Ravi Gopalakrishnan – Head, Equities, Canara Robeco Asset Management Company, feels that the markets are not very expensive, though he indicates that investors may be overpaying for select sectors. He sees an uptick in earnings in a year’s time. Excerpts from an interview to BusinessLine.
Given that equity markets have rallied and corporate earnings are yet to pick up, do you still see opportunities in the market?
It is true that corporate earnings are reflecting the state of the economy, which is still not out of the woods. We are coming out of a prolonged slowdown and it is difficult for the Indian economy to have a V-shaped recovery.
We expect a similar trend in earnings in the fourth quarter of 2014-15 and also the first quarter of this fiscal.
We do not expect a sharp jump in earnings in 2015-16, which is expected to grow by 13-15 per cent.
The real delta in earnings will be visible only in 2017 fiscal and beyond, when benefits of operational and financial leverage start to kick in. Indian companies have gone through a massive restructuring in the past three or four years. Also, by then, we believe interest rates would have fallen by 1-1.5 percentage points, which will help reduce the interest burden for many companies. In the near term, though, there may be some consolidation in the markets.
Do you think markets are expensive, at current levels?
The Sensex currently is trading at 16-17 times FY 17 earnings, which is in the middle of its historical range. So, going by these numbers, the market is not expensive. But we like to look at individual stocks rather than the broad index because there is a lot of polarisation among stocks and sectors.
Good sectors are trading at a hefty premium and the ones that are struggling are available at a steep discount. And this will continue until there is a broad-based recovery in the economy.
But some of the good quality stocks are trading at a steep premium to their own historical average. Do you think there is still some value left in these expensive stocks?
Most of the earnings growth is going to be back-ended. Most of these companies have been able to deliver even during the bad patch. Once the economy picks up, due to the massive restructuring and cost cutting, these companies will see a substantial jump in earnings, even on a modest growth in revenues. This is why markets are assigning a far greater premium to these companies, despite lacklustre current earnings growth.
As a fund house, what are the themes you are riding on?
We follow a bottom-up approach and look at specific stocks. Goods and Services Tax (GST) is one theme we have been quite positive on.
There is a huge unorganised market which will shrink once GST is implemented, thus improving margins of organised players.
In terms of sectors, we have been overweight on banking and financials for some time now as it will directly benefit from an improving macro environment and lower interest rates, going forward.
We are also overweight on capital goods and the engineering sector.
Pharma is also one sector we like, given the earnings visibility while we are neutral on the sector as a whole, given the high valuations.
Defence, engineering, distribution and logistics are other sectors we are positive.
Your Equity Diversified Fund has delivered below-category-average returns. Why?
Our fund, on an average, has invested 15-18 per cent in mid-caps in the last one year, compared with about 25 to 30 per cent for some of the other funds in the peer group.
Given that mid-cap stocks have outperformed large-caps by a wide margin, our fund has delivered marginally lower returns in relative terms.
In the last few months, though, we have gradually increased our exposure to mid-cap stocks and it has helped in improving our performance.