Don't expect markets to retest December lows: Sunil Singhania, Reliance Mutual Fund

In an interview with ET Now, Sunil Singhania, Head Equities, Reliance Mutual Fund, says the composition of the market movement is definitely going to change, but the downside to the market looks limited. Excerpts:

ET Now: Can the market retest December lows?

Sunil Singhania: We definitely do not expect that. At the same time, the whole composition of the market movement is changing. The earlier bellwether stocks are no longer the same. Therefore, the composition of the market movement is definitely going to change, but we definitely believe the downside is going to be limited.

ET Now: Your exposure to pharma has worked for you like a charm. You have 18% exposure to pharma, and out of your top 5 holdings, 3 are pharma names that are at an all-time high. That is an aggressive bet which has worked for you. Are you still bullish on it?

Sunil Singhania: I will give you a perspective of what we did. The consumption story in India has been played out significantly. We felt it was a good story and a good theme, but it was slightly pricy in terms of stock valuations. We felt that pharma had the benefit of the consumption theme domestically, because domestic pharma has been growing at upwards of 15-18% for the last 2-3 years. Also, there was an export story in terms of a massive opening up of the generic markets in the US, Europe and in other countries. The Indian companies were now mature enough to take benefit of that. Further, the currency also helped.

So it has been a combination of being underweight on some sectors, which are similar but which looked a little pricy, and being overweight on pharma, which had similar characteristics, ROE, neat and clean balance sheets and also the added opportunity of the export front. And we are lucky to some extent. We hope the performance continues and at this point of time, we continue to be positive on the pharma sector.

ET Now: So you are in no hurry to reduce your exposure to pharma stocks?

Sunil Singhania: Reduction and addition is a day to day...

ET Now: 1% here, 1% there, that is fair enough, but what about...?

Sunil Singhania: At this point of time, we continue to be positive. Obviously there are some segments of the pharma sector which might face some headwinds because of the government policy of generalisation even on the domestic market. But by and large, the companies are growing significantly well, and the ROEs and the managements are good and even quite comfortable.

ET Now: But your bias is clearly more towards the Indian pharma companies?

Sunil Singhania: Again, it is a mix. In some funds, we have exposure to multinational pharma companies, but at this point in time, the company is obviously in the portfolio, and there are others we have big positive bias on.

ET Now: If I look at the portfolio of Reliance Growth Fund, the only consumption space you are bullish on is liquor. What makes you bullish on liquor stocks?

Sunil Singhania: I do not want to mention particular companies, but if you analyse the cigarette market and the liquor market, both are vices. Cigarettes are actually very injurious to health. Liquor, to some extent, is a social vice, but it is not as harmful to human health, but you see the market cap of the cigarette industry in India and the market cap of the liquor industry in India -- obviously one industry has done well because of one company which is supposed to be a very clean company and rightly so. In the liquor industry, however, the dominant player has been plagued by other non-fundamental problems.

So our call is that the liquor industry has got huge potential in India. It has probably the best consumption theme as far as India is concerned. It is becoming more and more socially acceptable in India. We have a young population who is more prone to accepting social drinking, who drinks socially and responsibly, and the valuations are in favour. So we use this opportunity of non-fundamental problems to build positions there.

ET Now: Your current declared portfolio shows you are bullish on banks, but within the banking space, you pretty much like all the banking businesses. You have exposure to SBI, ICICI Bank and Federal Bank in the PSU, private and small private banks space, respectively. So you are pretty much bullish on the entire banking spectrum?

Sunil Singhania: No. Obviously we understand NPLs and restructured assets are a big problem. Our call has been to move towards larger banks, away from the smaller banks for some time. So the biggest banks in our portfolio are the largest banks and among the smaller banks, we have stuck to banks where we feel that the perceived asset quality is better than the street.

So across funds we have more or less moved towards larger banks vis-a-vis the smaller banks. And at an opportune time, once the environment on the economy clears, we will take a call on whether we need to rejig the portfolio as far as the banking space is concerned.

ET Now: In our previous conversation, you made a case for buying PSU banks. Are you now making a case not to buy PSU banks?

Sunil Singhania: No, we are taking a PSU banking versus private banking stand. Obviously private banks are slightly less prone to NPL problems for the simple reason because they do not have the kind of social obligation as some of the PSU banks have.

But the call is that in this kind of an environment, smaller banks might get hit more if one or two big accounts turn NPLs or turn into restructured assets. So the call is more towards larger banks.

We are not taking a PSU versus private stand because while private banks are good, they are also priced accordingly. PSU banks have some issues, but their valuations have also come down accordingly. But the call from our side is to be in larger banks, which might be able to withstand near-term NPL or restructuring issues slightly more strongly than the smaller banks.

ET Now: Why are you so negative on autos?

Sunil Singhania: I do not think we are negative on autos.

ET Now: You have got 1 or 2 exposure there, no exposure...

Sunil Singhania: No. In fact, in some of our funds, we have a huge exposure to auto. In India, auto is a great story structurally. But auto is also slightly negatively correlated with interest rates. With the interest rate scenario improving now, there is near-term headwinds in terms of auto sales, because of the way the economy is progressing and also because of the perception that monsoon might not be as good.

So the purchase is being shifted, but we will continue to track it closely. In fact, we feel that in future the support auto sector companies, i.e. engineering and auto ancillary companies, would be very interesting to look at.

So we are not negative, but in the near term, there might be months when you have some disappointing sales.

ET Now: Looking at Infosys and TCS, do you think IT or largecap IT stocks could go through a process of de-rating?

Sunil Singhania: TCS is almost at an all-time high barring the past few days, but it clearly reflects that even within this sector, all companies are not going to move together. So there is a huge diversion of performance within the IT segment. So one company is down significantly like 20% year to date, but some of the other companies are up 15-17-20% year to date.

Some of the smaller IT companies have been doing very well, and many of these IT companies are trading at 5 to 7 year highs. The sector is superb. As a country with a huge working population, we have an advantage. The cost pressures are slowly coming under control. All it will take is some revival in the global economy before investors start to look at this sector again.

So we will closely watch this sector, and we do believe that stock specifics even within the sector will be more important.

Source: http://articles.economictimes.indiatimes.com/2012-07-20/news/32748646_1_pharma-sector-pharma-stocks-domestic-pharma/2

Rajiv equity scheme: Funds may flow only to PSUs, large-caps

The tax-saver Rajiv Gandhi Equity Scheme intends to allow investments in Maharatna, Navaratna and Miniratna shares, besides in top 100 shares on the BSE and the NSE. These are part of the draft guidelines approved by the Department of Economic Affairs.

However, the draft guidelines do not mention investments through mutual funds. This is despite the demand from the mutual fund industry, supported by the Securities and Exchange Board of India.

According to an official source, “This draft is now going to SEBI and then the Department of Revenue will notify. Since the scheme involves tax matters, a final notification has to come from the Department of Revenue.” The scheme was announced in this year’s Budget and is expected to be notified soon.

Approved amendments

According to the amendments approved by Parliament in the Finance Bill, the scheme will allow deduction of 50 per cent of the amount invested in equity shares to the extent that the deduction does not exceed Rs 25,000.

This means one can invest a maximum of Rs 50,000 to get the benefits. The condition is that the benefits will accrue only to first-time investors and will be given once.

On why not investment through mutual funds, the source said since the approved amendments in the Finance Bill talked about investments in listed equity shares, no diversion was possible without further amendments. The amendments have inserted a new Section 80CCG in the Income Tax Act.

The approved amendments also talk about a three-year lock-in period for investments under the scheme.

However, the draft guidelines propose churning of investments after the first year, but any point of time during the three-year period.

But, the minimum investment should be maintained at Rs 50,000.

Security & Liquidity

The source also added that investment in listed top scrips, besides Maharatna, Navaratna and Miniratna, will give not just give security but also liquidity at the time of churning.

At present, there are five Maharatna (Coal India, IOC, ONGC, SAIL and NTPC), 16 Navratnas (BHEL, HPCL, NMDC, Power Finance and Shipping Corporation, besides others) and 68 Miniratnas (MOIL, Engineer India, MRPL and MMTC, besides others).

The then Finance Minister, Mr Pranab Mukheerjee, while announcing the Budget for 2012-13, had said, “To encourage flow of savings in financial instruments and improve the depth of domestic capital market, it is proposed to introduce a new scheme called Rajiv Gandhi Equity Savings Scheme.

“The scheme would allow for income tax deduction of 50 per cent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh”.

Source: http://www.thehindubusinessline.com/markets/article3658488.ece

You may have to shell out 0.55% more to buy MF units

Mutual funds may become a tad more expensive for investors. A committee appointed by the Securities and Exchange Board of India (Sebi) has recommended raising the total expense ratio - charged by mutual funds to manage and operate schemes - and excluding service tax from this fee.

The 14-member mutual fund advisory committee (MFAC), which met on Tuesday, has also suggested to the Sebi board to allow greater flexibility for mutual funds to use the expense ratio, which includes management fees, administrative fees, and other operating costs, said four people familiar with the matter.

The proposal to raise the expense ratio, if approved by Sebi, could result in unitholders shelling out almost 55 basis points (0.55%) more than what they are paying now. The MFAC, in the four-hour meeting, recommended raising the expense ratio to 2.5% from 2.25%. The exclusion of the service tax of 10.3% from the expense ratio will result in investors incurring costs to the tune of another 30 basis points.

"The 0.25% increase in expense ratio will not be charged on existing equity assets - but only on incremental equity investments," said a person, who attended the meeting.

MFAC, headed by former SBI chairman Janki Ballabh, debated on various issues including entry load roll-back, implementation of single cheque system and raising the net worth of AMCs. MFAC members have decided to not push for a roll- back of entry load.

Mutual funds will be able to manage expenses better if Sebi allows them flexibility to use the expense ratio. At present, mutual funds are allowed to charge up to 2.25% (in funds with assets in excess of Rs 100 crore) as expense ratio. Out of the 2.25% charged as expense ratio, fund houses are allowed to accept only 1% as asset management charges; the remaining 1.25% has to be mandatorily used to meet recurring expenses, which include payment of annual trail fees, auditor & registrar charges and dealing charges to empanelled brokers.

MFAC has asked Sebi to retain the slab system of calculating the expense ratio. Under the slab system, mutual funds with a lower asset base are allowed to charge a higher slab-rate while funds with a higher base are mandated to charge a lower expense ratio. So, a fund with asset base lower than Rs 100 crore will be able to charge 2.5% as expense ratio while funds with assets in excess of Rs 700 crore will only be allowed to charge 1.75% as expense ratio. Smaller mutual funds had protested against their larger peers' demand to remove the slab system. MFAC has voted against the proposal to increase the net worth criteria for setting up MF business. The committee has decided to retain minimum capital requirement for starting an asset management company at Rs 10 crore. The proposal to increase capital base of AMCs from Rs 10 crore to Rs 50 crore was first introduced by Sebi committee on 'Review of Eligibility Norm' in 2010 to ward off non-serious players.

The decision to maintain status quo on net-worth requirement will come as a breather to smaller fund houses. Higher capital base would have meant more capital infusion by trustee companies or promoter groups intending to start fund management business.

The committee also expressed concerns over the concentrated exposure of debt funds to NBFC papers. ET, in its February 7 edition, had reported that fund industry has more than Rs 50,000 crore worth of investments in short- and medium-term NBFC issuances.

Source: http://economictimes.indiatimes.com/markets/regulation/you-may-have-to-shell-out-0-55-more-to-buy-mf-units/articleshow/15025211.cms?curpg=2

Not the right time to invest in mid-cap stocks: Sanjay Dongre

Despite volatility and macro-economic headwinds, Sanjay Dongre, senior vice-president and fund manager, UTI Mutual Fund, tells Puneet Wadhwa he has increased exposure to interest rate-sensitive sectors and expects the cement and infrastructure spaces to do well in the medium-term. Edited excerpts:

With the results season kicking off and the coming review of the monetary policy, do you think global cues could play second fiddle to domestic factors for a while?
I think both domestic as well as global factors are equally important from the Indian stock market’s point of view. Domestic factors, such as monetary policy review by the Reserve Bank of India (RBI) and measures to reduce fiscal deficit, will determine extent and timing of growth recovery in the Indian economy.

On the other hand, recessionary conditions in advanced countries may impact the exports growth prospects. Any large scale financial instability in the US/Euro region may lead to financial crisis in the global economy and may impact the risk appetite (risk ‘on’ or risk ‘off’) for capital flows into the country in the short to medium term. It could have large bearing on the growth trajectory of the Indian economy in the medium term.

What are your expectations from the June quarter results season? Do you think inflation, the rupee and crude oil movement can severely dent corporate earnings over the next few quarters?
Earnings for the April-June quarter will not be significantly different from the recent quarters. While the revenue growth is likely to be in double digits, the margin pressure will continue to impact the overall earnings. I expect the earnings growth of the Sensex companies to be in low single digit.

We will continue to see consumption-driven sectors, such as FMCG (fast-moving consumer goods) and pharmaceuticals, do well in the recently concluded quarter, but infrastructure, power, capital goods and oil and gas would continue to struggle. For these sectors to do well, interest rates have to soften more to kick-start the investment cycle in the economy.

Rupee depreciation may benefit the export-oriented sectors like software and pharmaceuticals, while it may impact sectors like capital goods due to net import status. Telecom and infrastructure sectors will also get impacted due to the rupee’s depreciation.

The markets world over have swung between bouts of hope, optimism and pessimism in the first half of the current calendar year. What has been your investment strategy in such an environment? What returns have you been able to generate in the schemes you manage?
In the last six-nine months, it was very evident that interest rates in India have peaked. Crude oil prices have declined 20 per cent from the top and most of the commodities have witnessed a drop of at least 10 per cent in the last six months.

Against the background, we have been following the strategy of reducing the exposure to defensives and have increased exposure to the interest rate-sensitive sectors. This strategy has worked very well in the last six months. Our diversified funds performed very well and have beaten the benchmark indices in the last one year.

Do you think it is a good time to bet on the mid-cap space? Can you suggest a few themes / sectors from this space that could do well, going ahead?
Mid-caps are most vulnerable in high inflation, high interest rates and a slower growth environment. Hence, it may not be a good time to bet on the mid-cap space. Investors can look at this space once RBI cuts interest rates by 100-150 basis points cumulatively.

A lot of news has been flowing in regarding the off-beat sectors like sugar and telecom. Do you think the tide is turning for these sectors? How should investors approach them?
In the sugar sector, production has exceeded demand in the last three years, resulting in accretion to the inventory levels. Hence, sugar prices are unlikely to run away in the short term. With elevated levels of sugar cane prices, the profitability of sugar companies may continue to remain under pressure.

The telecom sector has been undergoing serious challenges and regulatory uncertainty may continue to impact the valuations of the telecom sector. Steep spectrum prices may lead to cost escalation, both on the capex and opex front, thereby impacting the profitability of the sector significantly. However, another 10 per cent fall could make the stocks attractive as most of the negatives would be priced in.

What about the infrastructure sector given the outlook for interest rates?
With expectations of decline in interest rates, going forward, this space looks attractive from a medium-term perspective.

What about the cement, textiles and fertiliser sectors? Are they a good contrarian bet in this environment?
The demand-supply gap may narrow down significantly in the next 18-24 months in the cement sector. Setting up a greenfield capacity is becoming difficult on account of land acquisition, limestone mines and environmental issues. Thus, the cement sector is an attractive opportunity from a medium-term perspective.

Though the rupee depreciation may benefit the textile sector, the slowdown in key markets like the US and European Union may continue to put pressure on the revenue and profit growth of the textile sector.

As regards the fertiliser space, players expect key reforms, especially in the area of urea pricing, which once undertaken, would be beneficial to urea manufacturers.

Source: http://www.business-standard.com/india/news/notright-time-to-invest-in-mid-cap-stocks-sanjay-dongre/480602/

Arbitrage funds fetch better returns than equity, debt schemes

Arbitrage schemes of mutual funds have fetched better returns than equity and debt schemes in the past one year, thanks to smaller asset sizes and algorithmic trading. These funds have given post-tax returns of 9% over the year, compared with 8.4% for debt funds. Value of equity funds fell 4.1%, as per a Crisil study.

Arbitrage funds take advantage of the price difference between cash and futures markets to generate returns. "Arbitrage market does not have many players these days; this factor opens up a lot of scalping opportunities. Also, machine trading is helping funds to scalp higher and sharper returns," said the chief investment officer of a bank-promoted fund house on condition of anonymity.

"All said, arbitrage fund as a category has shrunk in size. Net investment in this category is minuscule. It is not very difficult to outperform, managing small sums of money," the above-quoted CIO said.

The ability of these funds to generate higher returns depends on the volatility in equity markets - the higher the better. Over the past one year, equity markets have been volatile, thereby creating opportunities for such funds with lower assets under management to generate superior returns.

"Arbitrage funds have a low risk-return trade-off and generate moderate returns. Arbitrage opportunities to be exploited depend upon the extent of volatility in the equity market -- the higher the volatility, the higher the returns. During the volatile 2006-2008 period, arbitrage funds gave healthy post-tax returns of 8-9%," said Jiju Vidyadharan, director - funds and fixed income research, Crisil.

As arbitrage funds predominantly invest in equities, they are treated on a par with other equity funds for tax treatment. Risk-averse investors, who shy away from equities owing to high volatility, can look at arbitrage funds as a relatively safer option within equities, the Crisil study said

According to Crisil Research, arbitrage funds can act as an alternative to short-term debt funds as they have generated higher returns in the short-term. During the past three and six months, arbitrage funds gave post-tax returns of 2.38% and 4.28%, respectively, vis-a-vis 1.84% and 3.5% for debt short-term funds and 1.99% and 3.74% for ultra short-term funds.

"The dividend option of arbitrage funds is further lucrative as dividends are tax-free for equity funds, while short-maturity debt funds are subject to dividend distribution tax," Vidyadharan said.

There are 15 funds in India that use arbitrage strategies to generate returns.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/arbitrage-funds-fetch-better-returns-than-equity-debt-schemes/articleshow/15012409.cms