With mid-cap valuations correcting since the beginning of 2013, Chirag Setalvad, Senior Fund Manager — Equities, HDFC Mutual Fund, finds a fair amount of opportunities in these stocks.
Excerpts from an interview:
How are market valuations currently poised? Are mid-caps once again looking attractive after the correction?
Valuations, in general, are reasonable. The Sensex is trading at 13-14 times one year forward earnings. This is slightly below where it has historically traded.
There is room for valuations to improve as interest rates begin to come off and the growth environment improves. Mid-caps, which were trading at a similar multiple to large-caps in January, are now trading at a 10-15 per cent discount on an average.
This discount over a period of time has been anywhere between 0-25 per cent, so this is somewhere in the middle. Looked at that way, the markets are looking interesting once again. As I mentioned, the valuation gap has expanded, and if you pick and choose, you can find high quality mid-cap companies that are doing well. Many are trading at discounts to their intrinsic value.
Should investors look for growth or value now?
We don’t have a particular, value or growth bias. Having said that, value does currently look more interesting, particularly, in mid-caps. Of course, value emerges for a reason and a lot of companies that are available at a very cheap price are facing issues — demand, cash flows, balance sheet related. Typically that’s where you make money — where the environment may be difficult but the valuations are more than compensating for it.
Is the consumption theme still holding up?
The consumption theme is certainly holding up better than the investment theme. However, there are signs of a relative slowdown. Within consumption, the demand from tier-2 and tier-3 cities is doing better. Demand for larger ticket items such as cars is obviously struggling more while that for smaller ticket items such as FMCG is doing better.
We have not yet seen any significant down trading happening as yet, and if it happens that will be an additional source of concern. Another consumption theme is the domestic pharma market, which is doing well. Consumer durables demand is struggling, but it is expected to bounce back because penetration is very low in India. Overall, the long-term outlook is positive and this should only be a temporary blip.
How would you differentiate HDFC Prudence Fund vs HDFC Balanced Fund?
There is a slight difference in asset allocation between the two. HDFC Balanced Fund has a higher allocation to debt. HDFC Prudence Fund has a closer to 75 per cent allocation to equity, while HDFC Balanced Fund has about 68-70 per cent. Secondly, within the fixed income portion, HDFC Balanced Fund tends to have shorter duration while HDFC Prudence Fund has a longer duration. The third is the size — HDFC Balanced Fund is smaller.