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We think India is all set for a secular macro economic recovery over the next three to five years

BFSI Industry Interview

On: Nov 6, 2014 | Duration: 1.00 hrs | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - We think India is all set for a secular macro economic recovery over the next three to five years

Mr. Ravi Gopalkrishnan is the Head - Equities of Canara Robeco Mutual Fund. He is also the Fund Manager for CR Equity Diversified, Large Cap+, Co-Fund Manager - Infrastructure, MIP and CR Emerging Equities.

He is responsible for overall performance of Indian equities. He has over 24 years of experience in research and asset management with Pramerica AMC, Principal PNB AMC, SUN F&C & UTI Mutual Fund. Ravi is a MS in Finance from Drexel University, Philadelphia and MBA in Finance from Bradley University, Peoria, IL. He is With Canara Robeco since September 2012.

Congratulations on the launch of your forthcoming NFO CANARA ROBECO INDIA OPPORTUNITIES – A Close Ended Equity Scheme. The fund plans exposure of 65 – 90% in Mid and Small Equities. Therefore, how it is going to be different from your existing fund Canara Robeco Emerging Equities which is also essentially a mid and small cap fund?

Canara Robeco India Opportunities Fund being a 3 year closed ended fund, it gives the fund manager enough flexibility to pick stocks and hold the position for a longer tenure without worrying about redemption pressures unlike an open ended structure.

Further, Canara Robeco India Opportunities funds is likely to have a relatively higher exposure to mid and small cap stocks compared to the Emerging Equities fund. Small cap stocks have high growth prospects, however it takes a while before their potential are completely realized.

A close ended structure provides flexibility to the fund manager to hold on to high conviction ideas in the fund till they completely play out.

We find that the top 5 sectors for Canara Robeco Emerging Equity Equities are Financial, Construction, Automobiles, Services and Engineering. Are you going to follow the same sector allocation for CANARA ROBECO INDIA OPPORTUNITIES too? Do you still think more is expected from these sectors?

In present dynamics we envisage that the economic growth this time around will be led by investment demand. We are positive on any sector which offers a play on the revival of the economy be it Automobiles, banking and financials, infrastructure, Materials (Cement and Metals) and capital goods sectors, which are likely to do well. We are also quite positive on energy sector because of the on-going reforms in this sector. We believe that their growth potential is far higher than what they are currently due to the high subsidies. We also believe that the Pharmaceutical sector growth is likely to remain strong because of their exports and companies within the sector are likely benefit from same.

The valuations in some sectors may seem above average, but if earnings growth are supportive it will be easy to maintain compelling PE multiples.

In the last one year we have witnessed huge number of Close Ended fund launches. What is the rationale behind launching a Close Ended Fund?

Canara Robeco India Opportunities fund, a close ended scheme is launched with an aim to benefit investors from prevailing growth opportunities in domestic equity market and provide a disciplined approach for investing compared to open ended funds.

The fund manager gets the ability to take more long term exposure without worrying about immediate liquidity requirements.

Close ended structure offer better control on investment positions since inflows and outflows are clearly defined and portfolio maybe run undisturbed with active fund management. It also facilitates adequate holding period time to add to the security position and hence a 3 year close ended scheme would be beneficial.

In the last one year mid and small cap funds have delivered 60 – 120%. Do you think replicating this kind of performance is possible considering that the Indian equity markets are already at life time high?

Empirically comparing large-cap and midcap performance with the real GDP growth rate suggests that midcaps outperform large-caps during periods of sharp economic recovery. India had witnessed strong economic recovery in FY04, with GDP growth doubling to 8.1%. Consequently, midcaps outperformed large-caps by 60pp. Similarly post the global slowdown, India’s GDP recovered from 6.7% in FY09 to 8.6% in FY10. Correspondingly, the CNX Midcap Index outperformed the Sensex by 45pp to register 126% growth in FY10.

Looking at the valuations, our markets are currently trading at around 16 times one year forward earnings and are just trading above the historical average. During bull markets we have seen price earnings (PE) of markets peaking at nearly 22-23. Once we see growth touching 8+ percent in the next few years, we might see PEs expanding that will have a positive impact in terms of market valuations. An investor can expect attractive performance from mid and small cap segment over next 3-5 years.

Some experts proclaim that this the start of a new secular bull market run (even though the Indian stock market is at life time high) while some are more guarded as they feel this is a hype rally only and soon settle to realistic levels. What is your take on the current market and what do you see as the key drivers for markets in the next three to five years?

The Indian economy is currently having a twin engine support, an economy that has bottomed out in FY14 and a decisive election mandate by the electorate in favor of reforms and economic growth. In addition, the headwinds of past 2-3 years (high inflation, CAD, fiscal deficit, BoP etc) are on the receding trajectory and this provides a ground for potential monetary easing by the RBI. The equity markets ideally thrive in this expected mix of improving economy and monetary easing as the earnings growth and high valuations will follow going ahead.

Given the scenario, we think India is all set for a ‘secular macro economic recovery’ over the next three-five years. We expect India to achieve a target of 8.5 percent gross domestic product (GDP) growth, and equity markets will reflect that growth.

There are several key growth drivers which are likely to influence market movements going ahead. The trend in lower inflation resulting in expectations of lower interest rates by 1Q FY16 will help in kick starting the investment cycle. Sustainability of low oil prices and commodity prices will help in bringing down the deficit and also help performance of corporate India. Further, the introduction of GST on a time-bound manner should help in improving GDP growth over the next 3 to 5 years.

From a global perspective, the extent of the slowdown in Europe and the actions of various Central Banks around the world will result in heightened volatility across financial markets. In addition, timing of interest rate increases in the U.S. could also determine flows towards emerging markets. All this warrants for a strong investment case with focus on mid and small cap segment with 3-5 years horizon.

What is the valuation gap between Midcaps vs Large Caps in the current market scenario?

Historically the valuation gap between mid cap to large cap segment has been in a range of premium/ (discount) of +/- 30%. Currently CNX midcap is trading at 6% premium over premium of BSE Sensex. Generally during a bull cycle the midcap to large cap premium tend to expand.

An analysis of the performances of your key flagship schemes – Canara Robeco Emerging Equities, Equity Diversified fund and Large Cap – have given stellar performances so far. Are you proposing any changes in these schemes in keeping tune with the recent market trends? What broadly will be your style and strategy going forward considering the fact that the markets are not cheap?

Canara Robeco Diversified Equity Fund, focuses on well-managed companies that are likely to deliver superior capital appreciation over the medium to long term. The fund has a mix of large-caps as well as mid-caps and follows a growth and value style of investing. We are looking to increase midcap exposure by a few percentage points because we believe given the current market conditions, alpha generation would be based largely on stock picking rather than the performance of overall markets.

Canara Robeco Emerging Equities, follows a bottom up stock picking approach to identify the best companies primarily in the mid-cap space. We have invested in a few engineering companies with export focus, because we believe that if domestic economy doesn’t recovery for next few quarters then the exports side of the business will help the performance of these companies.

Canara Robeco Large Cap Plus will continue to focus on large cap opportunities with "Growth at Reasonable Price" principle.

Keeping the current market scenario in mind, what would be your advice to a potential equity mutual fund investor?

The core attraction now is that in a growth phase of an economy, midcaps usually deliver faster earnings growth and therefore offer attractive investment opportunities. We think this advantage will manifest itself very clearly in the prevailing economic cycle.

The thing to note is going forward, as far as mid caps is concerned, the returns are going to be delivered more by earnings growth rather than further PE re-rating

Investors need to be clear about their objective when investing in mid and small caps now. They have become the flavor of the market with increasing interest from FIIs. Mid and small caps remain convincing propositions for long term investors who wish to participate in a more robust earnings driven growth over the next few years. You need to remain invested in midcaps to really get the benefits from here on.

If you are buying into growth of the economy, Canara Robeco India Opportunities Fund offer you an excellent growth vehicle - one that can perhaps generate faster earnings growth in the growth phase of the economic cycle.

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