Domestic institutions played a major role in enabling the market to consolidate in January-March 2009, by buying when FIIs were selling. The Indian market didn’t crack when developed markets did.
The market is in fair value zone, and has discounted an improving picture on future earnings. Asserting that it was the domestic institutions that held up markets in January-March 2009, Mr Sanjay Sinha, CEO of DBS Cholamandalam AMC, shares his views on the nature of the recent rally and why realty and technology are not among his preferred sectors at this juncture.The stock market has come a long way from its March lows. Do you think there is more upside left for 2009? We believe there is some more room for upside from hereon for rest of the year given that business confidence has gone up dramatically. Almost all stocks have run up sharply during the recent rally.
Upside from current levels would be driven by some sectors performing better relative to others either on account of valuations or events.
Analysts have already started revising their GDP and earnings growth targets for FY10 and therefore justifiable market levels may need to be reviewed.
Sensex is currently trading at a trailing price-earnings multiple of about 15 times. But the PE expansion hasn’t been driven by any significant earnings upgrades. Do you feel earnings upgrades may soon follow or was it just that India got re-rated on expectations of a stable government at the Centre?
Market levels are influenced more by forward price- earnings multiples and not trailing ones. It has been seen in the past that sell-side research has always lagged, not only in terms of earnings downgrades/upgrades but also on the extent of downgrades/upgrades. We believe that from here on, earnings upgrades will pick up.
Our thought is that market has come up from distressed case valuations to a fair value zone. No doubt, the overwhelming election results have been an important factor for pushing markets faster to near the fair value zone, but the journey from here on will depend on the policy announcements and how the economy responds to them.
The rally so far has been driven mostly by the increasing FII interest in Indian equities. Do you think domestic fund managers, who were earlier on the sidelines or were holding cash, may now join the party? How have you tackled the same?
We don’t subscribe to the view that the FIIs alone have led the rally. We accept the fact that they have been key participants in accelerating the direction of the market in the recent upsurge. But this rally has to be seen in context of the period prior to it.
Data show that domestic institutions played a major role in enabling the market to consolidate in the January-March 2009 period, when the FIIs were selling. All the developed market indices were hitting new lows during the period, while the Indian market didn’t crack to October lows in this phase.
Hence, we believe domestic institutions have also played an important role in setting the stage for current rally. Specifically, as far mutual fund industry is concerned, it is true that on an overall basis, cash levels were relatively high. Reasons for such high cash levels would depend on the individual mutual fund player’s view on the market and economy.
We believe fund managers in the industry would deploy cash gradually depending on opportunities available and also based on the incremental information on the policy measures, economic revival, etc. However, the amount of cash sitting on the sidelines waiting to be invested in mutual funds may be far higher than the cash which has not been deployed yet. As far as our performance in the rally is concerned, we believe we have participated to the best extent possible. Our broader call to remain almost fully invested, and that too in right sectors, has paid off well.
What are the key aspects you will be looking at to select stocks now, considering that most of them have run up considerably from their lows? Do you think mid- and small-cap stocks may also hold potential? While it is true that stocks have run up sharply from their lows, it is also equally true that they have fallen very sharply to those levels. Generally, we would like to follow a top-down approach for picking sectors. Some of the key aspects while selecting stocks within a sector would be the position of the company in the industry, revenue and earnings growth prospects, profitability measures, such as return on equity (RoE) and return on invested capital (RoIC), apart from events having an impact on the company’s fundamentals.
Mid-cap and small-cap stocks have seen the maximum erosion in their prices during the turmoil, mainly because of sharp decline in earnings. Hence, in the event of economic recovery, there is also the likelihood of their earnings bouncing back. Moreover, some of the macro factors, such as availability of finance and lower interest rates will play an important role in improving their profitability.
There’s been a sharp sector divergence in the rally so far. Which, according to you, are the sectors that may now stand a better chance of participating in the rally? Which are the ones you would rather stay away from?
We believe financials, infrastructure and the rural economy-driven segment of the market will continue to do well in the times to come. The reason for the better performance would be that a) they are largely domestic focused, b) major reforms and policy measures will be targeted at these segments c) government will give priority to these segments to revive growth and finally d) there is huge opportunity for expansion in the segment.
We believe IT and real estate would not do as well as other sectors, though we will be exposed to these sectors on selective basis. The IT sector is largely exposed to external factors, which are still uncertain, leading to some question marks on business and earnings growth potential.
The rupee too is expected to gain ground, which may impact margins. Lower volumes and higher competition means higher pressure on margins for these players. On real estate, a revival in the end-user’s confidence depends on economic revival and an increase in earnings, which would take some time.
Companies in the sector are still in balance sheet restructuring mode. That suggests that earnings may remain subdued for some more time. The reluctance of real estate players to reduce prices to drive demand, due to improving sentiment and the rush to issue paper, are also issues.
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