interview prashant jain with cnbc oct10

8/8/2019 Interview Prashant Jain With CNBC Oct10

1/9

The Indian stock markets have been on a heady upswing throughout September and October. Sadly,

domestic investors and institutional investors have not been able to participate as they havent had too

much by way of inflows. But most of the frontline mutual funds, hit all time high NAVs much before the

stock market itself reflected an upsurge.

Does that mean that fund houses are positive the market upswing would continue? In an interview with

CNBC-TV18's Udayan Mukherjee, Prashant Jain of HDFC Mutual Fund said the market indices this time

around were fairly valued as compared to the high PE multiples three years ago when the markets last hit

20,000. I dont think the index valuations are stretched, it is certainly true that index is not cheap but I

dont think it is stretched at a broader level. I think we are as close to fair value as one can be, he said.Jain added that a global crisis right now should not cause the Indian markets to correct too deeply. The

only negative that could see the Indian market spiral would be a spike in oil prices he said.

Here is a verbatim transcript of the interview.

Q: All your NAVs for equity products are at all time highs, do you think the market deserves to be

at an all time high?

A: I think so, to put things in perspective last time the index crossed 20,000 was in December 2007 and

its almost 3 years since then and lot of growth has taken place in these 3 years. The economy is doing

fairly well. The companies are doing quite well so the PE multiples have moderated significantly

compared to last time the index was at 20,000. So I would say the index is fairly valued at these levels.Q: Are you comfortable with valuations for the index or do you think it is stretched? A: I dont think the index valuations are stretched, it is certainly true that index is not cheap but I dont

think it is stretched at a broader level. I think we are as close to fair value as one can be.Q: Any apprehension that earnings might start to fall off over the next year or two which might

make the market look expensive in hindsight?A: We may be disappointed or may be surprised big time by the global cyclicals but that is a function of

how global commodity prices move. If you look at the non cyclical sectors, may be consumer stocks are a

little expensive but then given the quality and sustainability of businesses I think it would still make sense

to hold on to them with 2 3 year view but other than that I dont really see much excesses in the market

place.Q: Has it been a difficult market to be a fund manager in; given the kind of very polarised

performances that you had between sectors?


2/9

A: This time around, at least at our company, the experience has been much better and we have faired

better than in 2007. I think unlike 2007, the markets have been clearly respecting quality and cash flows

in the last two years and that is what suits our style and therefore its been a good market.

Q: So you think stocks prices have actually moved in sync with fundamentals much more than the

last time we went to 20,000?A: I think so yes, definitely.Q: So the sectors that have underperformed deserve to be underperformers?A: I would say so.Q: Do you find pockets of very frothy valuations in any part of the index in any of the sectors? A: No, we dont find very frothy valuations at this point of time anywhere.Q: For the cyclical sectors any sense that any of the cyclical sectors are approaching their peak in

terms of earnings?A: That is very hard to say because we dont know where the cycle is going but if you look at cyclicals

compared to the replacement costs, I do not think there is any great value because most stocks are

trading at reasonable premiums to replacement costs but that can happen in cyclicals for fairly long

periods of time if the cycle keeps on improving and we dont know which way we are going and thats why

we are basically underweight cyclicals and we also feel that if you look at some other sectors like banks

particularly the public sector banks, if you compare them with cyclicals, the risk reward is significantly in

favour of the PSU banks. Not only are the valuations much cheaper but the growth is also more secular,

acyclical and much higher and therefore we continue to prefer these over the cyclicals.Q: So you are actually underweight on names like autos?

A: I dont think auto is a cyclical in the strict sense, so we are not underweight autos. The volume of

growth in this segment should be very good so we have reasonable exposure. What I meant by cyclicals

are sectors like refining, petrochemical, metals and even cement we think is a domestic cyclical.

Q: And global metals?

A: We are underweight global metals, petrochemical, refining and all that.

Q: There is no Reliance in your top 5 in any of the funds so that is an under weight position?


3/9

A: Its a big underweight; basically we think if you compare RIL with other companies you get much better

value in other companies

Q: How long has this underweight position been there in your funds?

A: For the last one year or so.

Q: What is going on with flows? Are you also seeing skittishness in part of the Retail or the HNI

investor?

A: Yes, in fact as an industry we have been seeing significant outflows though we have been fortunate, as

we are seeing significant inflows over the last one year. At a broad level, a lot of money came into funds 3

years back when the Sensex hit 20,000. That money suddenly became half or lost 40% in value and all of

it was not long-term money, it was driven by momentum by spate of IPOs, from mutual funds, etc. I think

it was feeling trapped; that my Rs 10 has become Rs 5-6. Now that the NAVs have crossed those highs

and you are also getting some reasonable return, I think it is natural to expect some redemptions at times

like these. Unfortunately though, the retail investor is 1-2 steps behind the market. So they did not invest

big time when the market was at 3K, 5K, six seven years back. A bulk of the money came in above the

18,000 index three years back and again now we are seeing redemptions. I think its a cycle which

repeats every few years. But I think these outflows will stop at one point of time when investors out there

feel 20,000 this time is not an excess like it was three years back. So I think at some stage this will stop

and we should be getting net inflows but it may take few months.

Q: What will convince them you think - a prolonged period of the market staying above 20,000 or a

dash away from these levels, what do you think gets them back in again?

A: I think it could be either of these two things if markets break decisively away from 20,000, then majority

should get convinced that 20,000 may become the base. Or if markets remain around these levels for

some more periods of time, I would say maybe few months. We have seen similar investor behaviour

even in the past when after a dip whenever market bounces back, at close to earlier peaks, you will see

reasonable redemptions but that stops over time and you start getting new inflows over time once again.

Q: Did you see it post the technology meltdown when the market bounced back after that, was

there selling after that?

A: Yes but the fund sizes were much smaller than the industry was small but yes it did happen.


4/9

Q: So you think in the next six months there is a chance that retail and HNI comes back to

equities?

A: Yes, I would strongly think so.

Q: So you do think a possibility of a major correction is not looming ahead?

A: This is what we have been saying for almost a year that this index is very different from the index of 2-

3 years back and corrections if any should be small and not very deep. Therefore we have been telling

clients for last many months that if markets have to fall they should fall maybe by December or by March.

Because beyond that there is not much room for markets to fall because one year from today we will be

focused on FY13 earnings and markets look fairly reasonably valued on those levels. So we have been

saying that whatever you need to invest, get invested in 3-6 months.

Q: So what could be the trigger for any fall between now and March in your eyes?

A: If you look at it structurally India has one key risk and that is the oil prices. If they spike up big time,

then that is negative for us and that may also spoil the sentiment for foreigners and they may say I dont

want to buy now, I will time it better because India is vulnerable to oil, that could be one.

Second, it could be that global equities just come off sharply. We have seen a reasonable co-relation over

very short-term returns. But if markets were to fall only driven by global fall in equities, I would say thatwould be a great opportunity to buy Indian equities once again.

Q: But in the event of a global correction do you see a more than 10-15% fall in India stock prices?

A: It would be very hard in my opinion. Because this time the crisis is unlikely to take the banks or the

governments by surprise as everyone is on their guard. So I would be surprised if a crisis of that

magnitude takes place and even if there is a correction in equities, I dont think correction here will be

very deep.

We cannot ignore the fact that 3 years is a reasonably long time and markets are basically trading 16-17

times one year forward earnings. For an economy which is growing as fast as ours and on a fairly

sustainable basis because neither the companies nor the households are leveraged in India. It is a fairly

acyclical growth, I dont think we are really too expensive. And given the fact that India is emerging for the

right reasons a key asset, very favoured asset globally, I think corrections would be used as better entry

points by lots of people.


5/9

Q: You think a 20% kind of earnings growth over the next two years CAGR is a reasonable

expectation?

A: One should always segregate the cyclicals and the acyclicals. If you remove the cyclicals I think it is

doable, though in some sectors we see margins at levels which are significantly higher than the historic

levels and only time will tell whether those margins revert back to normal levels or not.

Q: Give me an example which sector could you be talking about?

A: Lets say some companies in the consumer sector or some companies in the two wheeler space are

sitting on margins which are way above the historical averages. No doubt their competitive position is

very strong, underlying demand trends are very strong but you still cannot be sure that these margins will

hold for let say 1 2 years, but I would say 15% to 20% earnings growth minus the cyclicals appears to

be broadly sustainable in my opinion.

Q: Do you worry about excessive dilution by any of the companies at this point where capital is

quite abundant, which might later on pose a challenge to earnings per share growth or even

return ratios?

A: This is very sector specific, so we are not seeing excessive dilution from consumer, media,

Pharmaceuticals, Automobiles, engineering companies, or software companies. We are seeing a dilution

from a lot of real estate companies, NBFCs and I would say infrastructure owners but that is more or less

for the right reasons. These are capital intensive businesses and if this economy has to grow at such a

brisk pace and our capacity utilization in manufacturing is also running at very high levels. So capex cycle

has to pick up. So capital will be raised.

Q: Whats your call as a fund manger on Infra, thats underperformed and its a big sector. You are

a longer term investor, a value investor. 2 3 years can you take a big bet or just the risk of

underperformance lie there?

A: Infra is a very I would say, a very loosely used word. For infrastructure development you need banks tofund, you need the engineering, the construction companies to build and you need the asset owners who

will ultimately own the assets. We think the banks are the best way to play this and the second best today

would be the engineering and the construction companies. The growth rates should be more or less

similar but banks stand out because they are trading quite cheap even today I would say.


6/9

Q: I can see a lot of banks in most of your equity funds top holdings but there is no L&T, its a

large cap, typically you would expect to see if you are bullish on infra but you have stayed away?

A: Its a great company and the gap between L&T and number two is very large, it is just that it is quite

expensive. We own L&T but it is not there in the top 5 10 I would say.

Q: You dont like the capital goods space, the BHELs and ABBs of the world?

A: I think that space is good and it is just that they are expensive and I think the thermal capacity addition

in the country will peak out in the next one to three years so if you take a long term view we feel that

some of these companies might be hitting peak earnings in the next to 1 3 years so thats why we dont

own them.

Q: You have got a lot of oil in your portfolio, even the oil marketing companies, I see BPCL, HPCL

in the top 5 is that post the moves from the government and reform based or generally you think

now earnings will show up over the next two years?

A: Intrinsically if you look at replacement cost, if you look at book value, if you look at the entry barriers to

this business, I think these businesses are significantly undervalued. The challenge is whether they will

earn a reasonable return on these assets or not. I would say government policy direction is fairly clear,

they have said that for Diesel the intent is to decontrol.

I think the risk is therefore not so much government policy as it is the crude prices. If crude prices spike

up the ability for decontrol will be limited, unlikely to happen. If crude remains rangebound or falls I think it

will happen over time may be 6 months, maybe 1 year or 2 years. This sectors profitability has to improve

because you need refineries in all parts of this country to service it effectively, you need pipelines,

tankages depots to service and these companies have that and today their technology is at par with the

most modern; they have used these last 4 5 years to bridge the gaps in distribution and therefore we

think as and when this sector is decontrolled the profitability of this sector will be meaningfully higher than

what we have seen in last 4 5 years.

Yes, there is a risk of crude prices going up but in a portfolio context 3% - 4% in a portfolio it makes

sense and that should add value over time, in my opinion.

Q: Even from here because some of these stocks have doubled ever since the petrol deregulation

came in?


7/9

A: I would think so but if you look at last ten years they are where they were ten years back and in ten

years their book value is a grown and some of these companies have reasonable sum of parts. If you

look at BPCL or some of these companies they have reasonable value which is residing there in eitheroffshore discoveries or strategic investments and few other companies in that sector.

Q: But its not just downstream, you have taken a bet on upstream as well, ONGC is there in

practically all your portfolio?

A: I think ONGC is reasonably I would not say it will double over two years or three years but I think

related to the index it offers good value and we think overtime ONGC will also have their share of

discoveries and which should also kind of add value to ONGC.

Q: In HDFC equity fund the interesting one is Bharti. Has it been a longstanding holding or

recently inclusion?

A: No, in fact we bought it over the last few quarters.

Q: Do you think the worst is over for telecom?

A: I think so but I am not very confident about that but I think so because now almost every player is

bleeding and their network rollouts are getting lesser and the economic case for new entrants is very

weak and Bharti and few other players have come out much stronger in terms of competitive position. Soover time the worst seems to be behind us.

Q: Do you think consumption plays still have value or do you think the space is over researched

and even expensive, you own stocks like Titan, Raymond which are consumption plays. Have they

been fully priced in by the market?

A: If you look at earnings today I think so but some of these companies have great brands, they have

great growth potential ahead of them. So yes, if you look at trailing multiples for current year some of

them would be fully valued and I said that some of the consumer companies are looking fully valued but

these are businesses, some of which can grow at a fairly brisk pace with great competitive advantages for

three-five-ten years and therefore I think one would still like to hold on to them.

Q: How much of FY2012 is priced in by the market already you think?


8/9

A: Lets look at like this, one year from today when you would be looking at FY13 the PE multiples based

on FY13 are maybe 13-14 times which is not very demanding.

Q: Assuming a constant earnings trajectory?

A: Yes, there is an assumption there but I think all of us will agree that this economy will grow north of

8%, industry and service will grow maybe 9-10% in real terms, add 5-7% in inflation so 15-17% earnings

growth is there and so I think if you have to invest with one year view think of what the markets will look

like after one year and for that you have to price in FY13. Equities are very forward looking assets so I

think it always make sense to think not just one year but two years forward and that is where you are

more likely to take the right decision

Q: So if today you are sitting at two year forward, 13 times FY13 so by next year this time you

could be looking at that 13-17 kind of a leap which could be a return?

A: It is possible. That is what in our view that the next big move should be on the way up and not on the

way down unless something completely unexpected happens globally or if crude goes to 110-120 per bbl

and that uncertainty will always be there in equities; we cannot forecast equities over short periods, thats

why. We can build scenarios, but we cannot say which scenario will play out. Logically the next big move

however, should be on the way up not on the way down. No bull market has peaked out at 16-17 PE

multiples. If you look historically in any bull market whenever there has been a major correction after that,

the PE multiples have been north of 25 times.

Q: You think we will get there in this run as well at some point?

A: At some point one should get there because the more the market goes up the more the money you

tend to attract and at some point it will repeat. We dont know whether it will happen today or after three

years or more. There is one more thought if you look historically whichever economy has grown at

significantly higher than global averages tends to become very popular asset globally whether it was

Japan in 80s or south East Asia in 90s, I think that way India could acquire similar status sometime over

the next few years and if that happens, the PE multiples could go much higher. I am not saying one

should invest with that basis or premise but possibility of that cannot be ruled out. So if that happens it

would be a great exit and equities may give you much more than what one is budgeting for but I think it

would help to keep the possibility, the presence of that possibility at the back of your mind.


9/9

DISCLAIMER: The views expressed Mr. Prashant Jain, Executive Director & Chief Investment Officer ofHDFC Asset Management Company Limited (HDFC AMC), constitutes the authors views as of this date

and is based upon information that is considered reliable, but does not represent that it is accurate orcomplete, and it should not be relied upon as such. The response to the questionnaire is for informationpurpose only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. Theinformation / data herein alone is not sufficient and shouldnt be used for the development orimplementation of an investment strategy. It should not be construed as investment advice to any party.The statements contained herein may include statements of future expectations and other forward-looking statements that are based on the authors views and assumptions and involve known andunknown risks and uncertainties that could cause actual results, performance or events to differ materiallyfrom those expressed or implied in such statements. The recipient alone shall be fully responsible / liablefor any decision taken on the basis of this interview. The recipient(s) should before investing in theScheme(s) make his/their own investigation and seek appropriate professional advice.

interview prashant jain with cnbc oct10

Documents