It's been a volatile week for the stock markets, especially the mid and smallcap space. There have been concerns over rising froth in this space on the back of a huge run-up over the past year. A few mutual funds, like ICICI Prudential, the country's second-largest fund house have restricted fresh flows in its mid and smallcap space. In this backdrop, THE WEEK caught up with Anish Tawakley, deputy chief investment officer - equity, ICICI Prudential Mutual Fund, to get his views on how are the markets looking ahead, what should investors do and the sector he remains positive on.
Q. Mid and smallcaps have seen huge inflows over the past year. Now, SEBI has been warning of froth building in that space, AMFI has written a letter urging fund houses to put in more safeguards... ICICI Pru AMC too has stopped taking fresh inflows in these schemes. What's happening?
If you look at our situation, our funds are not amongst the largest in size in the smallcap and midcap space. But we have been saying for the last few months that you should be gradually booking profits from small and midcaps, moving to large caps. We have not been aggressively marketing our smallcap or midcap fund for a fairly long time. So, that was anyway our recommendation, just looking at things fundamentally. The regulator has more data than we have and kind of signalled that they are also concerned.
Q. Are the concerns in the mid and smallcap space related to valuations?
I would know of the issues only on the valuation front. We do feel that after such a large run-up, valuations are not cheap.
You can argue that structurally, things have improved in India, and that's a valid argument. But you actually have to say that, while structurally things may have improved, we are also probably at a cyclical peak in profitability in some cases. When demand picks up, your capacity utilisation improves. You get a peak in profitability. Then new capacity gets added, and capacity utilisation and profitability goes back to normal levels. And what you have to avoid is extrapolating forever, a peak cycle of profitability, and we did feel that in some of the cases that was being done. So it's not just the P/E (price-to-earnings) multiple, you are also looking above mid-cycle profitability.
Q. From here on how do you view the markets from say a 12-month perspective?
The way I think about it is, in markets you have to look at two things. One is P/E multiple and then earnings growth. So, we are not saying that markets are cheap, anywhere. So it's not like we are saying P/E multiples are cheap.
But we do see that the earnings outlook is good. If the earnings outlook is good and if earnings come through, and if you stay invested for the medium term and if the economy does well, you will still get decent returns in equities, particularly in the large cap space.
But earnings have to come through. The case for positive surprises is highest in domestically oriented cyclical sectors. These are capital goods, automobiles, cement and financials, particularly insurance and asset managers, less so banks.
Q. What are the concerns around banks?
About banks, we have been saying for a while that the competitive intensity is very high. The fight for deposits is quite intense. And that restrains your profitability.
Q. Other sectors like automobiles and capital goods that you mentioned, the stocks here have also moved up quite a bit.
We aren't saying valuations are cheap. But, if you look at the automobile sector, and and if you look at the longer term growth, like in a cycle, if the economy does well they have room to continue to deliver volumes and earnings should then follow if the volumes come through. We don't think they are peak cycle volumes in automobiles.
If home-building activity continues, construction activity continues, that is the driver for everything. If construction happens, jobs are created. And then durable goods demand is created. If there is demand for fans or lights or whatever, then there will be somebody who will make them.
So, ultimately, for me, I watch only four variables - cement demand healthy, power demand healthy, home sales to the extent that they are trackable, and automobiles. If these four sales are going on that means the economy is doing well.
Q. How do you look at FMCG? Interestingly, that doesn't figure in the variables that you watch.
My view on FMCG has been that their margins are too high. That's why they are losing market share to what they call local competitors. The best way to see my sector views is in the business cycle fund portfolio, that's where we make top-down sector picks. FMCG has been zero for three years.
Q. What is your view on the technology sector? The sector has gone through a slowdown for a year now.
If you look at IT services, the industry grows between 3 per cent to 5 per cent. Indian companies grew faster because they were gaining market share. When you were 1 per cent of the market, you gained 1 per cent market share, you grew 100 per cent faster than the industry. Now, you are 20 per cent of the market. So that 1 per cent market share gain becomes more difficult. If you have gained that 1 per cent, then you will grow 4-5 per cent faster than the competitors. You just had one year where it was very bad because of COVID and one year where there was a makeup of that. People got excited and they extrapolated too much. We are neutral or slightly cautious about the IT services industry.
The US economy is booming. So I am struggling to understand why IT services are not. What is perhaps also happening is that we are looking at only listed IT companies. But, the Indian IT services industry also includes the captive centres that companies have in India. Those are doing very well. So one should look at the Indian IT services industry overall, and those guys are getting comfortable operating in India. So, while work is still coming to India, some of it is moving from vendors to captive centres.
Q. We have the general elections coming up and a lot of people are expecting the status quo to continue. Is there a near-term concern?
I don't tend to take 10-year views. I think of economic cycles. I don't have any special insight into the elections. But, I do feel that the economic cycle, at least for the next two or three years, is good, irrespective of the elections.
Q. What is your view on interest rates?
I don't see a pressing reason for a cut, because the economy is in decent shape. If the economy weakens, there is enough room to cut. Inflation at 5 per cent is well within the 2-6 per cent band that the RBI is allowed to operate in. So, it's not a problem. I don't see growth being a huge problem. So, I don't expect big changes at least on the interest rate front.
