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Invest in these 3 themes of deep value in a poll-bound market: Rahul Chadha, Mirae Asset

Auto, consumer durables look soft for at least next two to three quarters, says Chadha.

ET Now|
Feb 25, 2019, 01.25 PM IST
Rahul Chadha1-Mirae-1200
Consumption would be a multi-year story but near term, it can be soft for the next couple of quarters, says Rahul Chadha, Co-CIO, Mirae Asset Global Investments, in an interview with ET Now. Select PSUs, insurance, corporate banks is where deep value is. Outside that, be selective, says Chadha.

Edited excerpts:

Is the India story getting slightly sour because we are underperforming and earnings are not there and valuations are not that attractive? That clearly means either investors buy potential of earnings recovery or they buy attractive valuations. If both are a miss, then what happens?

India started underperforming from mid Jan onwards, once we had the talk of SP-BSP combine and there were some bit of uncertainty on election outcome. If the ruling party does not come back to power, the next best alternative from what people are predicting here is a third front and that is really not very comforting for markets, for foreign institutional investors and that is why people are taking a wait-and-watch stance.

On the other hand, all these talks of a trade deal breakthrough between China and US with Fed sounding more dovish seem to look much better for China and Korea.

Is it time to re-enter India after the recent bout of underperformance or will you take an overweight stance only after the elections?

If this level of underperformance continues, somewhere the election uncertainty would be baked in the prices. Going into April-May, markets would be pricing in some of the uncertainty on account of elections. Earnings traction has not been that bad if you look at corporate banks. If you look at IT, things are okay. Where the pain point is consumption, or some of the NBFCs, but outside broadly earnings contract, the two-three months of underperformance of India compared to the region should price in this uncertainty on account of elections.

Would you say the worst is behind us or would you say that the index will continue to be range-bound at about 10,100 odd on the lower end and maybe 11,100 on the upper end and we will continue to move around in the 500-1000 odd range?

It would go on for next couple of months. As some of the opinion polls come out as we closer to the elections, we will get a better understanding of the outcome. That is when we will see the breakout. Till then, it is going to be a fairly range-bound market.

You have spoken about how the pickup in the discretionary consumption due to market share gains would be a big beneficiary for the consumption sector as a whole. But then there is that argument about expensive valuations. Are you comfortable about buying into consumption?

There is selective buying in that space. We have seen some of the fast food restaurants do well. We have seen names like Titan do well where it is more of a market share gain story. What has taken a breather here is autos and that can attribute a part of it to the financing crunch which happened. You can attribute it partly to the consumers going in a shelf for couple of quarters. So one has got to be selective over there. Consumption would be a multi-year story but near term, it can be soft for the next couple of quarters.

What within consumption is going to be soft?

Auto, consumer durables look soft for at least next two to three quarters.

You have to invest the classic way, which is buy today, do not worry about election, do not worry about what will happen to all the macro and the political tensions. What within the portfolio are the classic compounders where you say I am a believer for next five years?

Look for businesses which are attractive from a three-five year perspective. Some of the corporate banks post the management changes, post the NPA recognition look fairly attractive from a risk-reward basis. What looks attractive is some of the life insurance names. These names have underperformed. If one takes a three-year view, there is room to go for protection business to grow. PSUs are selectively very attractive here.

What has happened is that the central ETF thing has done more harm than good to the sector. Government has met its divestment targets, but the stock has been hammered because the arbitrage just comes and plays in these stocks. It creates great value from a long-term investor perspective. Select PSUs, insurance, corporate banks is where deep value is. Outside that, it becomes very selective like the Titan example we gave. Some of the other consumption names look attractive basically.

What is your understanding of the NBFC liquidity situation –a) for NBFCs and b) for the system at large? Is there a time-bomb ticking or are there liquidity issues which have been sorted out and now it is back to normal which are dependent on NBFC funding?

It would take a couple of quarters to sort out because slowly some of the mutual funds, some of the private banks cut back on liquidity to NBFCs though the central bank has clearly come out and said that they are going to prevent any systemic crisis. In near term, liquidity gets impacted overall. One would be surprised to see if any of these NBFCs grow beyond 10-15%, leave one or two aside, but broadly the system would be flat or de-grow and that is where consumption also gets impacted because a lot of these guys were aggressive lenders.

You have mentioned that there are some economy-oriented companies which are available at attractive prices besides corporate banks which is the consensus trade on the street. What else do you find of interest?

Selectively, cement may be considered, as this sector has underperformed. We have seen one of the large industry players care more about market share than pricing. Those things should change in the coming quarters. Demand has held on very wall and the worst of the cost pressures are behind us.

From an industrial recovery perspective, cement should do well. There is a big government focus on rural housing. Urban housing is very attractive again because the liquidity issues did not pick up, but hopefully they would do well with the GST rate normalisation. Outside that, domestic cyclicals again should pick up but election outcome is a big variable out there.

What about what is going on with China, do you think that there is some sort of merit in the metals sector or do you believe that given the kind of volatility that we are seeing globally you would be a little bit sceptical on this space?

China is selectively giving credit in the economy. If things get slow, they open credit taps but at the same time, the broad policy is more towards deleveraging, controlling the credit growth, controlling their FAI growth in the economy.

Globally one is not sure where the economic cycle peaks. It is early 2020 and so there is value in metals. But it is really the uncertainty which would keep investors away from the space. One would rather pick the banks over metals, one would rather pick something like a cement over metals to play the recovery.

Where are you getting slightly disenchanted with the earnings?

In consumption, one saw a good set of earnings last year in June quarter but things got fairly slow in the festival season post demonetisation. GST never really managed to kick off because one had the NBFC crisis around that time. So that has been the disappointment. Normally you need two, three years of good strong growth and that has not happened in the last regime.

Indian companies always enjoyed a premium for excellent corporate governance and that why foreign investors were ready to pay a top dollar premium to buy Indian companies. But when you see episodes like in Sun Pharma, Essel Group of Companies, when question marks have been raised about the debt servicing of Adani Goup, it just makes you wonder that are Indian companies or stocks worth that price because you are buying gold at the price of gold?

You are absolutely right. This is the question our investors ask us look you have always kind of highlighted the corporate governance of India and that is why you have got the top private sector banks in India trading at 3-3.5 times book. So that is where high standards have to be maintained.

The changes in private sector banks helped but clearly all those group names which you mentioned get asked by investors time and again and look where this is going.

Hopefully, these are changes which happened for better but India enjoys a significant premium over rest of the region and that premium comes because of high quality governance. We hope that high-quality governance is maintained or else, stocks would get derated. Whether it is on a macro front or on a micro front, if we do not keep up the high standards again markets are ruthless.

Are you a contra buyer in the telecom space or are you worried with the latest data that shows Reliance Jio has beaten incumbents with 30% revenue market share. Idea-Vodafone merger has taken place now. Do they stand a chance?

From next five, 10-year perspective, hopefully there is less pressure in the telecom space.

Are markets factoring in the election cycle? Do you think at the current level a) markets are betting on a return of current administration; b) that the current administration comes back with outside support; or c) a change of government?

What the market is pricing in today is the second scenario where the current government comes back with fewer seats and with outside support. Markets are not pricing in a change in government. First of all, that pain would be reflected in rupee which can easily depreciate by 5% if we have a third front government. Your second scenario is more likely priced in at today’s level.

How exactly are you preparing your portfolio to deal with the election volatility? Would you be looking at raising cash or buying puts or going short?

I would look at exporters -- 20-25% of the portfolio. One is still predisposed towards largecaps at this point of time and though select midcaps, small caps are attractive, but one is not looking to increase positions significantly to that in the run up to the elections. So it is more largecaps, strong companies which can withstand two, three years of volatility should the government not be voted back to power.

Also Read

If govt shies away from tough decisions, market may go down from here: Rahul Chadha, Mirae Asset

We like pharma selectively, hospitals offer deep value: Rahul Chadha, Mirae Asset

Incremental flows to go into real estate, corporate banks and telecom: Rahul Chadha, Mirae Asset

Bullish on India recovery, Mirae’s Rahul Chadha bets contra on this sector

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