Satisfied by earnings, barring some disappointment in the infrastructure space, Sunil Singhania of Reliance Mutual Fund says that arbitrage unwinding and global cues led to a fall in the market. Further he goes on to say that now 50-60% of arbitrage positions have been unwound.
Singhania expects the domestic flows to be stronger in February-March. “We have seen net inflows in equity mutual funds in the last 10-15 days,” he says, adding, cash has been deployed in infrastructure funds in the last 10-15 days. “The cash levels are around 8-10%.”
Gammon India, IVRCL Infrastructure and Nagarjuna Construction, according to him, can grow three to five times in the next few years.
Here is a verbatim transcript of the exclusive interview with Sunil Singhania on CNBC-TV18. Also watch the accompanying video.
Q: What kind of stocks your panel is choosing from which you have short listed? Can you give us some tips from the early birds?
A: They do not choose a stock. We have four regions: The north, south, east and west and we give each college one eminent company to research on. We organize the company visits and the management meets for these colleges and on that particular stock those colleges are expected to give a presentation. So for the west zone we had Hindustan Unilever as a target company. For the north zone Hero Honda. For the south we had Wipro and for east zone Balrampur Chini. Interestingly, the four regional winners will present respective colleges in the finals and the winner goes for the Asia Pacific Research Challenge and from thereon if they win they go to the World Challenge.
So it’s very methodical and very well planned event and specifically from the student community, who are budding investment professionals, it provides them huge platform to not only learn but also strengthen their resume for the career going forward.
Q: Are you trying to also increase awareness about non-index stocks and not so much focus on Nifty 50 and Sensex 30 kind of stocks?
A: As I mentioned earlier, the winner goes for the Asia Pacific Challenge and our attempt is for Indian colleges to win the Asia Pacific as well as the World Challenge. So we would have loved all the more renowned companies. Unfortunately, in the east zone there aren’t too many index companies. We did try for the large companies in the east zone but they were not as receptive.
Also, sugar as a industry is now gaining a lot of interest in the world and Balrampur Chini really stands out as one of the largest sugar company. So it was a combination of all these factors.
Q: It’s a good time of course to be doing specific stock research, we have come out of earning season with a slightly sour after taste, what did you make of the Q3 performance?
A: We were more or less very satisfied with the results. Obviously, there were some disappointments specifically from the infrastructure space where a lot of execution got deferred probably to the next one-two quarters and in large projects this is always going to happen.
Unfortunately, in this quarter there were some events in few states, there were also floods in couple of states, the new government also took charge somewhere in the months of June and July realistically. So all this has lead to more deferment of execution rather than some sort of problem on the sector as such. So we remain quite optimistic and apart from this sector most of the other sectors have been quite good in their reporting results and more or less stocks have surprised on the upside.
Q: What has lead to this kind of apprehension for the market over the last couple of weeks you think and do you see this constant outflow of global money continuing?
A: It’s been a global phenomenon. We have had strong nine months and leading into January obviously the optimism was that this rally is going to continue. There were some data points which came in little bit negative, there were also some sound bytes predominantly from the US, which were sort of perceived to be negative for the markets. It also coincide India to some outflow from foreigners predominantly on the arbitrage book because Nifty suddenly started to trade at a discount.
So it was more news based reaction coupled with technical factors like arbitrage unwinding which lead to some kind of a sell off. There were some sectors as I mentioned earlier, some of the larger engineering, procurement and construction (EPC) companies like Larsen and some of the other construction companies, south based companies were not able to meet the expectations as far as their results are concerned and those kinds of sectors also had that impact.
So in the near-term it was more rebalancing coupled with some arbitrage unwinding which lead to the fall. But as we speak our view is that more or less the reaction is behind us and we see a good year ahead.
Q: Are you saying that most of what had to happen in terms of a technical cleanup has happened already at 4,800 Nifty?
A: On an arbitrage unwinding, I would say that 50-60% of the book is already unwound. We are also seeing a scenario where after big appreciation in the dollar, the dollar has sort started to either weaken slightly or hold on to its level. This is a key factor when arbitragers bring in money or take out money. If the dollar starts to weaken a bit probably, the arbitrage book will start to build up again and you might see some uptick there also.
January was unnaturally a low month for the insurance companies. There were some regulation changes. Some of the product launches got deferred by sometime. From the insurance perspective, January was an unnaturally slow month. Hopefully, February and March would make up for the slow inflows in January. So that support should also come in going forward.
Q: How likely or unlikely is the possibility of the market testing 4,500 either immediately ahead of or immediately after the Budget because that’s the big event it’s moving around?
A: Budget typically does have an impact on the market. However, the good thing is that into the run up to the budget we have already seen a sizeable reaction to some extent and even the expectations in the true sense are not very high which normally happens just before the budget.
So from our point of view, we do not think the budget to be an event which is going to cause a lot of panic in the market. Hundred points on the Nifty, up and down, are always a possibility because there are always knee jerk reactions to the proposals which get sorted out over the next two-three days when the participants involved, try and understand that true implications properly. But a panic sell off after the budget, right now, doesn’t seem to be the case.
After long time we have started to see inflows even in the equity schemes in mutual funds. So over the last 10-15 days, ever since the reaction started, we have been seeing net inflows in good quantity in almost all our equity schemes. So I think that is also a welcome change.
Q: I was coming to that because last time we spoke you had fairly reasonable cash levels especially in some of your newer products. What kind of cash levels are you holding right now?
A: Cash levels have reduced significantly. We have been deploying over the last 15-20 days specifically in the new infrastructure fund which we mentioned. In that fund, we are down to around 14-15% cash. In most of our other funds, the cash levels would be anywhere between 5-10%. So overall, as a house our cash levels would be somewhere in the region of 8-10%.
Q: How are you approaching this space that you referred to a couple of times, the infrastructure space because sentiment has been hurt a bit by L&T’s numbers, Punj Lloyd, IVRCL, do you see it as a short-term blip or do you think investors might have to wait for beyond six-nine months for returns from this space?
A: There are two-three aspects to it. One is these are all long gestation period and there is a time lag between hope, expectation and the actual delivery. I think the way the government is focused on and even the way we are seeing some of the projects getting off the ground, we are very optimistic on this space.
If you go few years behind, I will give you an example of a company like Nagarjuna Construction. The turnover in 2003 was Rs 400 crore. The company grew to nearly ten times its size in five years and that was true for a lot of other companies which were in this space whether it was Gammon, IVRCL or xyz. So what we are trying to say here is that once this sector takes off in terms of actual execution, then the possibility of fast growth is very high and when you start to compound you will suddenly see a lot of these companies at least three-five X of their size in the next five-six years.
So what we are doing is having conviction in the space, having conviction in government’s resolve in creating infrastructure and giving time for the investments to sort of bear fruit and I think that is what the investors should also look at. So from our perspective if there is a theme, which can play off over the next three-five years, it would be this theme.
Q: You were talking about Balrampur Chini a while back, how do you see the cycle for some of these agriculture plays whether its sugar or fertilisers or some of the rice producing companies? In your funds, do you own a slice of them or are you not very optimistic?
A: We do own a lot of agro-chemical companies even lot of fertiliser companies as you mentioned for few reasons. One is obviously they are very cheap. Second we feel that there have been no reforms in this space for the last 15 years and the time has come when a lot of reforms in this space are expected. Third, with retention prices going up and with agricultural product prices in the world rising, the demand for a lot of these products is also rising and it is also because that demand for agricultural products is rising obviously you need more fertiliser, more agrichemicals to increase yields. So our fundamental belief in the sector is very firm.
The other thing is that with gas supply become available in India and hopefully should increase over the next few years, a lot of these companies would be in a position to even expand capacities. In fact if you see last ten years there has been hardly any urea capacity which has come in the country and we have been importing urea at some obscene prices in 2007-08 because the prices in global markets went up. So I think from a government’s viewpoint as well as from the availability of raw material and demand perspective we remain very optimistic.
On agricultural products, whether it is rice or sugar, I think it’s definitely a cyclical industry. But the kind of cash flows, which a company makes in a good year, sort of compensates two-three years of bad performance or substandard performance. So from our perspective those companies would be in our radar. Depending on our view on a particular commodity and the valuations, we would not be hesitant in taking stakes on those companies.
Q: You haven’t in the past very enthused with the kind of pricing the primary market has had, but have you started looking at that a fresh particularly some of these large follow-on public offers (FPO) that have been coming?
A: We have been active participants in lot of qualified institutional placements (QIPs) even to some extent in initial public offerings (IPOs). As you mentioned pricing definitely is a cause of concern in few of them. But because of the poor response, which a lot of these highly priced issues have been getting, thankfully over the last two-three months we are seeing a welcome change where a lot of promoters and a lot of companies have been responsive to the fact that they need to leave something on the table.
If you see over the last two-three months, the IPOs have started to open at least at some premium and that is the need of the hour because you need to get the retail investors back. In a lot of these IPOs the retail portion gets undersubscribed and that is what the attempt should be that let investors also see some gains on the listing day because it encourages them to be investors in a company for a long-term. Unfortunately that is a trend and fortunately the companies as well as the merchant bankers are looking at it more pragmatically.
Source: http://www.moneycontrol.com/news/mf-interview/domestic-fund-flows-to-be-strongerfeb-mar-rel-mf_439634-3.html
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