Where to pull out money from & where to deploy it? Pankaj Murarka answers

“There could be some delay of a few quarters here and there but beyond that, I do see a risk to the investment cycle this time around,” says Pankaj Murarka, CIO, Renaissance Investment Managers Limited.

Have you been a buyer at all in the recent correction in the markets?
We generally tend to remain fully invested; not that we are sitting on too much cash but yes we are certainly looking for opportunity in this market and make some portfolio adjustments. Any dislocation that is caused by macroeconomic factors or geopolitical issues like the one we are witnessing, is always a great time and a great opportunity for long-term investors like us because it gives us an opportunity to buy into some of these high quality businesses at prices lower than at what they would have been otherwise available.

We have seen some fairly good or healthy corrections across the market and even in some good quality names. I do feel excited about markets and we find a lot of good opportunities.

That is quite interesting and tricky at the same time considering that you are pretty much fully invested in the market. The question is of a balancing act. Where have you been pulling money out from and where are you deploying next?
We have essentially been somewhat cautious to underweight on a lot of staple names where valuations are extremely rich and that has been the case for some time now. We have been taking money off them for a while now. And in terms incremental investments, we are very excited about India’s investment cycle. So, essentially, we have been gearing our portfolios towards engineering and capital goods names because there are the concrete signs of revival in the investment cycle on the ground and there is significant thrust on the government as well which was visible in these Budget announcements as well.

More importantly, after a very long time, we are seeing a revival in private sector capex. My firm belief is that over the next three to five years, we will see a sharp recovery in India’s investment cycle which otherwise has been missing for almost the last 10 years. Some of these companies are available at valuations which are very reasonable and more importantly, there is significant operating leverage that exists in these companies because they have not witnessed growth for almost 10 years.

As growth sets in these companies, probably we will see a profitable opportunity far higher in their revenue growth because the operating leverage that sets in their P&L is the one which we have started liking. Apart from that, while we have been positive on the internet sector, we have stayed away incrementally from that sector for the last almost a year or so because we thought things were getting a bit out of hand in terms of valuations and a fair degree of frenzy was building into that.

But after a sharp correction in that sector over the last three-four months, again we find some good investment opportunities there. So, the internet is another sector which we firmly believe is a sector which can do a 25-30% growth over the next 10 years in India and good companies there could deliver very healthy returns to investors. So that is another sector where we have started investing in.

While there is reason to be optimistic about the investment cycle and earnings should recover, the early indicator is always capacity utilisation and credit offtake. If both are not picking up, could we be in for more disappointment on some of the cyclicals and industrials?
My view is that things can get delayed by a few quarters but I do not see that the cycle will get delayed beyond that. Secondly, credit is always a lagged indicator of revival in the investment cycle because credit pick up will happen when companies start drawing down their credit limits when the execution starts on the ground and that will always happen after a gap of time.

What is encouraging is companies in the core sectors have seen phenomenal profits. Their cash flows over the last 18 months have been the highest they have ever witnessed in their lives. More importantly, these companies’ leverage is significantly low or moderate now because they have used these cash flows to retire debt or improve their balance sheet quality. Now, they are sitting on very strong balance sheets. They have a lot of cash on their balance sheet and they are seeing that over the next 18 to 24 months their existing capacities will be fully utilised which effectively means they have to start planning for capacities now, because in a large industries commodities will take three to five years to bring capacities to work.

My view is that there could be some delay of a few quarters here and there but beyond that, I do see a risk to the investment cycle this time around.