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We are getting more pro-cyclical, looking at midcaps and smallcaps: Pankaj Murarka

We believe that India’s growth will revert to mean growth of 6-6.5% in four quarters.

ET Now|
Nov 22, 2019, 03.32 PM IST
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We will see money flowing into midcaps and small caps and there is a very high degree of pessimism in that space which effectively means that investors who have put in money in that space at this point of time will certainly make handsome returns over the next two to three years, says Pankaj Murarka, Founder, Renaissance Investment Managers. Excerpts from an interview with ETNOW.

What do you think the market is focussing on? Is it the economic slowdown? Is it the government reforms?
The GDP numbers that will come out are more of a foregone conclusion because all of us know that the second quarter GDP growth is going to be much worse than the first quarter and growth has been at a cyclical low. Markets are forward looking animals and markets are looking at initiatives that can help revive growth over the medium to long term.

We have had few announcements from the government in terms of the strategic divestments that they are doing. The market is looking at some concerns around slippages, given that we have had a huge tax cut that the government has given out. Markets want some assurance that the government will be able to meet its fiscal deficit targets on very close to the range.

Those are the primary things that the market is looking forward to. Having said that, the base expectation in the market is that the second quarter GDP growth should probably be the trough and now growth should improve from this quarter onwards. Markets is looking at revival in growth and studying every data point very closely to figure out or conform to the thesis that growth is there.

Autos are literally the poster boys of the slowdown in Indian consumption. Is it simply cyclicality that is affecting autos or is it a structural issue. It is going to take a bit of time before autos can rebound?
There is not much of a structural issue with the industry as a whole. While technology shift to EVs and so on will happen gradually. I do not see that as much of a concern. What has really impacted the industry is both very deep industrial slowdown that is manifested across industries in India and which is visible as growth has fallen to sub 5%. At the same time, there has been a significant hit on consumer confidence as well.

Some of the basic consumer staples category like biscuits and toothpastes are seeing degrowth or very sluggish growth in consumption categories which are daily necessities. For something like a discretionary, consumer, autos or a passenger vehicle, the slowdown will be very much justified. There are more issues as growth recovers and as we see revival of consumer confidence and business confidence, I think growth will come back.

In fact, we are getting more procyclical in our whole approach to portfolio. So far, we have stayed away from cyclicals but given the fact that the growth is two standard deviation below normal, we believe that India’s growth will revert to mean growth or something like 6-6.5% probably in four quarters’ time. Some of these sectors including autos is looking pretty attractive from a medium term perspective.

Do you think that privatisation magic can work its wonders on BPCL, Shipping Corp another divestment candidates too?
India desperately needs to do strategic divestment. Hindustan Zinc was divested sometime in 2003 or 2004. We have not done anything meaningful on that count in the last 10 years. Strategic divestment was part of the agenda of this government in their first term. Today we are at a crossroads where government revenues are significantly undershooting their budget estimates and the only way to generate those revenues is through the sale of government assets. It works both ways because the same assets are very valuable when you are talking about something like a BPCL, which is 30% odd market share in all marketing or a Concor which is something like a 65% market share in container transportation. These are extremely valuable assets and in the hands of private sector they will be much more valuable.

We seriously need to do this on a very concerted basis and it is not about doing it one time. It has to be a continuous programme but over the next five years or seven years, the government needs to monetise these assets and probably use these resources for meeting our developmental goals because that is what the job of the government is to make sure that they meet the development needs of the country and not run businesses.

What are the sectors you are watching out for? We just had the second quarter numbers. It was a bit of a mixed bag. Anything that stood out for you?
A significant amount of numbers were really bad. They were awful to say the least. We have had de-growth at the PBT level. There has been sales de-growth across Nifty companies on an aggregate basis. The PAT growth is more because of the tax cuts and companies were accounted for that.

But otherwise, there has been a de-growth at the PBT level on the aggregate basis. So that clearly is the reflection of the slowdown that is manifested in the economy. Having said that, we are looking more constructively at the cyclical sector, we are getting more pro-cyclicals in our approach to the portfolio because we are taking the view that the economy has slowed down significantly, but we will mean revert over the next four to six quarters and a lot of these stocks across sectors like autos and industrials will go up. We find some good opportunities there.

We also like healthcare as a sector because that has been on a downward spiral for almost four years. Our view is that earnings in the sector are clearly troughing out and this is a base year and from next year onward the sector will get back to growth trajectory. We find the valuations pretty reasonable there in the context of the growth that some of these companies can deliver over the medium to long term.

What would you make of this mid and smallcap rally that we have also seen? Do you think now is when we will see a nice recovery and there should be a good amount of ownership by retail investors in these names?
Two points here; one, obviously it has been extremely painful. We have seen smallcap stocks fall 60-70-80%, in some cases even 90%. But the point I want to highlight is that is the nature of the beast. This is how the cycles play out every time. Midcaps and smallcaps, because they tend to be illiquid, when they fall, they fall pretty sharply. This happens every five years.

Having said that, what does one do from here on or how does it play out? We have reached a point where we see significant value in a lot of midcaps and smallcaps and we find a lot of midcap or smallcap stocks available at attractive valuations. We are clearly looking at that space and probably we are increasing our exposure to that.

As far as retail HNI participation is concerned, the risk appetite has completely gone out. They will take a while to come back into the midcaps and smallcaps because they have burnt their fingers pretty badly. But institutions will step in and we are already seeing some signs of institutional participation. We will see money flowing into midcaps and small caps and there is a very high degree of pessimism in that space which effectively means that investors who have put in money in that space at this point of time will certainly make handsome returns over the next two to three years.

Also Read

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