Leader's Speak

Mr. Pankaj Tibrewal, Fund Manager, Principal Mutual

Mr. Pankaj Tibrewal, Fund Manager joined Principal Mutual Fund in 2003 as a Credit Analyst and is currently holding the position of Fund Manager. Prior to joining Principal Mutual Fund, he had a short stint with Global Trade Finance. He is a graduate in Commerce from St. Xavier's College, Calcutta and holds a Masters degree in Finance from Manchester University, U.K. Pankaj Tibrewal’s schemes, mostly the Principal Child Benefit Fund, Principal Monthly Income Plan & Monthly Income Plan – MIP Plus and most recently Principal Emerging Bluechip Fund have done well (145% + returns in less than 1 year and launched during Nov 08’ last year).
Principal Mutual Fund is sponsored by Principal Financial Services Inc. USA through its wholly owned subsidiary, Principal Financial Group (Mauritius) Limited, with Punjab National Bank and Vijaya Bank as its co-settlors. As on September 30, 2009 the average assets under management was around Rs 8882 crores with over 10.2 lac investors (on the basis of live folios). Principal Mutual Fund serves its clients through 40 locations and 80 investor service centres.
Speaking with Yash Ved of India Infoline, Pankaj Tibrewal says "Compared to the rest of the world, valuations in India are moving into the expensive zone."

What is your view on the Indian stock market? Where do you see SENSEX by March?

The last six months’ rally has caught most people by surprise. Over the last six months, the Indian economy has showed resilience in overall growth. We are of the view that over the next few months the earning upgrades for Sensex companies need to be sharp in order to support the markets which in our view has limited scope. Over the last four years, it was not only Indian growth in isolation which happened, but it was lot to do with global GDP growth led by consumption in US and European Union. Also we had a strong commodity cycle which was led by some of the developing economies. All the three things - global growth, easy credit cycle and commodity cycle which were growth drivers over the last few years– are not in favour of us today. Global growth is weak, credit cycle has worsened and consumers are very cautious. There is no denial to the fact that the largest consumer of the world which is USA, has gone into hibernation for sometime to come which will keep the US and global economic growth subdued. The argument that the emergence or growth of India and China would offset the contraction of consumer demand of the West may not be true. Also, in commodities, there is huge overhang of excess capacity. Overall fundamentals globally are not in support of growth.

India is still seen growing at 6-6.5% which is reasonable as compared to the rest of the world. The large part of the rally which we have seen not only in India but globally is due to liquidity tap which has been opened up because of loose monetary policy in the world by the central banks. Sooner or later, once the central banks start indicating that the growth is returning back and that they will withdraw stimulus, markets will suffer a set back. Barring new stocks or sectors, I see limited scope for earnings upgrade by the street going forward for the Sensex companies . Hence leaving liquidity variable aside which is difficult one to call on, on absolute fundamentals the market should correct in the intermediate period until the global and domestic growth surprises us on the upside.

Are you comfortable with current valuations?

Compared to the rest of the world, valuations in India are moving into the expensive zone. From an earnings perspective, the consensus expects Sensex earnings growth of around 5% and 19% in FY2010 and FY2011, respectively. BSE Sensex now quote at 18xFY10 and 15xFY11 consensus earnings The forward earnings estimate over the last six months has undergone sharp upward revisions and have lagged the sharp rally in the markets. However going forward we believe that there is a limited scope of earnings surprise in the FY11 earnings estimate until domestic and global demand picks up very strongly and volumes surprises us on the upside as we believe that room for operating leverage is limited and pricing environment could remain weak. Some of the sectors where we believe, scope for positive earnings surprise/upgrades are present are Banking, Energy (regulatory development in terms of subsidy sharing etc) or Metal (globally linked prices).

What is your outlook on the global and Indian economy?

This year because of the bad monsoon, the rainfall deficiency till now is over 20%. This will affect the rural demand. However, IIP is starting to show strength from the last few months. For the second half, though IIP will continue to be strong, rural demand would be negative which could affect sectors like automobiles, FMCG, consumer durables or cement companies.
Next year monsoon will be a big variable. Capex by a lot of companies will start picking up. A lot of big companies will carry on with their capex plans and this will lead to growth. In FY10, we are looking at 6-6.5% GDP growth in India. We are looking at 7% GDP growth for FY10-11.
The global economy will still be in trouble. In the US, the debt leverage is high. If the US consumption does not pick up, 4-5% global growth is history for some time. 4-5% global GDP growth may not materialise over the next couple of years.

How do you see inflation and interest rates going forward?

I would look at food inflation and non-food inflation. Because of bad monsoon, there is going to be price pressure on food inflation. The non-food inflation may not be that high. Commodity prices are still subdued. The RBI clearly looks at segregation. Inflation could touch 4-4.5% by December-January because of low base effect.
We saw some uptick happening in the benchmark 10 year yield. The bond yield could go to 7.5-7.75% by the year end. The tax revenues as budgeted by the government could have an upside if Corporate India surprises on the earnings and hence fiscal deficit could be better than estimates and lower the budgeted borrowing programme for FY10.
We believe that the RBI would not be in a hurry to reverse the rate cycle until it is sure of growth recovery in the economy. On the contrast we believe that if credit growth picks up you could incrementally see liquidity getting lower in the system which may affect short end of the yield curve.

What is your AUM?

Our Average Assets Under Management is around Rs 8882 crores as on September 30, 2009.

Which of the sectors you are positive and negative?

We are positive on Power, Infrastructure and Retail. We are negative on IT, Automobiles and Metal stocks.

How do you see movement in small-cap and mid-cap shares?

Overall I don’t see much upside in the large cap stocks from the current level over the next 6months. However the valuations of mid-small cap stocks still look reasonable considering the growth they can potentially deliver next year. Also we believe that over the last 12months stock picking as a theme has not worked well however going forward if market remains range bound for some time stock pickers will be rewarded again.