We look at quality businesses with decent growth prospects as well as return on capital employed

BFSI Industry Interview
On: Jul 28, 2017 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - We look at quality businesses with decent growth prospects as well as return on capital employed

Ankit Jain is an Associate Fund Manager at Mirae Asset, responsible for managing Mirae Asset Great Consumer Fund. He also actively tracks auto & consumer sector. Prior to joining Mirae, he worked as a research analyst with Equirus Securities, responsible for tracking mid cap companies acros various sectors. An engineering graduate with MBA in Finance from NMIMS Mumbai, Ankit has over 6 years of experience in equity research and portfolio management.

Consumption has been a popular theme with many fund managers across different AMCs over the last few years. We saw slowdown in private consumption and GDP growth in Q4 FY 2017 mainly due to demonetization. Are you seeing private consumption growth picking up again in this fiscal year? What is your GDP growth forecast for FY 2018?

Yes, de-monetization has impacted private consumption as we have seen GVA decelerating to 6.1% in H2FY17 in against 7.2% in H1FY17. However, we see this normalizing as economy re-monetize quickly in H1FY18. We see GDP growth to slightly pick up to 7.5% in FY18 in against 7.1% in FY17 on account of normalization of base effect of H2FY17 and pickup in rural spending notwithstanding GST related transient impact. Significant pickup in growth will take some more time as private sector investment picks up.

What are some of the key factors that will drive private consumption growth in India in FY 2018 and beyond?

Lower inflation and hence lower interest rate, implementation of 7th pay commission and higher rural income backed by higher produce due to good monsoon are some of the strong factors for the near to medium term. Over the long term, Government aspiration of housing for all by 2022, power for all and doubling of farm income are some of the key factors which will drive consumption in the longer term

There are some concerns that, companies may pass on increase in tax rate due to GST to consumers. There are also concerns that companies which benefit in rates from GST may not pass on the benefit to the consumer. What is your view on the impact of GST on prices and thereby consumption? Also, what will be the impact of GST on consumption in the long term?

First of all, we have to understand that GST is a massive tax reform implemented by the Govt which simplifies indirect tax structure and will be structurally positive in the longer run. While most of the categories have seen minimal change in the taxation structure under new regime, there are certain categories which have seen changes in the tax slab. We believe companies have to pass on incremental cost/benefit in such categories compulsorily, also because of anti-profiteering clause. Though, with availing of input credit in the entire value addition coupled with supply chain efficiency would help in generating internal efficiencies for most of the companies, translating in sustainable margin improvement in the longer run.

While GST implementation has caused near term impact in the form of channel de-stocking because of cut-overs and first time execution and likely loss because of limited input credit on the tax paid. However, in the long run it will help in consumption to shift more towards organized channels benefitting companies.

What is your inflation forecast for this year? Do you expect the RBI to cut interest rates in this fiscal?

Presently, inflation is at historical low of 1.5% in June, also aided by favorable base effect, which might see slight uptick as base effect turn adverse. Overall inflation band is very comforting (2-3.5% in H1FY18 and 3.5-4.5% in H2FY18), well below RBI target range of 4-6%. Broader market expectation is of rate cut by 25bps in upcoming policy review in Aug.

Rural demand was low, particularly in the FMCG sector in 2016. What is your outlook on rural demand,both for FMCG and other sectors in 2017? What are likely to be some of the key drivers of rural demand in 2017?

Yes, rural demand has been under pressure over last 2-3 years because of, poor monsoon for consecutive years and relatively lower MSP hikes. We believe better monsoon during last year led to 8% increase in food grain production, this coupled with ongoing normal monsoon should augur well for rural demand in the near term. Furthermore, general thrust by the Government to double farm income in next 5 years, success of PM crop insurance, implementation of 7th pay commission which has >50% rural beneficiary, and farm loan waiver will improve rural demand.

In your current scheme portfolio, banks, consumer non-durables and automobiles (including auto ancillaries) have the largest allocations. For the benefit of retail investors among Advisorkhoj readers, please discuss the earnings growth potential in these three sectors. Also please talk a little bit about your stock selection methodology?

Our stock selection process has three aspects: business selection, management analysis and valuation. We look at quality businesses with decent growth prospects as well as return on capital employed. The second filter is management analysis, which is a bit subjective. This has to look at historical track record and capital efficiency. The last factor is to arrive at a particular value, which should be more than the price to have enough “margin of safety”. Overall idea is not to buy companies having cheaper valuation but to invest in quality growth businesses at a reasonable value.

Yes, presently >50% of the portfolio allocation is made to financial services, consumer durable/non-durable and automobile sector. We expect mid teen earnings growth across consumer durable/non-durable and automobile, while earnings growth in financial services would be much higher because of base effect.

Which segments within the Indian consumption story appear to offer value at current levels?

We continue to remain positive on the consumption side of the economy as factors like lower interest rates, falling inflation, benefit of pay commission allowance etc. will accelerate growth. We continue to look for segments which offer high growth and good RoI. High growth is generally where penetration levels are less like passenger vehicle and air conditioner to name a few. Overall, we are more positive on sectors like consumer discretionary, auto & auto ancillary, retail banking, and building material etc.

About 20% of the scheme assets are invested in international securities. For the benefit of Advisorkhoj readers, please talk to us briefly about the international portfolio and investment opportunities in the consumption theme in Asia (outside India)?

Mirae Asset Great Consumer Fund is one of the most unique funds, which provides exposure to the long term consumption theme in India and Asia. 70-75% of the portfolio is invested in companies which will directly or indirectly be benefitted from consumption demand in India, while we invest between 20-30% of the funds in the “Mirae Asset Asia Great Cosnumer Equity Fund”, which is Luxembourg domiciled SICAV fund. The fund mainly invests in equities and equity-related securities of “Asian companies” which are expected to benefit from growing consumption activities of Asian region, excluding Japan. Geo-graphically, it has largest exposure to China followed by India, Korea, Indonesia, Taiwan and other countries. It’s large sectoral composition is towards high growth Consumer Discretionary followed by IT (which includes e-commerce), Consumer staple companies and Healthcare. Typically sectors like e-commerce etc. are much evolved in those geographies and growing at a brisk pace, which complements India. The Mirae Asset Asia Great Consumer Equity Fund (SICAV Fund) has a 6 year track record and has generated, 47% absolute returns, compared to 28% of the benchmark (as on 30th June, 2017).

The Indian consumption story is seen as a strong secular one but also regarded as the most expensive zone within the stock market. How do you navigate valuations in this context to pick stocks for your portfolio?

Our investment philosophy is to invest in quality growth businesses at a reasonable value. Valuation is an integral aspect of investing and we avoid businesses which don’t fit in our matrix of margin of safety. As such, characteristic of this fund is not to confine itself to invest in traditional consumer space, rather we have adopted an approach to invest in diversified set of sectors like auto, consumer durable, FMCG, media etc, which are going to benefit from increasing consumption in the country. While certain pockets are expensive, we believe there are enough opportunities to invest in growth companies at a reasonable price.

Consumption is largely a cyclical theme. What is your advice to retail investors who are looking to invest in equity for the long term? Why is consumption an attractive theme, in the overall India Growth Story? What should be investment tenure for investors looking to invest in the consumption theme?

I would beg to differ with you on the statement that consumption is a cyclical theme. Historically, India consumption as a theme has shown strong resilience in comparison to other themes irrespective of the investment cycle.

India consumption is a very powerful long term theme strongly backed by favorable demographics. ~50% of the India population is <25 years and ~65% of the population is <35 years. Country median age is 26 years, which is 10 year lower than the countries like China/US etc. Proportion of working age population (15-64 years), which is presently 64% is further set to rise for India in against most of the countries like China, Brazil etc will see a decline. Given all of these structural demand drivers, India is expected to become 3rd largest consumer market in the world by 2030.

Given strong long term growth driver and relatively lower volatility, we would suggest investors to be invested for as long as possible.