Energy sector may take few more years to deliver

Equity markets go through extremely good and weak periods. It's based on what point in time you set the valuation. We are in an extremely challenging local environment and that has impacted the performance of key companies. SATISH RAMANATHAN, HEAD, EQUITIES, SUNDARAM MUTUAL FUND

Managing equity in uncertain times is a challenge for any fund manager. In an interview with Business Line Mr Satish Ramanathan, Head of Equities, Sundaram Mutual Fund, spoke about the underperforming sectors and about the performance of Sundaram funds that have exposure to these sectors.

Excerpts from the interview:

Infrastructure based funds have given very poor returns. Is it advisable for investors to move out of such funds? Or should AMCs dilute the theme and make it more broad-based?

The performance of infrastructure funds has been disappointing over the past one year. The key learning is that infrastructure is not just about constructing projects. It is also not about taking up several projects and over-stretching yourself. It's about viable business with some cash-flow and investments.

The key takeaway for us is to invest in more mature companies like NTPC or GAIL or ONGC. It may be better to invest in slightly mature companies which have gone through the initial learning cycle. Going ahead, many of the funds and fund houses will not replicate the strategy they did in their previous tenure. They may back the large and stable companies than investing in smaller companies for growth purpose. So all this means that the rate of appreciation will come down and equally the volatility of the portfolio.

If you ask me whether infrastructure as theme is viable or not, the answer is it is very viable, provided you are selective. The second phase we are talking about is selectivity.

You should hold the right companies rather than looking at the sector. So, the first leg was about sectors but the second phase is about companies.

Investors buy theme funds for high growth. If you start buying only large-cap stocks, then the purpose may be defeated?

I did not imply that we will be looking only at large-cap companies. It's about selecting the right companies for the portfolio.

So if you have a company that is conservative and have profitable projects, we would prefer those instead of companies that take on number of unviable projects. It is about selecting the right companies and the right set of business models rather than having high-growth companies only for growth prospects.

So, from an investor's perspective since they have taken the conscious risk of investing in a theme fund or sector fund, unless their risk perception has changed, they should continue in the fund.

Schemes that invest in large cap stocks are now struggling to reward investors. Is it due to high valuations?

Equity markets go through extremely good and weak periods. It's based on what point in time you set the valuation.

Needless to say, we are in extremely challenging local environment and that had impacted the performance of key companies. Second point is that our political stability is also questioned and investor's sentiment is also low.

Retail participation has been very low for several years now and domestic inflows into equity are also low. The inflows are coming only through FIIs and they can be volatile. You also have a situation where the interest rate offered is at 10-10.5 per cent and it will dissuade any risk-taking.

Why should any investor walk in and invest in equity with all these risks when you can get assured return for 3-4 years. That is the key deterrent as we stand today. When the interest rate eases and comes down I am sure the risk appetite will come back into the market albeit slowly and money would move into equity market.

For how many quarters do you anticipate the Indian markets will be under pressure due to macro-economic concerns, domestic and global?

I expect weakness in the Indian markets to continue for next 6-12 months. But most of the weakness is internally created. On reversing some of the issues we can move forward quicker than anticipated.

The key thing we need to bear in the mind is that reduction in subsidies of petrol, fuel and fertilisers will help release of lot money for government's core development activities.

We can be cynical about this, but nevertheless what we need to bear in the mind is that government borrowing for petrol subsidy is going to come down when the fuel prices are passed on to public.

If we are little lucky and the crude oil price falls below $90, losses of oil marketing companies and State Electricity Boards are likely to come down significantly.

With concerns in the banking space which segment — public or private banks — do you expect will perform better?

For the PSU banks incentive to maintain asset quality and growth is not so high given that these banks' Chairmen keep changing often, and their commitment is only for 3-5 years. So the bank's growth and profitability can swing extremely. It is one of the key concerns I have in the PSU space. So it's more individual-centric than system driven.

The same holds good for private banks also, but there exists continuity of the same management and the targets are fairly aligned with the shareholders' expectations. For the long term I would bet on private banks.

Sundaram Energy Fund was launched almost four years ago, but is still below its face value. What should investors do with the fund? Are you planning any mandate change?

We are not planning to change the mandate of the fund. What has happened is very unfortunate. One, many of the projects are getting delayed due to environmental issues. Reliance Industries, which is a major holding in the portfolio, is getting impacted due to its KG D6 issue.

So, what has really happened in the energy space is that the stock prices have fallen 40-50 per cent. Considering that, our performance is satisfactory. It could have been far worse.

We have taken course correction along the way. But are we happy about our performance? Clearly not. I think some of these will reverse over time. Clearly it will take a minimum of one and a half years in terms of projects and delivery, given the significant project delays. Everything has slipped in the past two years. That was one reason why promoters, companies and fund under-delivered.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2482455.ece