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Sensex will gain over 30% in three years: Sunil Singhania, Reliance Mutual Fund - The E

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Mon, Jul 04, 2011 | Updated 01.24PM IST

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4 JUL, 2011, 01.03PM IST,ET NOW

Sensex will gain over 30% in three years: Sunil Singhania, Reliance Mutual Fund

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ET Now caught up with Sunil Singhania, Head-Equities, Reliance Mutual Fund, for his views on the current market scenario and his investment strategy . Excerpts:

How would you characterise the recent market strength? In last three days Indian markets have added about 700 points on the Sensex. Do you think the Indian markets have bottomed out for the year?

You have to look at in perspective. I think what has happened over the last six months, there has been obviously a slew of challenging news flow both domestic as well as global. One interesting thing was that whenever you used to meet anyone, everyone was unanimously talking about the same negatives and that was basically the reason why we had a view that most of the negatives were factored into the market prices.

As soon as there is some positive news flow, all the apprehensive prospective investors sitting on the sidelines just want to come in at the same time. That is what you have seen over the last one week. So you had slight positive news flow in terms of some reforms by the government in terms of increasing prices of a few petro products. It also got helped by the fact that there was a sharp cool off at least on the crude prices and you had those front-seaters who are bullish long term India, wanting to get into India immediately.

So do you see 5200-5250 acting as a solid base for the Indian markets?

What we have seen in this market is that there have been three-four instances when the markets have corrected to those levels and the markets have been written off and there will be a lot of gloom and doom and the markets have bounced back from those levels for whatever reasons. That level now acts as a solid level to attract long-term money.

So our view would be that at that level there would be more than willing investors who would be willing to commit long-term money. Also, there are not too many sellers because of the caution and because of the apprehension the markets have been seeing over the last few months. So it is a combination of more buyers emerging at those levels and there are sellers.

Are you also a buyer at current levels?

We are very positive from a longer-term perspective in India. Our view might be biased because we are based in India, but if the economy has to grow five times or four times from these levels over the next 8-10 years, our view is very clear that short-term challenges like what we have seen in the recent past will continue, but eventually you will have the markets which will sort of mimic the growth in the economy and we would be always looking at adding to long-term positions in India.

But why are you bullish at a time when the economy is slowing down, GDP growth rate has slowed down and earnings also, if I look at the most optimistic forecast also for this year and for next year, are about 15% plus?

One thing is that sometimes it makes sense to slow down and probably that is a time right now. We need to slow down a little bit because there was some sort of pressure led by increased demand on the inflation numbers. When we talk about India slowing down, we are talking about India growing at 7% or 7.5% vis-a-vis 8% or 8.5%. In no stretch of imagination can 7%-7.5% be a bad rate of growth. Also, an earnings growth of 15% vis-a-vis the 18% or 20% is obviously a little bit of a slowdown, but it is not bad in a challenging scenario.

We have seen in the past India takes three forward steps and one step backward, but ultimately over a five year cycle we have seen India growing at upwards of 8%. So our view is that this also is that kind of a scenario where probably slight slowdown might eventually be very good from a longer-term perspective and in fact more than India slowing down we would be very fortunate if the global economy outlook also remains to be much more benign and that would ensure that commodities including crude will continue to be having a soft bias.

Would you bet on anti-commodity trade or it is too early to bet on that? When I say anti-commodity would you like to buy consumers of commodities?

There is always a trade which you keep on evaluating. From our perspective what we have tried to do and doing it very diligently right now is to see which companies have survived or to some extent maintain their profitability despite rise in their raw material cost. There are a few instances where the companies have been able to pass on and now if you have a scenario where the raw material cost might reduce, there is that possibility that some part of that reduction might be retained by the company.

So we are continuously evaluating and it would be a good trade to bet on companies which are big consumers of some of these commodities where they have been able to pass on the rise in the commodities and where there is a possibility that input cost might reduce. I think it can be a really good trade, if it works out.

If I look at your declared portfolio you hardly have any commodity stocks. Jindals and Reliance only two commodity stocks?

We have our fair bit of commodity stocks, but we typically like to bet on stocks even in that sector which have sustainable earnings model. So companies which have backward integration in terms of their raw material supply, less volatility in terms of earnings, we have commodity stock which also rise into power so that gives it some stability as far as earnings is concerned. So depending on what outlook is from fund to fund, we have had varied allocation to a few commodity stocks.

Why are you so bullish on banks and if I look at your top two holdings, holding number one is BoB (Bank of Baroda), holding number two is ICICI Bank?

One is, obviously except for the last six months, banks have been doing very-very well. Now if you look at an emerging economy like India, typically the financial

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Sensex will gain over 30% in three years: Sunil Singhania, Reliance Mutual Fund - The E

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sector tends to grow at 1.5 times nominal growth of the economy. So if you are banking on 8% real growth and a 12% nominal growth, our estimate is that the banking sector can grow at upwards of 18% per annum that means that banks' balance sheet, top line and bottom line can double in every four years.

It is a large sector, it is a sector which has got huge potential. We are one of the most under-banked economies in the world. We are an economy where the loans which the retailers have taken are much less than the global average. That is a potential area. There also we are an economy where we still to scratch the surface as far as allied financial services are concerned. So whether it is wealth management, mutual funds, credit cards, there is huge potential in all the segments. Even on the corporate side most of the companies have big expansion plans. I think it is a country which will need channelisation of huge savings, channelisation of huge capital and it is a very-very steady sector.

The bank quality of the assets is much better than what they used to be, say, 7-8-10 years back. The way they work, the computerisation, the staff, everything has improved significantly. So notwithstanding the near-term headwinds, which will always be there because when you lend you should always be prepared for some advances going bad, but despite that this is one sector which has potential of delivering steady profit growth and as a result of which steady stock returns.

But within the banking space your two large holdings are Bank of Baroda and State Bank of India , the bias clearly is in favour of PSU banks and PSU banks they normally tend to underperform a) in a rising interest rate scenario, b) if interest rates they move up NPA or the book quality could also deteriorate?

I think that was true to a greater extent few years back. Right now the quality, as I said, obviously there will be some advantages which a private sector bank will

have over a public sector bank, but then valuations will also play a role. So we have our fair share of private banks, but obviously valuations will take a precedence and our top holding has been the best performing banking stock over one year, two years, five years, 10 years despite it being a public sector bank. So at a

valuation you will have to take that call and we continue to be positive on both the segments of banking whether it is a public sector and private sector banks. I think

it is the valuation at which they trade which will determine whether we are overweight on one segment versus other.

You currently have a large exposure to pharma and a call which has worked very well for you. When market conditions are choppy, pharma stocks always tend to outperform. Now that market conditions are looking stable and safe, do you think pharma stocks could underperform?

The characteristic of the Indian pharma industry has changed quite significantly. 10 years back, 15 years back, India pharma companies were trying to make a mark in the global market and they were investing a lot of money. I think that investments and that effort have started to bear fruit. As we speak a lot of the large Indian pharma companies now have operations running into millions of dollars from their overseas subsidiaries. The characteristics have changed.

Also, the Indian domestic pharma industry has been growing at upwards of 15%-17% which is much faster than any FMCG, whether it soaps or detergents or shampoos. So, both domestically as well as globally, there is an increasing possibility of faster growth for Indian pharma companies.

The global multinational pharma companies are also realising the expertise and the benefits of allying with the Indian pharma companies and we have seen large companies like Glaxo, Pfizer and so on tie up with Indian pharma companies to source their requirements. There are multiple opportunities, stocks are not as cheap as they were, but given their growth potential over the next three-four years, I think this is a sector which cannot be ignored.

So you are in no hurry to cut your exposure to pharma stocks?

Definitely not.

You would like to maintain a weightage of about 10% to 11%?

Right now I would not give you the percentage weightage, but right now there is no sort of view that we need to cut.

You have exposure to autos, but within the auto space you own Maruti and Mahindra & Mahindra. No two wheelers?

That is a call again that depends on the valuation.

But what prompted that call?

See it is a call which you have to take at that point of time. So obviously if you want to play one segment versus the other the intensity of competition which unfortunately is also coming up in the four wheeler side, but there are obviously some parameters which go into it.

Construction stocks and that call clearly has not worked for you, are you still overweight on constructions stocks?

We have a small exposure to construction stocks.

You have reduced your exposure to construction stocks?

To some extent we have reduced and to some extent because of the price performance they have got automatically reduced. But having said that this is one segment which has a lot of potential. Unfortunately because it is a segment which depends on government push for execution, which also depends to some extent or which has been perceived to be a segment which does not have like AAA balance sheet or a AAA corporate governance structure because of the nature of the business, the stocks have got hit much more than warranted. But at the same time what the market would like is some kind of execution push for the sector.

As and when that push comes probably a few of those stocks or a few of those companies would tend to be very interesting plays because we have seen in the past

like from 2004 to 2008 a lot of these constructions companies nearly increased their sales by as much as 10 times because the size of the opportunity was so huge.

I think that size of the opportunity continues, but the push has been missing in the last two years. So if the market starts to see that the push has returned on a sustainable basis, it is possible that a few of these stocks might again see that kind of growth trajectory.

There are about 300 listed construction stocks. Within the construction space what do you like? Do you like pure builders, do you like construction companies which are asset owners or do you like construction companies which are asset owners and they also generate power and they build roads?

There will be opportunities in all the sub segments as you have said, but right now the mood of the market is to reward companies which focus on return on equity

and whether you create your own power plant or whether you create your port or you develop roads

what the market and the shareholders would be interested in

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is that if you have Rs.100 taken from me, whether you are generating Rs.15 profit out of it, Rs.20 profit out of it or only Rs.5 out of it. So if you are generating more than what I can make on my own. probably the markets will reward. Only asset gathering is not going to help the way it was earlier. Only net asset value is not going to help the way it was earlier. I think people want to look at sustainable earnings trajectory.

But your largest holding there a JP Associates which is an asset owner?

I do not want to discuss individual stocks, but as I said there is definitely one class where there were only asset owners, now there is a class of companies which

have created those assets and those assets have started to yield returns. So as I said once the market and the investor start to get a feeling that the return on the

investments which have gone behind the assets are decent enough, I am very sure that the stocks will get re-rated.

Why stocks like Nestle, Titan, Jubilant Foodworks trading at PE multiples of 40 plus?

It will be unfair for me to say that they are over valued or under valued or fairly valued, but probably I can give you the reasons why that has happened. One is, it is very easy to make an investment case in a country which has 1.2 billion people. So you can always say that if you are having 5 gms of sweets or chocolates in a year, this can easily become 20 gm per capita which is four times. So it is very easy to justify. Second, these companies are very good return generator.

So they are safe in the sense of ROE, ROC. There has been no negative news flow with the sector because these are sectors which are independent of government decisions, which are independent of capital intensity, capital investments, they never figure any so-called scams or anything. So one you had safe sectors in the sense that it is perceivably in some of these companies will really really probably become 10 times your size.

Some companies might falter, but some of these well-managed companies will becomes 10 times of their size and with such a huge population with growing income,

a few of these companies would obviously become much larger and so the investors, who have that long-term vision, are right in taking a call. At the same time

because the opportunities in alternative sectors have been missing or have been sort of avoided because of the risk involved, a lot of money has also gone into the sector. So I think it is a combination of some potential, some hope, and some lack of alternative opportunities.

In 2003, at Reliance Mutual Fund your big call was to buy JSPL, in 2006 your big call was to buy pharma stocks. What is your big call for the year 2011 and beyond?

I hope I would have got the big call right in 2009, would have been a much happier person. But I think very clearly when we see the balance sheets of companies and all the balance sheets have started coming in as a fund house a lot of focus goes into analysing balance sheets, we are seeing some very well-managed companies that really make themselves more and more efficient because of what happened in 2009 and 2010. Right now it is not getting translated into profit because the top line has not grown due to lack of capital expenditure or lack of asset creation.

Because of nature of business what you like, I also read the same balance sheets but I cannot figure out which is good and which is bad?

That is why you are interviewing, I am sitting here taking all the questions. I hope I was at that side and asking you all the questions, but having said that there are like engineering companies so we really transform them. I think the capability of Indian companies has improved significantly. As I said capability of Indian pharma companies in going much beyond just making the bear API or the bull drug are two actually launching formulations globally that has changed. Even in technology companies rather than just being back office, a lot of these companies are transforming themselves into going into more productive and intellectual.

So look at companies which are moving up value chain whether they are from the IT space or whether they are from the pharma space?

Right, what will happen is that suddenly you will start to see that one, the scale of the company can change quite dramatically and the return which they can generate because of high profitability can change very-very dramatically.

Why have you added Bharti in your portfolio, do you think the worst is over for telecom stocks?

Again I cannot discuss individual stocks.

But for telecom per se?

See telecom is a sector I think we are very-very positive. Obviously the intensity of competition in India is highest ever in the world where you have six-seven players fighting for the same customer, but beyond a point you already are paying about 40 paisa for a minute of phone call which is again the cheapest anywhere in the world. I have a 13-year-old son and I can see using data and playing games and using all sorts of communication devices.

I think we are going to move towards that. So whether it is voice or data, I think the potential of the sector is huge. Obviously that is not to say that everything is fine and absolutely perfect for the sector, the capital intensity remains. At the same time you have to keep a close eye on because there will be few companies will get over this capital intensity and those would be the companies would can be good plays over the longer term.

Why are your funds underperforming? Is Sunil Singhania losing his touch? You have been a brilliant fund manager and you still are a brilliant fund manager.

There are always times when you take some calls. We have been more value focused with obviously keeping growth also in mind that we tend to invest in companies which can probably double their size in 3 to 4 years and double their profitability in 3 or 4 years, but at the same time, we tend to be a little bit more careful about the value we play and that definitely impacts us in the short term.

It impacted us during the telecom boom. Also though I was not here, but it impacted a lot of funds during that time. But eventually if you maintain your discipline, if you maintain your philosophy, we are very sure that we will get over the humps and to the credit of our peer group, a few of them have really done well. So kudos to them.

But you are confident you will bounce back.

We are optimistic and we are very sure that the team we have, the processes which we have, the portfolio which we have which is open to public scrutiny, everything is fine. What we need is a little bit of luck moving our way.

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Sensex will gain over 30% in three years: Sunil Singhania, Reliance Mutual Fund - The E

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So if I look at your open portfolio, your top 3 holdings are ICICI Bank , Bank of Baroda and Lupin along with Reliance Industries , interesting position there. Do you see your top holding changing in near future?

That is a continuous process and that is what we have

They have not changed at all in last 6 months.

They might have the top holding, I am not very sure of the exact month to month comparison of the top holdings, but as long as you are comfortable with your stocks, we are not compulsive churners and in fact as far as growth fund is concerned, probably the churn ratio is among the lowest in the industry. We have a clear buy and hold strategy.

We would like to invest in stocks where we feel that the profit can double in a 3 to 4 years' perspective, specifically in our midcap exposure, and that has been our focus and we are very sure that with the portfolio we have and with our view that the economy is showing signs of again moving into that 8% plus trajectory after a lag of say a quarter or two. These are the stocks which would tend to catch up with what they have underperformed over the last one year.

Would you bang the table and predict that Sensex will be at least 30% higher from current levels in next 3 years?

30% per year or total?

No, total.

That is a very modest target.

So what is your target?

We are very clear. As a country, it has to grow at 12% on a nominal basis and if you add even 3-4% as the corporate India's outperformance over that, so you should easily look at mid-teen returns over a period of time and if you have that rule of 70, which is 70 divided by 15, you should logically see at least much more than your target return.

Last year 3 years, fixed deposits have managed to beat equities. Next 3 years, do you think equities will beat fixed deposits?

My personal view and which I do not know whether it is our fixed income, I am sure that they also share this view, we feel that we are seeing the peak as far as fixed deposit rates are concerned right now and our call would be that investors who are looking at investing in fixed income probably the FMPs right now, offer you the best option because 9.5% on a sustained basis if everyone starts to make lazy money, then there will be no incentive for anyone to do work in this country.

Other thing is that at these levels we are already seeing a demand for credit slowdown quite significantly. On the contrary because the rates are high, the banks are flushed with deposits. So the demand supply itself will mean that the banks will on their own start cutting the fixed deposit rates, but probably it is a good time for a debt investor to lock in long dated money now.

So what is the way forward for equity investors, still stick to the SIP route or this is a time when you should be investing disproportionately higher in equities?

Last 3 years if you see, 2008 to 2011 as a country, the individual household saving would be roughly $750 billion. Nothing of it has come into the equity markets. So the under ownership of equity in every Indian household has already fallen to a very low level. So for those investors who are significantly underinvested equity, probably they should look at correcting that underweight position over the next 2-3 months.

You are absolutely certain about that?

No one can be certain, but there are always a little bit of risk you have to take when you are investing. But at this point of time our call would be that the risk reward ratio is in favour of investing in equities.

Really on a lighter vein Gordon Gekko said that every man on Wall Street has a number, so do you have a number in your mind, not for your wealth but for your NAV?

I do not know. The NAV is obviously a very frightening number, but hopefully if the markets were to grow at more than 30% over the next 3 years, our NAV should definitely grow higher than that. That should be our endeavour.

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