Equity markets gave stellar returns in the current financial year and have touched fresh lifetime highs in recent weeks. But, the coming year could well be one of moderate stock market returns, says Shridatta Bhandwaldar, head of equity at Canara Robeco Mutual Fund. The fund house is very bullish on the manufacturing theme and has just launched a fund around the same. In an interview with THE WEEK, Bhahdwaldar said one should be inclined toward large caps than mid and small-caps from a 6-12 months perspective.
Canara Robeco has launched a new fund focusing on the manufacturing sector. What gives you confidence that the manufacturing theme doing well now?
Today, there is a marketplace. Right from mobiles to auto to pharma products, everywhere there is growing demand and a lot of that we were importing. The basic factors of production, whether it is labour costs, logistics costs, the regulatory environment is in place now. Your per capita is increasing, you are going to grow as a country at 10 per cent nominal GDP growth at least, which means your manufactured goods in electronics, for example, might keep growing at 15-20 per cent. So, the policy initiative is supportive through PLI (production-linked incentives), through tax reduction, GST, and the customs duties on certain sectors.
Corporate balance sheets are in place and that balance sheet will be used to deploy back in the businesses. Private capex is here to stay. The government is also ensuring that the public capex is staying elevated. Also, in the backdrop of Covid, the Ukraine-Russia conflict, what is happening in the Middle East, there is no way the supply chain for the next 20 years will remain the same way they were in the past 20 years. There is a good opportunity for us to participate in a sizable manner here, given the available labour, our wage bills, logistics and infrastructure, and policy support. Banks are there to support you now, as there are very less NPAs (non-performing assets).
This will be a very long-term theme?
I think it will play out over the next 15-20 years. Just imagine, five years back we were hardly exporting cables and conductors. Today, you have $500-$600 million of exports. So those companies are growing at 20 per cent. Hence, this (manufacturing) is going to be a very powerful theme. What we are basically looking at from an investors' angle is that if you are comfortable, invest five rupees out of 100 rupees in this. If the thesis plays out and the probability is 70-80 per cent that this will play out, you will make a disproportionate amount of money.
Post Covid markets have gone up significantly. Now when you look at manufacturing as a theme, do you see value in some of these sectors because a lot of these stocks, like electronic manufacturing companies, have gone up a fair bit?
Your value in any space or market is always a function of earnings longevity, capital efficiency and near-term earnings growth. If I am expecting anywhere between 15-20 per cent earnings growth, which is superior to market by at least 3-5 per cent, then even if I pay a little higher in some of these spaces today, it won't matter. We are convinced that the earnings pool is likely to grow significantly over the next 5-10 years.
In the past few months, we have seen sharp market volatility, and significant ups and downs on some days. What is your view?
That is the nature of the market when sometimes a lot of non-institutional participation is higher. That is how I will technically describe this and that is where you are seeing more volatility. Fundamentals don't justify that (valuation) in a lot of stocks. But that is the nature of the market. That is where we keep saying that don't judge any fund or any market movement from even a year's perspective sometimes. The near term is more driven by narratives and noise, the longer term is always purely driven by earnings and capital efficiency.
What is your view on public sector stocks? We have seen a significant run-up there
There are businesses in PSUs that are good and there are businesses that are very average. The good businesses you should own of course, because in those cases there is likely to be capex for some period. And if you get it at a valuation where it is likely to compound 15-20 per cent, you should buy them. But to paint this as if every manufacturing company will do well, it will not happen.
I think that (PSU rally) to some degree also happened because your starting valuation point was really low and there is a lot of liquidity, so people are thinking that every company will deliver the same. My hunch is there will be different buckets in that, so you have to stick to buckets where the business models are good.
When markets are extremely bullish, research kind of takes a back seat. Where do you see the markets right now?
As the earnings moderate; the financial year 2024 saw 25-30 per cent earnings growth, because you had huge margin tailwinds. In the financial year 2025, you will not have any margin tailwinds. So your topline has to grow at 15 per cent for your earnings to grow at 20-25 per cent, which is very unlikely. So that is where we are seeing that in FY2025, 2026, you will have more closer to 13-15 per cent earnings growth. And as time passes and the market realizes that earnings are not necessarily playing out in some of these spaces where people are exuberant, stocks will actually go down or collapse or will consolidate depending on the sector you are talking about. So we are expecting it to be a more moderate return year clearly.
But, structurally we are not negative for a simple reason that from your business cycle, credit growth cycle, from a balance sheet expansion cycle, you are on the right side and political stability is there. I see enough number of midcap and smallcaps, which have not done anything in the last one year in the same bullish phase. So it is just a matter of valuations or exuberance in pockets that needs to correct.
What kind of impact could elections this year have on the markets?
The election is largely discounted by the market right now. I don't think there are even 5 per cent people who are saying that the same government is unlikely to return. So, it means the risk is on the other side. If the political stability were not to continue or if they were to get just 270 seats, probably market will be very disappointed, at least to start with and that will be a buying opportunity.
Should your money be right now in largecaps or mid and smallcaps?
We are actually incrementally recommending that for next 6-8 months, or a year, there is no reward to be in midcap smallcaps vis-a-vis large caps. It will be low-to-moderate return year and if it is a moderate return here then why do you want to go in illiquid portfolio incrementally from an allocation perspective. If you are a five-year investor, stay put.
Other than manufacturing, what are the other themes you are bullish on?
BFSI (banking, financial services and insurance) we are still constructive on particularly the larger private sector names, or even larger insurance companies. Again, consumption has not been doing well. But I think there is nothing structurally that is broken. So it is an opportunity to actually participate. Technology space is a little tough to call out right now because it is just too dependent on the US market and how the US plays out. So, we are not making that call; we are kind of neutral on IT today.
