The domestic economy looks strong and is heading in the right direction, which has helped the market to remain buoyant, says Jinesh Gopani, Senior Fund Manager, Equity at Axis Mutual Fund. Excerpts from an interview with Business Line:
The market is at an eight-month high. Your views?
Brexit was an event that the market was not anticipating and was looking the other way, but the market has been pretty resilient and the only reason could be the anticipation of domestic reforms — such as FDI limits being liberalised, the talk of GST getting into the forefront in the current Parliament session and the anticipation of a rate cut on the back of a good monsoon. So I feel that the domestic economy looks strong and is heading in the right direction, which has helped the market to remain buoyant. And fortunately, even as the results of Brexit broke out, significant outflows from FIIs did not materialise even as the European markets posted losses.
What themes are you betting on in the next three to five years?
The construct of Axis Long Term Equity Fund’s portfolio is a play on the domestic economy. We are quite focussed on the quality of the company and sector, so private banks, autos, consumer, auto ancillaries and NBFCs are the five sectors that we are betting on. As a hedge to the domestic theme, we also have a selective exposure to IT and pharma.
After the award of the 7th Pay Commission, is it safe to bet on consumption?
It is like a booster dose. At this stage the economy needs to start picking up and consumer confidence is not very high.
Cash in the hands of the consumer is always good, so it will have some benefit and selective sectors will benefit, such as consumer discretionary and autos. It will be quite difficult to judge where this spending will be directed to, but it can go into home loans as well. The hope is that most of it will be spent or consumed. Some portion of it may even be directed towards savings. The release of ₹1 lakh crore into the system is a big thing. It is a stimulus in the hands of the consumers; but it is just a start.
Axis Long Term Equity’s (ALTE) top sector choice is banks and finance, but it does not have any PSU banks. Do risks still remain? Are valuations not attractive yet?
Normally, from an investment thought process, we invest in a company with a three-to-five-year time horizon. So we must be convinced about the quality of the management.
That said, while PSU banks do have quality personnel, we are not comfortable with the way asset quality is managed. With the short tenure of the CEO/MD, there is always a question mark on the agenda of the company.
For long-term investors like us, it therefore becomes quite difficult to gauge the vision and momentum of the business. For instance, where would their focus lie? How would they like to position themselves — corporate or retail, which sectors would they like to lend to or avoid? We, therefore, prefer private banks at the moment.
However, with the change in government, if things improve and if there is more surety on the long-term structure of PSU banks, we may consider them as investment candidates.
Private sector banks have managed their business better. Valuations are an outcome of how management has managed business cycles. If earnings compound, private sector banks will tend to do well.
How are you banking on domestic infrastructure plays?
We try to buy stories that are highly cash flow driven, low in debt and can manage their working capital cycles. Our focus is more on companies that generate positive cash flows and have a good dividend policy.
History tells that companies in the infra space find it quite difficult to generate meaningful IRR (internal rate of return) over the medium to long term for various reasons.
Quality has been finding money for the last 3-4 years. But the universe of stocks has shrunk from around 400 to 200-250.
Money is available in plenty and valuations are, therefore, rich. With negative rates in some parts of the world, investing in companies with positive cash flow has gained prominence.
SOURCE -the hindu business line