India will remain favoured by global investors: Satish Ramanathan

Though Sensex valuations may appear high, Satish Ramanathan, Head of Equities at Sundaram Mutual Fund, believes that the risk of steep meltdown in stock prices from here is limited. Investor preference for quality companies, the strong case for investing in India and favourable demographics that are enhancing the long-term growth prospects are key factors that investors should bear in mind before they consider exiting equities, he told Business Line.


Market valuations appear quite high, though people like to say they are a little way away from the 2007 highs. Do you feel there is a bubble in the making?

Markets are close to their all-time highs, but what one needs to appreciate is that earnings have grown in the interim. It is now two years since the all time high was reached and earnings have grown by 50% in this period. So, in that sense, the markets are less euphoric than earlier.

Two or three trends have unfolded, which we need to bear in mind when we talk about valuations. One is the flight to quality. Quality companies that are underleveraged have become far more expensive than they were in the previous market cycle. Companies that have debt, and issues on repayments or on credibility, have become far cheaper than they were in 2007 and 2008.

So, when we aggregate and say that the average market P/E is X, what has actually happened is that companies with good quality have become two times the median valuations and companies that have issues such as constant need for capital, have become half the median valuations. Markets have become far more discriminating.

The second trend is that global investors now have to invest outside of their home country, primarily for growth. India is going to remain one of the favoured destinations for that reason. China is moving to become a far more developed country and its requirement for heavy capital is going to come down. Therefore, incremental money has to come to India, though it may probably go to Africa or some of the LatAm countries too.

Trend number three, which is very important, is demographics. You are going to have a very robust period of domestic demand which can stretch on for 10 or 15 years. Case in point, look at the two-wheeler industry. That is demographics at work.

The industry offers a home-grown solution for infrastructure because we did not privatise transportation in rural markets adequately. So while yes, the market is expensive, based on what we have seen in the past, there are always going to be themes and sub-themes that will work and are available at a price.

So, do you believe that, overall, the markets are not expensive?

These are two key risks we need to bear in mind when we call the market expensive or cheap because, technically, the market looks only one year or 18 months ahead. But it does not factor in the cumulative power of growth over a sustained period and that is really where most people go wrong in evaluating the positive trends in the economy and stock markets.

Markets may be expensive, some of the leading companies may be expensive but if growth were to last for five years, then it is not expensive. So, from a fund manager`s and investor`s perspective one has to bear in mind this point before selling off equity positions.

Consumption-related sectors have led this rally and are at a premium to the market while other sectors (such as infrastructure) are at a discount. Do you see scope for the latter to catch up?

This is not really just about sectoral shifts. Within sectors, the good companies or the well-run companies with high return on equity have been continuously re-rated in this market.

Fund managers have taken the call that - if I have to buy a company I will buy a quality well-run company rather than a depressed company on depressed valuations based on the hope that there will be a turnaround in business sentiment or management.

However, probably a year down the road, risk appetite could come back. If there is a quantitative easing II and if there is indeed an abundance of cheap money, at some point in time there could be a section of the market actually saying why don`t we take that extra risk or how can a company be trading at 20 PE or 25 PE and why don`t I get a company that is at 10 PE and get that 2 or 3 PE extra? That risk appetite has not yet set in but could come in pretty fast if the money situation remains adequately liquid.

Are you saying that earnings performance in one quarter or so does not really matter?

The earnings performance could have several aspects. One is the commodity cycle itself. We have to bear in mind that 20-25% of our earnings comes from the commodity oriented companies. The commodity cycle is far better in the second quarter. Financials too appear to be coming out of their troubled patch.

Having said that, the fundamental risk that Indian companies and markets face is that their margins are among the highest, given that ours is a capacity-starved economy. And the price power is tremendous with companies. So there is a risk that even though our GDP grows, that profits do not grow for some period of time as a result of higher interest cost coming in and higher depreciation as a result of capacity expansion.

Also, the logical end to higher capacity expansion is lower margins. So you could see three or four quarters of this adjustment taking place. The risk is that the markets actually do nothing for some time. Eight quarters from now, you may see markets at the same level as they are today. Apart from that, do I fear a meltdown or am I building that into my scenario of expectations - the answer is `No`.

It is usual for mid-cap stocks to play catch-up in the second leg of any market rally. Do you believe the valuations of mid-caps offer room for this, given the fundamentals?

The term mid-caps has to be used with some caution. As a house, we see that some mid-caps are leaders in their space but are mid-caps because of the size of the business. Typically, what we find is that companies that are small in a large business segment do not have pricing power or capital access and become weaker after a recession or a slowdown. A case in point are the construction or infrastructure companies. L&T and BHEL have come out stronger but many small construction companies have become far weaker.

The qualitative aspects have a significant bearing on valuations in mid-caps now. We haven``t moved towards the commodity stocks and that``s something that helps us.

What is the risk of a shift in FII in to other emerging markets such as Latin America (LatAm) and African nations?

I think capital does not seek all destinations at all points in time. It seeks a favoured destination and the momentum sustains it for the next 5 to 10 years. The second aspect is that the first level of development is not as capital intensive as the second level of development.

Widening a road from 2 to 4 lanes is not as capital intensive as going from 2 to 16 lanes, which is what China has perhaps done. So we are at a lower level of capital intensity compared with China while Africa and LatAm countries are slightly behind us.

When I say LatAm a country like Brazil is probably far more advanced than India. So take China, Japan, Taiwan and Korea in turn - there was a logical way in which liquidity flowed. The demographics in India are now most favourable as was the case in China ten years ago or Korea 20 years ago.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20101108104609707&sec=fm

Tata Mutual under Sebi probe for front-running

The Securities and Exchange Board of India (Sebi) is investigating Tata Mutual Fund for suspected front-running, according to three people familiar with the development.

Sebi has sought information and data in this regard from the asset management company and the investigation is still on, they said.

Tata Mutual, the tenth-largest mutual fund with nearly Rs22,000 crore worth of assets under management as of September, confirmed the investigation and said it is cooperating with the regulator.

“Sebi had once sought to know our systems/ processes in this regard... We had also given a complete list of all dealing and fund management personnel’s landline as well as mobile numbers for their records and further investigation if required,” an official spokesperson said.

It emphasised its commitment to transparency and to following a vigilant policy with regard to keeping a watch on such activities. “Tata AMC is always willing to do all that is required to not only ensure compliance but also to act in the best interests of our investors, and the investing public generally,” it added.

Front-running refers to an activity where a person with inside knowledge of an upcoming large order takes a position ahead of it.

Here’s how it works. Consider a mutual fund that buys a company’s stock worth Rs5 crore. Suppose a dealer with knowledge that this order will be placed buys some stock ahead of it. When placed, the sheer size of the mutual fund would cause some increase in price. At this point, the front-runner will exit with a neat profit.

Meanwhile, his purchase would have made it more expensive for the fund to buy the same quantity of stock.

This is what is said to have happened in the case of HDFC Mutual Fund, where a dealer is said to have leaked information on the fund’s buying and selling activities to a college friend, among others.

In that case, Sebi banned those involved from the securities market and asked the asset management company to overhaul its control systems.

Sebi had made the order in the case of HDFC MF public in June this year.

In October, DNA had reported that Sebi is investigating a number of mutual funds over cases of front-running, after the regulator confirmed the investigation in reply to an application filed under the Right to Information Act.

Another application in the matter of Tata AMC filed by DNA elicited a similar response from the regulator. As before, Sebi confirmed that the investigation is ongoing while declining to go into details.

“It is informed that one case is being investigated by Sebi. As the matter is under investigation, disclosure of any information at this level would impede the process of investigation and therefore,
disclosure of the same is exempted under section 8(1)(h) of the RTI Act,” it said.

Sources say Tata isn’t the only mutual fund under investigation. A number of other asset management companies have also been summoned by the regulator as part of investigations over the last several months.

here’s no word yet on the extent of the financial losses that might have been caused to investors in these cases, but one thing is clear — mutual funds aren’t done with Diwali cleaning yet.

Source: http://www.dnaindia.com/money/report_tata-mutual-under-sebi-probe-for-front-running_1464063