 "Sivasubramanian K N")
Markets have priced in most of the bad news on the economy, said Sivasubramanian K N, Chief Investment Officer, Franklin Equity - India. In a chat with Chandan Kishore Kant and Clifford Alvares, he outlines his investment philosophy and advises to look at individual companies. Edited Excerpts:
How are you dealing with the ongoing volatility in the stock markets?
In the last twenty years we have understood that market movements actually do not matter. What matters is individual companies and the way they are run. So, key would be to take a call on the management of the companies, the opportunity the business offers; and stick with that.
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Do not side track with what happens in the markets on a day-to-day basis. Markets may have been static but there are enough businesses which have done well in India. Look at individual businesses rather than look at macro factors.
What could be the impact of the developments between Iran and Europe on India?
What can really work for India's advantage is the fact that finally there is some settlement between Iran and Western Powers. This can lead to oil supply increase. Once the settlement goes through, Iranian oil will be added to the global supply and that can have meaningful positive impact on a country like India which imports over 80% of its oil requirement.
In case the oil prices come down, the whole economy will be a beneficiary. Input costs for the industry will go down. Government's subsidy bill will go down as a consequence the fiscal deficit will go down which will have an impact on interest rate. Fall in interest rate will mean better profitability for the corporate sector.
So, is the worst is over?
In terms of the macro, most of the bad news is out there. We had very high fiscal deficit, record high CAD, highest inflation in a decade and GDP collapsing from 8.5% to 4.5%. Markets seem to be pricing in most of these bad news.
Have you tweaked your investment calls in the run up to the general elections?
We normally do not position ourselves based on what is the likely outcome of elections. Irrespective of who comes to power, liberalization which has been unleashed in India will have to continue. Some of the steps the current government took in the last few years have enabled the rural income to go up. I think we have more balanced growth as far as economy is concerned.
In current situation, which are your top calls?
We do not look at sectors, per se, from a top down perspective. Sector exposures are the result of the individual stock calls we have taken. And if you look at our large cap portfolios, we have large investments in Telecom where Bharti Airtel is a very large holding.
We have large exposures to stocks like Dr. Reddy in pharmaceutical space, Infosys in the IT space and ICICI Bank in the private banking sector. We prefer the private bank against PSU banks. In the longer term, the private banks will continue to gain market share than PSU Banks. And we believe that private banks offer a good value even at today's prices.
Why are PSU banks not in your preferred category? Is there more pain left?
It is not because of the recent issues like NPAs that we are negative on PSUs. If you go back ten years and look at our portfolios, we were predominantly invested in the private banks. We think, slowly there will be a market share shift. There was a point of time when PSU banks' market share was 100%. That has fallen to 70%.
Increasingly, market share shift is going to determine which bank turns out to be the winner and which will be the loser. Apart from that, you need capital for growth, and private banks have been able to access the markets periodically to get capital to grow their business.
In case of the PSU banks, government does not want to relinquish control. As a consequence, government has to keep putting in capital for these banks to grow. And government itself, has not enough money to enable PSUs to grow. So capital is also becoming an issue with PSUs.
You sound quite bullish on Telecom...
It is very clear now that intense competition we saw in the past is history and there has been consolidation in the industry. There are going to be three dominant players and Bharti, probably is going to be the largest among them.
And pricing power seems to returning to the industry after taking sharp correction on the tariffs. So far it has been voice which has been driving growth. Increasingly data will drive the growth as penetration of smart phones increases.
Realty has shown some upside movements recently. Does it look interesting to you?
We have stayed away from realty for many reasons. I think, the best way to play real estate will be through companies that supply materials to the real estate sector and in terms of management they are extremely good and have delivered returns to investors. We are extremely positive on the real estate segment but we would rather play it indirectly.
Two of your funds -- Bluechip and the Prima funds are completing two decades. Were there times when your investment calls went awry?
Fortunately we have not made very large mistakes. But in momentum and a very bullish market generally our style of investing probably will lag the broad markets. But over a cycle the returns are either par or even better. We have stayed away from momentum investing and there were periods when we were under intense pressure.
It all depends how you take pressure. Every job has its pressure and it is the same with fund management. In 2006-07, there was a huge bull rally and stocks went up because of momentum. The learning is that if we stick to fundamentals, it works. Any deviation in the past against this philosophy has hurt us.
ETFs are popular overseas because active funds are lagging behind. Do you see that happening in India?
As markets become more efficient, chances of an active fund manager beating the benchmarks will keep reducing. So far in India active fund manager is doing very well. But the the moment ETFs become popular, active managers will start beating it. But I think ETFs are only investing in an index, and there are enough companies which are outside the index to invest in.
