Sunil Subramaniam on 4 ways Sundaram Mutual changed stance in last 6 months
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Synopsis
“In midcaps, because of the cyclicality, the high operating and financial leverage, this is the first year of recovery that we are seeing in a way. Those midcap companies which are going to build off the domestic economic growth, are going to post higher EPS growth in the coming years. That apart, we continue to be strongly overweight on industrials and capital goods and banks.”
No, some amount but I would say that it is more about the trend in future yields rather than the absolute level of the yields. Why I say this is, interest rates have been high in the US for quite some time and from April onwards we have seen while emerging market flows have been under pressure precisely because of the yields, India had been receiving flows despite the higher yields. So, it is a trend line that matters because for India more than yields it is the oil price trend that is more critical.
As far as FIIs oriented towards India are concerned, the higher yields in the US have more or less been factored in. It is the oil price trend which affects India's fiscal as well as inflation and a whole host of EPSes of companies that is far more of a concern and that is why the rising oil price is probably a higher risk factor in terms of flows as compared to yields.
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Not at all, because this one-year forward PE as a measure, it is something that asset allocators look at. So, if there is somebody who has got a pot of money and says, how much I put large and mid, how much in small, he looks at these valuations to decide his asset allocation. But a fund manager who is doing bottom-up stock picking, when he is picking a stock, he is looking at a three- to five-year forward PE for that stock, discounting those cash flows to the present from net PV, NPV perspective, and see whether today's price makes sense.
So, in midcaps, because of the cyclicality, the high operating and financial leverage, this is the first year of recovery that we are seeing in a way. In that context, those midcap companies which are going to build off the domestic economic growth, are going to post higher EPS growth in the coming years. When you factor those in, many midcap stocks look reasonably valued today to buy from that perspective.
So, fund managers would continue to buy those even though one-year forward PEs may look rich there. So, to that extent, we are in a cyclical story. During 2003-2008, we had a similar phase. The capex cycle in India is yet to kick off. It is only the government that has been holding up capex. Private sector capex is in announcement stage, but over the next 12-18 months has to come into play and the midcap segments will benefit from a strong rise. Even a 10% rise in their top line will lead to 25-30% rise in their EPS, because of high interest and high depreciation costs. I would say that the quality of the stock is the concern.
Stocks Recommendations
One of the key things for us is that we have had a change in stance. We had gone underweight on cement a few months ago because of valuations and not because of demand concerns.
At one point but we went through a phase where we were underweight there and we are back to being neutral to overweight on cement, so that is one big change in stance.
The second stance is that we were heavily underweight in pharma; we moved that to neutral because we see a lot of selective stocks that we can buy there.
The new-age fintechs are the spaces where we feel that the Indian economy's growth is going to be well represented. That apart, industrials and capital goods continue to be strongly overweight for us and for all the things around banking, we feel that banking still has enough juice to be a safety plus kind of a sector. So, we continue to be overweight in the banking sector.