Ved Prakash Chaturvedi, CEO, Tata Mutual Fund, feels that valuations are currently stretched and the upside from here is very limited. He believes that three factors - monsoons, China and interest rates - will play a major role in deciding which way the market will head. Here goes an interview with Mr Ved Prakash Chaturvedi.
Q: What have you made of the run up of this market and do you expect to see a continuation of that in June or an easing of?
A: For the moment, the news flow and fund flow is very good. There is a fair bit of fund raising happening in the domestic market from mutual funds for domestic equities and we have had fairly good flows. The fund flows are looking good and the news flows has been good. The economic growth for FY07 has been reported at 9.4%, which is second only to China’s about 10%. There is no reason to say that we are going into a period of any concern but clearly valuations are stretched and the upside from here is very limited. I think the market will remain in a consolation phase.
Q: How did you approach that number itself - nearly 9.5% GDP growth? Are you revising any of your earnings forecast for FY08?
A: Broadly, the number of around 9-9.2% was anyway factored in; so what the market is learning from this also and what I have been talking about for some time is that if you look at the last 18 months, the midcaps have significantly underperformed the large caps. The market was virtually driven by a handful of stocks and that is going to change now because clearly if the entire economy is growing, it means that large and small companies are growing too; hence, the focus will shift back on the companies that are growing, but which are at a significant discount to the large cap companies and I guess that is a phenomenon we are seeing in he market right now.
Q: Just getting back to the point you were making about mid and small caps - what is your sense of how all this fresh money will be deployed at this point? Are these levels where you think a lot of that money will get put in or better prices will emerge?
A: If you are talking from a mutual fund perspective, I think typically mutual funds like to put in money or a large part of the money they raise, because NAVs are benchmarks to Indices and hence the fund manager’s typical inclination is to put money as soon as possible. However, I guess in some of the mainline stocks, clearly prices have run up and we are virtually at the peak of the valuation band. My sense is that much of the money that will get deployed now would get deployed in companies where valuations have not run up in the last few months. Hence, by definition, some of the midcaps will attract interest and maybe as far as large caps are concerned people would want to wait for some time and see more moderate prices.
Q: Would you put your money in Gilts at this juncture, as we have seen a significant run-up in at least shorter term paper?
A: From a mutual fund perspective, we have separate Gilt funds and I would say that yes, they made good money. That is the interesting point, because if you look at a one year perspective and if you look at the headroom left in the Index, at least it is not much and actually over the next one year we might have a situation where long bonds may give better returns than some equities.
Q: What have you made of the resurgence of a couple of erstwhile leaders in this market like capital goods and the like?
A: As you know, we have been bullish on the infrastructure and capital goods companies for a long time. We launched the first fund, the Tata Infrastructure Fund, which got money from retail investors for listed infrastructure companies in India. My sense is that it is a no-brainer space and there would be times when prices will decline.
I say one simple thing - you can’t import infrastructure; it has to be built by local companies and we have only a handful of large local companies, which will really be benefiting from all this infrastructure building and I think over the next four years, I clearly see that this sector again will be among the best performers in this market.
Q: What about realty companies? They have had a fairly decent run today and yet there is a big one coming in the primary market. Do you think that the presence of that kind of a primary issue would sap any energy out of the secondary market realty stocks?
A: I guess on realty I have not been a big bull, because of three reasons. One is, I think there is a lack of transparency in accounting, some of which has really come to the front pages of newspapers in the last few months.
Point number two is that for the quality of construction, I guess the prices that are being paid today by individual buyers are too high. Hence, quality has to improve and prices have to come down.
And last but not the least, my sense is that increasingly at prices, which we have now, a lot of realty space has gone out of the reach of the average middle-class consumer. Hence something has to give at some point of time. So, I am afraid at this point of time, I am not a big bull on realty. I guess one can wait and get better prices.
Q: What would be your choice sectors at this point in time? You did speak about capital goods but which other sectors and in particular, what is your outlook on the IT stocks?
A: I would watch four sectors very closely; I would watch capital goods and engineering, IT, telecom and the fourth sector would be the pharma sector, which is a bit of a contrarian sector at this point in time. I would watch this sector for newsflow; in my view, obviously the IT companies' results would be impacted by the currency movement that we have seen but I guess a lot of it is in the price. And if you speak to these companies, the volume growth too look very good and the fundamental story is intact.
So there would be a one time situation where these quarter numbers would not look very good but from the next quarter end, again there would be a zip back in these stocks. They may underperform for a bit while, but I would look at that space very closely. I think the volume growth in the performance of these companies is going to be very good again this year.
Q: How do you plot the next two months or so for this market in terms of big cues? What is it that it will be tracking, is it the monsoons, is it any other move from the interest rate front or is it from the global shows like what the FOMC might have to say?
A: I think there are three big cues. One is what happens to the monsoons. Second, what happens in China? We have seen a frenzied bull run there and we have to see how that unwinds. Thirdly, in the next two months we might see a paradigm shift in the outlook for interest rates in India. All these three factors will play out in the market.
Q: Why aren’t any rates looking for a drying of the liquidity that is feeding on the Indian stock markets for the past so many years?
A: I do not think so. Whenever we go overseas to raise money there is such a fantastic amount of interest on India. Over the next six months, we will be in a trading band. The upside is really limited because valuations are fresh. I guess the impact of high interest rates will, at some point of time, begin to filter into demand and corporate performance. The downside is really limited by the sheer interest in India. We will feet it the first time and you will feel it the first time when we go out to raise money. There are so many people who have not yet put money into India and want to know how to put money in. I guess we will be in a trading band, which would be anywhere between 12,500 to 14.800 levels, and may be we will have to live in that for sometime to come.
Q: You were speaking about capital goods, IT, pharma as the spaces that you would watch out for. Would your yardstick be different for midcap stocks and on the balance would you rather concentrate on midcaps in the next three-four months?
A: I would concentrate on midcaps. I think my yardstick would not be different. I would look at this space. We have a more diversified basket in midcaps. I would watch these spaces very carefully.
What always happens in India is that, in the initial phase of a rally, a lot of the money that comes from the market is from overseas and hence the largecaps typically outperform, which has been a prolonged space this time around. Then domestic funds raise money and start deploying it in the market, which has happened in the last three-four months. Since these domestic funds have a lot more focus on domestic midcaps, these companies get attention and value, and we are seeing some signs of that right now. A significant amount of money, may be about a billion dollars has been raised domestically in the last four months for the domestic market and some of that has really weighted towards midcaps.
Q: What is the call on cement now? It almost seems like a forgotten sector. With the onset of monsoons, how do you think that sector will pan out over the next three months in terms of pricing and the sector as a whole in terms of growth?
A: I would say that I would be very cautious on cement for some time. Obviously, monsoon is not a good period for cement companies and we need to watch the realty space more closely; banks are clearly talking about a slowdown in mortgage lending and stuff like that, as the realty space is one of the highest consumers of cement. I would be very cautious on cement for some time.
Q: What about two other spaces - one of them of course came out with a lot of numbers today - the auto space and the metal space?
A: Actually, I would say that selectively I would look positively at metals. My sense in automobiles is that yet the high interest rates have not filtered towards the consumer demand; we will need to watch that space closely. But I would be very careful. All of us know that in at some point of time a significant part of automobile demand does come from leveraged buys; hence in this reasonably high interest rate scenario, one might want to be cautious on that phase.
Q: Any Disclosures?
A: All statements made in this show should not be construed as recommendations for buying or selling of any individual securities. Comments on individual companies or sectors should be seen in the light of the fact that either I personally, or the funds we manage may be buying or selling into these companies or sectors.
