid to high teens is very much possible driven by petrochemicals, refining, consumer discretionary, banking and technology.

How do you define your investment style? What attributes do you look for in the company or sector while picking the same?
Being a life insurance company, we have to be cognisant of the fact that policyholders expect to build a corpus of funds for their long-term requirements. Therefore, our investment approach is to hold diversified portfolios at all points in time with different relative weights in different sectors, with benchmark focus. Within each sector, we look for stocks that are relatively better positioned than peers on a range of outcomes and scenarios.

As such one can say we are both top down as well as bottom up. Generally we look at long-term fundamentals and reasonable valuations while picking stocks; in addition we are comfortable in investing in companies that invest in known areas with a well-defined focus rather that diversifying into all manner of domains. Likewise, the company’s history of capital management is very important; there are several companies in growing sectors which have poor return ratios even after being in the investment phase for several years. We are not impressed with such companies or managements.

Which sectors look good in the medium term and why?
We believe stock selection is as important as sector selection at this point. As such we continue to favour private sector banks, auto companies levered to rural consumption, power equipment suppliers with strong order books and execution track record, consumer companies that are not facing intense competition, telecom companies that are likely to withstand current headwinds and emerge stronger. We are also positive on the cement sector in the near term. We also prefer the commodities sector over the medium term as the strengthening global recovery could keep commodity prices elevated.

The mid-caps have corrected a lot? Do you see value in some of the sectors there?
While the mid-cap universe is currently trading at attractive valuations, we prefer to have a stock-specific view while investing in mid-caps. We see value in niche NBFCs, banks, auto components, pharmaceuticals, agro chemicals and capital goods.

Which sectors are you avoiding at this point of time?
We would avoid sectors that are facing hyper-competitive intensity such as certain consumer goods categories, EPC companies that are richly valued, and infrastructure companies which have high debt levels and tepid cash flows.