‘Current valuations not a worry, earnings to catch up in 2-3 quarters

The mutual fund industry, insiders say, has been squeezed like a tube of toothpaste. Fund managers see nothing coming in, but plenty going out. Amit Nigam, senior portfolio manager – equities at Fortis Mutual Fund, manages redemption pressures by maintaining a high liquidity profile for his portfolio. He has fully deployed available cash in line with his positive views on the market and is especially bullish on the energy sector. Meanwhile, the line-up of big IPOs including the Coal India issue will help deepen stock markets and enable more investor participation in large organisations, he tells DNA in this interview. Excerpts:

Does the recent liquidity-driven surge in the markets worry you from a valuation perspective?
The liquidity surge in the last few months has taken the Sensex past 20000 in a short time wherein valuations on FY11 estimates are at 20 times earnings and on initial FY 12 estimates at 17 times earnings.

We are not “worried” at these valuations – however, we do not rule out some consolidation given that in the next 2-3 quarters, the earnings would catch up with price movements.

We would get worried only if we do not see any earnings upgrades as the markets at current valuations are factoring in a lot of optimism.

There have been a few sectors, which have underperformed after the last time we hit 20,000 — realty, infrastructure and metals. Is there a case for bottom-fishing in any of these sectors?
The underperformance in the above three sectors have specific reasons. In case of realty and infrastructure, we believe the underperformance is driven by the fact that this time capital is not chasing low return-generating companies.

In the rally, post March 2009 lows, companies or sectors that have shown more respect towards capital allocation and return ratios have outperformed. In case of metals, the underperformance is more due to the fact that it is a globally-linked sector.

With global growth being anaemic, the industry is still grappling with low utilisation rates. In fact, metal companies with domestic exposure have outperformed their counterparts with more global exposure, due to a better demand outlook in our country. We would advise investors to look at any of these factors reversing in these sectors before investing.

How could the line-up of public issues, including the Rs 13,000-crore Coal India IPO impact flows and performance in the secondary market?
Big public issues would be healthy avenues for deployment of any ‘large’ fund allocations meant for our country. Listing of these companies is expected to help deepen stock markets and investors would now be able to participate in large and profitable organisations.

Food and fuel inflation are still in double digits. How could this affect corporate profitability?
We believe that the food and fuel inflation would boost corporate profits at large. In such an environment, they enjoy a lot of pricing power making it easier for them to pass on cost increases to the consumer.

But with interest rates on the way up, will  demand continue to be resilient?
Our belief is that we would not see any sharp reductions in the demand pattern for two reasons —ability to service debt by retail consumers has gone up substantially over the last three years as they have seen a smart increase in their “take home” salaries. Secondly, banks have not yet fully passed on the rate hikes to consumers — both industrial and retail.

You are overweight on the energy sector. Could you elaborate your views on the space?
We are positive on the sector as growth in India, both on the consumption front and on the infrastructure front, is energy-intensive given the early stage of growth of our economy. Availability of gas is expected to lead to opportunities for both producers and transporters of gas.

The recent deregulation of petrol and diesel prices indicates the government’s intention to free operations of oil marketing companies operations. This, in our view, can potentially lead to a re-rating of the energy sector.

What impact could currency appreciation, 3% already seen in September, have on export-oriented sectors such as IT?
Rupee appreciation does impact export-oriented sectors negatively but historically, we have seen in the IT sector that the efficient players have been able to cushion such moves by managing other cost levers.

This cost management plays out more on a longer-term basis than on a quarterly basis as currency movements can be swift while the balancing cost levers generally take time to implement. 2007-08 was one such difficult year wherein the rupee appreciated by more than 7%.

However, at the end of four quarters efficient companies were able to effectively manage this adverse currency movement with minimal Ebitda impact.