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Overweight on Cement, Auto and Oil & Gas: Anoop Bhaskar
Sun, Nov 06, 2016
Source : Jeni Shukla, Citrus Interactive

Mr. Anoop Bhaskar is the Head - Equity at IDFC Asset management Company Limited. Mr. Bhaskar has an experience spanning over 23 years in the mutual fund industry. He has been associated with IDFC AMC since February 2016. Prior to joining IDFC AMC, he was associated with UTI Asset Management Company Ltd. as Head of Equity, responsible for overall domestic Equity fund management (Apr.2007 – Jan.2016). Prior to that he was associated with Sundaram Asset Management Company Limited as Fund Manager, responsible for Fund Management (Aug.2003 – Mar.2007).

He holds a Masters in Business Administration (Finance) and Bachelor’s degree in Commerce with honours.

 

In an exclusive interaction with Citrus Interactive he talks about the markets and his funds.

 

What is your view on the current market valuation?

From the point of view of valuations, we are at a level we have not seen before which is also on account of cost of capital being at a level that we have not seen before. The US 10-year yield used to be 4 to 5% on an average and now it is at 1.5%. This has an impact on the valuation of all asset classes. When you compare today’s P/E ratio with the past one mistake we make is not to adjust for the cost of capital and how the yields have moved. When we look at our view on equities and on returns 3 to 5 years from now you also need to have a view on where the yields are going to be. In May 2013 (which was not too far away) the 10-year US yield was 2.5% and in India the valuation was 17x trailing. Today, we are at 1.5% yield in the US and our earnings are at 21x trailing. In this scenario what is required is a big return in earnings growth. The last 4-year growth on Nifty earnings has been flat at about 4% - which has been one of the slowest. The estimate for the next 2 years is around 17-18%. However, even last year our view was that this year the earnings will be 15-16%. For markets to sustain and move up from here we not only need the P/Es to sustain but we also need the earnings growth to come back. The signs of this are not very universal. The signs are patchy and sector specific. But then that is how one has to expect this to happen. In 2003, after 3 years of slowdown earnings growth for the next 2 years was only 10-12%. After that we saw a sharp jump in the Nifty earnings. Between 2003 and 2008 our average earnings went up to 26%. So growth is going to be slower and therefore the P/E valuations are likely to remain a bit elevated.

 

What is your expectation from the quarterly earnings?

This quarter we expected the Nifty earnings growth to be 8% which will be the third quarter running where we have positive earnings. So the cycle of slowdown in terms of earnings downgrade is now behind us. As I said, in terms of pick up in the earnings growth may take some more time than expected. If you exclude corporate banks and commodities, then the Nifty earnings growth will likely increase to 17% for this quarter which is a fairly encouraging sign.

 

Midcaps have been becoming more expensive in terms of valuation. Would you advice investors to focus on the large and multi cap funds in the current scenario?

Midcap is a space where active share plays a big role. The midcap indices today don’t reflect what most investors view midcaps to be. Most investors believe the market capitalization range for midcaps is Rs. 2,000 crore to Rs. 10,000 crore. However, In terms of the midcap indices the smallest stock now ends at Rs 8,000 crore. So the midcap index does not really represent what is viewed by most investors as a midcap segment. Therefore, there is a dichotomy. The index trades at 34 times because a large part of the index is of companies that have lumpy losses. The midcap index EPS has fallen over the last 2 years because these companies have reported very large losses. If these companies turn to profitability the index growth will be 40%. On like to like basis when you take only profit making companies of the index the growth rate is only 14%. There is no small cap index which is significant and one can use. So you have this view that when you look at the index it looks very expensive but when you look at some companies outside the index they still look reasonable. These may be trading at 12-14 times.

  

Which sectors are you overweight/underweight on?

We are overweight on Cement, Auto and Oil & Gas. We are equal weight on Banking. We are underweight on IT services, Consumer Staples and Pharmaceuticals.

 

What is the positioning and mandate of IDFC Premier Equity, IDFC Classic and IDFC Sterling Equity?

In IDFC Classic Fund the mandate is to maintain 70% exposure to large caps and 30% to mid and small cap stocks. IDFC Sterling is a pure mid and small cap fund. We want to increase our mid cap exposure and slightly reduce our small cap exposure in this fund. For IDFC Premier Equity the positioning is a bit of a challenge. While its mandate is that of a multi cap fund, its investment style has been in the mid cap space. Our focus is that by looking at companies which are best in class we want to move away from positioning which is market capitalization specific (Large, Mid and Small cap).

 

What are the major changes made after you took charge of the funds at IDFC?

In IDFC Classic, we have come out with a new framework. We have clearly defined it as a diversified equity fund with focus on relative value within a sector. We think buying quality without valuation concern is not the best strategy at this point of time. If you buy quality with relative value within a sector it gives you some protection given the kind of high valuations.

 

In IDFC Sterling, our focus is to change the orientation of being non-benchmark oriented and highly concentrated in one sector (which was Industrials) and we increased the weight in Financials. As a pure mid and small cap fund this kind of re-orientation will help it improve the performance.

 

In IDFC Premier Equity Fund, our first aim is to clarify the positioning of the fund. It is a fund which is highly benchmark agnostic. It is a multicap fund by its objective but a midcap fund by its investment style. We want to buy the best in class companies of every sector or sectors where we think there is good growth potential. It will remain a product which will be differentiated from other equity schemes which are quite benchmark-focused or which have a high weight of Financials. This fund will continue to have a low beta and focus on companies that have a strong growth prospects, competitive strength vis-à-vis peers which will allow them to sustain that competitive strength over time. We believe that will be a good way to build a portfolio which will create wealth over long term. So this fund is more of a marathon runner within our portfolio of products. We believe all investors should have some amount of exposure to those products which are more long term focused.

 

What has contributed to the improvement in the performance of IDFC Classic after you took over as the fund manager?

The main factor contributing to the outperformance is the right stock selection.

 
 
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