The Economic Times daily newspaper is available online now.

    We are bottoming out in terms of growth: S Krishna Kumar, Sundaram AMC

    Synopsis

    I do not think we are looking to move into defensives to hedge ourselves, says the CIO-Equity.

    S Krishna Kuma2r-Sundaram AMC-1200ETMarkets.com
    By September the markets will be looking at a different picture. It should be a lot healthier, a lot more optimistic, and we as investors have to put in money when things are bad, says S Krishna Kumar, CIO-Equity and Executive Vice President, Sundaram AMC. Excerpts from an interview with ETNOW.

    Markets are looking for some kind of direction which does not seem to be coming any time in the near future. How do you make sense of a market like this? Would you continue to wait for lower levels to buy? What are you really expecting going forward?
    We are bottoming out in terms of growth. The budget did have several initiatives in terms of key steps to address the NBFC sector. It also addressed the capital requirements of PSU banks. These are two major lines of credit for the mid market economy. The PSU banks are afraid to be lending and NBFCs also were tight on liquidity in the last six-eight months. Those issues and risk aversion have been addressed by the measures in the Budget.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    Indian School of BusinessISB Chief Technology OfficerVisit
    IIM LucknowIIML Chief Operations Officer ProgrammeVisit
    IIM KozhikodeIIMK Chief Product Officer ProgrammeVisit
    Also, RBI has been stepping in with more liquidity and is cutting rates. There are also steps in the Budget to revive real estate jobs on the lower end through more focus on affordable housing. These are expected to kick start the economy and we see a rub-off across the other sectors too. The budget continues to lay emphasis on infra and the overall benefits to the mass population in terms of tax benefits and continuation of the rural income scheme. Basically, these will address the issue.

    As we have seen already, the credit spreads are improving a bit, but not as expected. With more borrowings from global markets, it will further push the domestic yields lower. Currency has been a lot stronger and so we seem to be in a fairly good wicket when it comes to macros. Definitely the disruption that happened on the NBFC space has been hitting the economy and we see a normalisation coming.

    Ashok Leyland is shutting down their plants because there is no demand. Bajaj Auto says exports are suffering. Tata Steel says the volume contraction is just not there. FMCG companies are openly telling us that they are not able to sell basic products like soaps and shampoos. Will this get worse before it gets better?
    As I mentioned, we are at the bottom of the cycle in terms of growth. The first quarter will be the bottom and we will see a recovery from hereon. What you hear in the news flow, etc, is a result of what happened in terms of slowdown in the last three-to-six months. With this correction that is happening in terms of the steps that companies are taking, I think things will get addressed on the cost front.

    But on the demand front, things are not as bad as you seem to be projecting. There definitely are cost implications on the BS-VI transition, etc, which have impacted the auto sales. But our channel checks with the dealers at the ground level indicate that pre-buying has started in the western markets already. So, we do see that things will improve in the next three months.

    What is happening now in terms of shutdowns, etc, is a result of the slowdown on stock levels of the last three-four months. We are already seeing things getting better. The NBFCs are getting more access to funds and as they push more money into the market, you will find that car financing, truck financing, two wheeler financing getting a lot more easier and the rates also coming down.

    We see that the consumers and the dealers would be incentivised by rate cuts. That is the construct that we are working on and so we are bottoming out as we speak. By September, the markets will be looking at a different picture. It should be a lot healthier, a lot more optimistic, and we as investors have to put in money when things are bad. When things are seemingly uncertain, that is when you get deals. What better time to buy a stock than when a factory is shut down because of lack of near-term demand.

    What is the ideal state for you right now? Would you look at large caps and midcaps as some names are totally beaten down? Would you be risk averse and stick to those few names that we see getting some traction? How would you go about investing in this market?
    S Krishna Kumar: While you find this perceived sense of comfort in largecaps, it is more important to see that the rally in largecaps has been very narrow and you should focus on companies that are able to deliver you visible quarter-on-quarter earnings; long-term stories probably have been neglected.

    We see the rally happen and we will see that it is broader within the largecap portfolio and the rally will move down the caps because you will see NSE, BSE and midcap, small cap index at 20-25% discount to the Nifty earnings, Nifty PE multiples.

    To that extent, a lot of value gap has opened up already in the mid and smallcaps. In the last two years, we have seen this gap widening big time. We see that investors should put a lot more money into the bottom-end of the market -- midcaps and smallcaps as allocation trade. We think a good way to get into the market for new investors could be through good multicap funds which will have the flexibility to move across the large, mid and small cap space.

    Typically these funds have a 45%, 30%, 20% allocation. They would capture the stories across the cap curve and provide fund managers with the flexibility to move up or down the cap curve as the market would push. That would be a good strategy to get into more multicap funds if one wants to be a little more cautious at this point and wait for stronger signals from the market.

    What is your outlook on auto? What is the way ahead when it comes to earnings? Are we going in with expectations or a certainty of tempered demand for the next 12 months in the sector?
    There was a lot of weakness in the first half of this year. By September, October, as the festive season comes around and we are closer to the BS-VI transition, demand will improve. We think that the second half will be a lot stronger and the year would end across segments with 5-12% kind of growth. Around 7-8% would be the number we are looking at for commercial vehicles and a little lower for cars. FY21 would be another year where you get into double digit growth. You will see some improvement in FY21 over FY20. That is why earnings have taken a big knock in the first and second quarters. It will progressively get better over the second half of the year and continue into the next year. Over a 12-24 month period, you will find a lot of growth. Though in the next two-three months we will have softness that we are already witnessing.

    Do you think the NBFC issue will continue to linger? Will it will be a festering wound disturbing the market until December, or until a clear resolution is in sight for Yes Bank and DHFL?
    Some of these issues are isolated to a few companies in particular. I do not think we should paint the sector with the same brush. If you look at the recap of PSU banks, it is very important from the perspective of the lenders of last resort and for many of the mid market and MSME companies that have had low liquidity or have not been lending in the market for the last five years. With some amount of capital infusion, the flow to the mid market, MSME and SME segment will improve and that in itself will be a great relief for the sector. That should be positive even if the NBFCs are slow in moving in because the banks will move in.

    The second thing is that the comfort the government has given in the Budget through taking the first loss on -- about 10% of the one lakh crores of securitisation deals -- clearly shows that the government is behind the sector. They are concerned about what is happening and there is no moral hazard in stepping in. While they will not try and rescue a particular company, they will definitely ensure that the risk aversion in lending to the NBFC sector is taken away and the PSU banks among others also come in -- including the mutual funds which are probably sizing down exposure to NBFCs.

    There will be normalisation in the next three months. So, the NBFC sector issue is being resolved as we speak and things will only get incrementally better in terms of liquidity and cost of funds to the sector. This is going to have a very strong impact on the economic recovery because NBFCs, like PSU banks, have longer tentacles and move the mass of population for lending.

    Would you look at any segments as a hedge because of the current domestic environment?
    Our belief has been that the recovery is almost here and it does not make sense to position oneself defensively. We need to have faith in the India story. The government has taken some steps more proactively now which could have been taken earlier, but after the elections, they have moved in and they are doing the right things. Now it is a matter of time before we get to hear more positive news. I do not think we are looking to move into defensives to hedge ourselves. We would probably rather be invested and use hedges to offset longs so that we are a little higher on net cash. But I do not think we will be under invested or moving into defensive sectors.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in