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00:00Let us now do a quick detour and go across to Harish Krishnan, Co-CIO and Head Equity
00:17of Aditya Birla Sun Life Mutual Fund joining us on Talking Point.
00:20Hi Harish, good morning, thank you very much for joining us.
00:24Let us start with the broader markets and get some perspective going from you on that.
00:30Markets have been fairly volatile despite us in, you know, kissing distance of record
00:35highs.
00:36What is your outlook?
00:37August has seen fears from a US recession to geopolitical stress, Federal Reserve rate
00:43cuts, Yen carry trade issues, corporate earnings fluctuations.
00:48How do you view the current situation?
00:51Morning, so clearly we do acknowledge the fact that, you know, corporate earnings from
00:57a broader perspective over the course of the last three years have kind of moved up meaningfully
01:03as far as India is concerned.
01:06We also acknowledge the fact that there has been a significant amount of liquidity that's
01:11been chasing Indian equities.
01:13Having said that, and the fact that the corporate health of India Inc. is in the best of shape,
01:22I think that, you know, we're taking cognizance of the fact that valuations are quite heady.
01:28There has been a significant expansion of multiples, especially as we go down the curve.
01:33So when we look at, say, from pre-COVID levels till now, over the course of the last three
01:38and a half, four years, and we see how much of the market cap expansion and various blocks
01:44of market cap, be it large cap, the top 100 names, 101 to 250, which is the mid cap, small
01:51cap and micro caps.
01:52What we see is that broadly, as far as large caps is concerned, the top 100 names, almost
01:58the entire market cap delta has been, can be explained by just earnings.
02:02In fact, earnings have gone up even more than what the market caps have gone up in aggregate.
02:07So there's been some amount of derating out there.
02:10But when we look at mid caps, it's been roughly about 66% of the market cap delta has come
02:15through by earnings.
02:17The balance has come in by valuation expansion.
02:19When it comes to small caps, it's at 50-50.
02:23And when it comes to micro caps, which is 501 and below, the almost valuations account
02:30for 67% of the increase in market cap expansion.
02:34So therefore, we do think that it takes a lot more time to be a lot more measured at
02:40this point of time.
02:41Risk has got rewarded disproportionately over the course of the last 12-18 months, and one
02:46should be a lot more sanguine about the prospects of equities going ahead, even as one remains
02:54positive from a 3-5 year perspective.
02:58And that makes it very tough, Rish, because the general view is that this is a bull market
03:02which is rising only because of liquidity and the markets are running ahead of themselves.
03:06I mean, gold is now available at the price of diamonds.
03:10And of course, investors, given that context, still need to be careful.
03:15This is a tight rope to walk, right?
03:17What do you recommend investors, new investors, let's start with new investors, because they
03:23are not, they've never seen a down market and they also may not know the importance
03:28of discipline investing.
03:30What do you feel new investors who've got incremental money on the sidelines should
03:35be doing?
03:36Is it best to sit on some cash and wait for an opportunity?
03:40Or would you say that go out and do your SIP, because that's probably the only way to build
03:45a significant corpus and timing the market is a futile exercise, we'd all agree.
03:50That's right.
03:51So clearly, I think we can all agree that time in the market is far more important than
03:55timing the market.
03:56So you buy more in that context.
04:00What we do recommend is A, to have an asset allocation perspective.
04:06For now, of course, it may appear that, you know, equities and especially lower down the
04:11curve, be it SMEs or small caps and micro caps can hold a lot of sway and promise.
04:18But I think, you know, three, five years or 10 years down the line, possibly it may not
04:23be as optimistic as what things are being made out over the course of the last two,
04:28three years.
04:29So don't extrapolate the last two, three, four years cycle into the future.
04:34Third, that we do advise is that, you know, whatever be your risk appetite and it's of
04:40course personal to each and every individual.
04:44But if you are primarily in small caps, go down one risk notch lower.
04:48So if you are in small cap, be it in mid caps, if you are primarily allocating to mid caps
04:54as a risk profile, move into large and mid caps.
04:56If you are into large and mid caps, move into flexi cap.
04:59So move down at least one notch so that, you know, you're not completely out of equities
05:04because clearly the medium and the long term story as far as Indian equities is concerned
05:10is still very encouraging.
05:13The balance sheets of corporate India are still very good.
05:16The banking system is in good shape.
05:18The macros are in good shape.
05:20So don't miss out by saying in cash and waiting for that inevitable crash to come through.
05:25But go down one level of risk curve and follow a prudence of asset allocation at this part
05:32of time rather than, you know, going fully into SMEs and small caps and micro caps at
05:40this point of time.
05:41In fact, why don't you share with me a view on the SME space with the recent high profile
05:46IPOs that have been debuting on the street.
05:48I mean, every day a listing comes in with a gap of 50 to 60 percent.
05:54And that's phenomenal.
05:55Right.
05:56But what are your thoughts on the SME space?
05:59I mean, to be quite honest, it's not a space that we professional investors actually participate
06:03in.
06:04So we are as much as a ringside watchers of the phenomenon that you are describing.
06:09But, you know, we did this analysis, roughly, you know, the markets can move in a random
06:18walk, as they say, on a daily basis.
06:21It can go up, it can go down, you know, but there are equal probability of going up or
06:27down on a daily basis.
06:28What we've seen in the last 15-18 months when it comes to SMEs is that markets are going
06:33up or the index level, I'm not even talking about individual companies out there, index
06:38levels are moving up 70 percent of the days, which is a significantly higher amount of
06:44days that, you know, those indices, especially in the SME side, have started moving up.
06:52So again, these are great times for those investors, but, you know, one can't be basically
06:59predicating only on the fact that you're going to have more liquidity chasing these names
07:06and you will be able to find another buyer for your name.
07:09So at least, you know, it's purely as an observer that we are kind of making this observation.
07:19We don't evaluate any of these companies ourselves as professional investors.
07:24Harish, everyone likes private banks and so do you.
07:28You've got an access and HDFC and ICICI bank on your portfolio.
07:33But unfortunately, you know, the trade has still not come in the true sense for some
07:39of these private banks.
07:41What in your opinion is the biggest restrictive factor for private banks and when do you see
07:46the gains or the fair, you know, stock price movements on some of these private sector banks?
07:52Right.
07:53Also, we were under this phase about a year and a half back, primarily predicated on the
07:59fact that you had the best of everything going in for the banking system.
08:06You had a very strong credit growth, you had NIMS, the net interest margins which had expanded
08:11quite significantly and you had very low credit costs.
08:15So much so that, you know, profit pools of just the scheduled commercial banking system
08:21had reached a 25 year high as a percentage of GDP at 1% of GDP.
08:27And then, you know, as we look over the course of the last 18 or months where banks have
08:32underperformed quite meaningfully, we see each of these three pegs normalizing.
08:37So credit growth, which was growing quite strong due to regulatory nudges of wanting
08:43to, you know, align it with deposit growth has kind of come off.
08:48Secondly, if you look at net interest margins, they have started coming off from the significant
08:54highs that they were there and you have started seeing some amount of normalcy when it comes
08:59to credit growth.
09:00Now, at the face of it, all of these are negative developments from earnings perspective.
09:05So we do think that there is likely to be a softness in earnings, but the space has
09:09gone de-rated significantly.
09:12What used to be some of the best run private sector banks, which were trading at anywhere
09:16between, say, 17, 18 times price to earnings forward have come down to as low as, say,
09:2112, 13 times.
09:22And to our mind, therefore, a lot of de-rating has happened because these profit pools were
09:27unsustainably high.
09:30And as the profit pools kind of normalize is where we think that there is going to be
09:35a re-rating back into these spaces.
09:37So that's the approach that we have when it comes to the banking space that, you know,
09:45the best of the times, ironically, are not the best of times for stock prices to move
09:49up.
09:50And the best of the times is now behind us.
09:53In fact, we are starting to see that, you know, profit growth is starting to trail off
09:59in many of the private sector bank franchises, which to our mind, ironically, is very good
10:05news because we think that now profit pool levels are normalizing to more sustainable
10:09levels, which is what a multiple can be given on.
10:12So we view the fall in earnings or the slowdown in earnings as a welcome development than,
10:19you know, looking at very high earnings and then one thing, why is it that stock prices
10:23were not reflecting that kind of earnings growth.
10:25So that's the broadly our view when it comes to the banking space in totality.
10:30Right.
10:31Harish, let's start talking with the leadership sectors and the leadership sector in this
10:35current bull market up until now has been hands down PSU.
10:40Across the board from metals to defense, even insurance PSUs, everything in the PSU space
10:45has gone up like a rising tide phenomena.
10:49Some of that may be catching up in terms of defense PSUs at least, right, in the last
10:54couple of weeks.
10:56Do you feel like the leadership mantle will continue to be carried by PSU stocks over
11:02the next two to three years or do you feel like it's now time to take profits off the
11:07table from PSU names across the board?
11:11So I think it's a lot more nuanced out there.
11:13There are certain pockets where, you know, valuations have clearly gone up significantly.
11:19So from a fundamental perspective, you know, if you look at it, there are certain pockets
11:23which are monopoly stocks, no doubt, where the near term outlook is really good.
11:28But if they're trading at, say, 15, 17 times price to book, you know, these are very, very
11:34heady valuations.
11:35Just as a context, the infracycle peaked at about 7, 8 times in 2017.
11:41So we are well past those levels when it comes to pockets like in defense.
11:47But on the other hand, if you look at, say, energy and utilities or oil and gas or oil
11:53and marketing companies, their valuations are a lot more sanguine.
11:58We really haven't, while they have performed, no doubt.
12:01But we haven't seen those kind of parabolic moves in a lot of those spaces.
12:05So I think it is not to say that, you know, the trade is completely over and out.
12:11But yes, we do prefer the private sector franchises wherever we can over many in the public sector
12:17franchises.
12:18But I wouldn't say that, you know, the entire pack is primed for a massive kind of a correction.
12:24We do still think that there are pockets within the PSU space that are very attractive and
12:29which we continue to own in our various funds.
12:33Right.
12:34Talking about a PSU fund that you also have under your umbrella, 85 percent gains.
12:39I mean, that's phenomenal.
12:41I know that a lot of fund managers that are missed out on the PSU rally because of underexposure.
12:48For those investors in that fund, what do you recommend they should do?
12:51Should they continue to go in and invest into that, into the fund or maybe, you know, take
12:57profits off the table?
12:58It's a very specific question, but it's about five, six thousand crores of AUA that you
13:02handle.
13:03That's right.
13:04So I think to all our investors, we are saying the same thing, which is to elongate your
13:10investment horizons.
13:11Don't extrapolate the past returns.
13:12The good thing about the PSU fund is that there is some amount of dividend flow through
13:20that comes through, which is still quite large compared to many other spaces which are there
13:27in the non-PSU space.
13:30But one should definitely be prepared for an underwhelming kind of an outlook when it
13:36comes to the next six, 12, 18 months and not extrapolate what the investors have seen
13:41over the course of the last one, two years.
13:44So as long as people are prepared for that, I still think that, you know, this is a space
13:48that can give you decent returns over the course of the next three, five years.
13:54But I mean, is it a place of that and you can put in massive lump sum at this point
14:00of time?
14:01Possibly not.
14:02One should be a lot more disciplined.
14:03Like I said, this is the time to take down risk rather than embrace risk head along across
14:10all our equity products.
14:13You know, I noticed, Harish, when I look at your portfolio, you only own one IT stock,
14:20which is Infosys.
14:21Do you feel like, you know, one reason that IT stocks corrected significantly was largely
14:26because legacy businesses, legacy clients were going to be threatened or there was
14:32an AI threat in that sense.
14:34I also noticed that you don't have the broader market, large cap, mid tier to IT companies.
14:42What do you feel?
14:43Do you feel like for the next two to three years, maybe legacy businesses in the IT pack
14:48is probably the best space to be in?
14:50And is that why you own Infosys or do you feel like, you know, there is a better valuation
14:55maybe around the corner for some of the broader market tier two IT companies?
14:59Whereas I can see the bias, but I want to understand why.
15:03So firstly, I think we have some exposure in tech.
15:07We have an overweight stance on tech, in fact, in many of our schemes.
15:12So yes, we do have a larger preference for the larger tech oriented names.
15:18As you said, the legacy names compared to mid tier and mid tier has clearly done quite
15:24well.
15:25We do have some ownership there, but our preference is more with the larger names.
15:28Our view on this AI disruption is it's more an opportunity than a threat as far as Indian
15:34IT services is concerned.
15:36I think Indian IT services have seen an impact of twofold.
15:41First is from pre-COVID till now, you know, we've basically seen a greater offshoring
15:46that has happened as far as Indian IT is concerned.
15:49Now, as more and more offshoring happens, the revenues do get deflated as a resource
15:55out in India can do a lot more than a resource based on site.
16:00Typically, higher offshoring would entail higher margins and therefore it is a win win
16:05for both the IT client as well as the IT service provider.
16:09Unfortunately for Indian IT over the course of the last two, three years, given the fact
16:13that they hadn't hired pretty much workforce before COVID, they saw a squeeze with the
16:21demand coming through and therefore they saw a massive hiring that had happened in 21 and
16:2722, which led to a squeeze in margins.
16:29So we've seen actually both revenues trailing off as well as margins kind of impacting.
16:34We do think that Indian IT companies will get their margin piece back into shape over
16:40the course of the next two, three years.
16:42These are some very well run companies who know how to pyramidize their workforce and
16:48to get their unit economics in place.
16:52And as and when the recessionary environment in the developed world, especially US, comes
16:58to pass and, you know, we are on the other side of it, we do think that there is going
17:02to be a greater spend on Indian IT.
17:04So I think Indian IT is therefore a very good space to be in.
17:08Yes, when it comes to the allocation between large, med, we have a greater preference to
17:14large cap primarily because valuations are a lot more sanguine out there, but we do also
17:19own some very exciting mid and small cap names across many of our other funds.
17:25Giri, Harish, another one that I want to talk to you about is the FMCG space and consumption.
17:31We saw in the first quarter was largely marked by top line growth primarily driven by sustained
17:37recovery on the rural side of things.
17:41And of course, from the way we look at it as well, it seems like rural growth is outpacing
17:45urban areas, despite the heat waves, despite various concerns that rural India is going
17:50through.
17:52And I know that one of your main portfolios doesn't have any consumption names.
17:55I do, I'm not sure, correct me if I'm wrong, but you have a consumption fund.
17:59Do you think it's time to increase exposure to consumption and in the consumption pack
18:05to rural, you know, rural growth as opposed to the urban areas?
18:09Right.
18:10So, I think, you know, at this point of time, there are two specific thematic funds that
18:15we do advocate our investors to evaluate.
18:18One is the consumption-oriented fund, which we call the GenNext Fund, which has been there
18:23for close to about 20 odd years, which has seen multiple cycles.
18:28Urban is a reasonably evergreen story in India, given our young population are increasing
18:35per capita incomes.
18:36Yes, it has hit some kind of an air pocket in the last two, three, four years, as the
18:42government has focused on supply-side stimulation far more significantly compared to demand-side
18:49boost.
18:50But, you know, while that can continue for another six months or a year or two years
18:55as well, we do think that, you know, the reasonable underperformance that the space
18:59has seen provides us a greater opportunity at this point of time.
19:02So, we do think and do think that investors can benefit by participating in this kind
19:09of a thematic.
19:10The other theme that we are advocating, which has reasonable margin of safety, is the Digital
19:15India Fund, which has a larger weight on IT services, as well as the Indian IT or the
19:22Indian tech landscape, which is seeing a lot of new listings, a lot of new startups
19:27coming through, multiple, you know, ecosystem developing out here as well.
19:32So, I think these are the two spaces that we would be advocating at this point of time
19:37from our thematic basket, that we manage a whole range of themes which are there, which
19:44we think that investors should definitely evaluate.
19:47Right.
19:48Very lastly, Ayesha, before I, you know, start wrapping this conversation up, will the NIFTY
19:55be higher in December than it is now?
19:58I mean, we are not astrologers, so I really don't know and we don't really kind of…
20:06What is the ideal time horizon for fresh SIPs?
20:11I would say that, you know, the goal for investors need to be at least five years out.
20:17So ideally…
20:18The investments, as in when you are doing a staggered investment, what is the ideal
20:22time horizon one should spread their investments over?
20:26I would say at least over the course of the next 12-18 months should be a reasonable time
20:30horizon for people to stagger their investments.
20:32So, you do it weekly or monthly, do it over the 12-18 months.
20:37How much percent of your portfolio do you recommend sitting on cash?
20:40If you are doing an SIP for 18 months, there will have to be some cash on the sidelines.
20:44Hence the question.
20:45Sure.
20:46So, I think, you know, there are products which automatically invest in, say, tax-efficient
20:51products including arbitrage funds or fixed income instruments.
20:56So you need not necessarily be in cash at all.
20:59There are, you know, solutions provided by the mutual fund industry, including Aditya
21:03Birla Sun Life, which help you obviate that issue.
21:08But I would say that, you know, it's not really a call on cash.
21:13It's more a call on anticipating volatility and turbulence ahead so that you can benefit
21:17from that by staggering your investments rather than saying a call that, you know, you are
21:23wanting to tie between cash and equity.
21:27Very quickly, Harish, mid-cap is expensive, small-cap some argue is a bubble, large-cap
21:32is where there is safety of margin.
21:34But the fact is the participation hasn't come from large-cap names.
21:37Would you still stick your neck out and say overweight large-cap because your portfolio
21:41is overweight large-cap?
21:42We don't think so.
21:43I mean, we think that there is a greater margin of safety.
21:47We don't see too much of a dispersion coming in from large, mid and small.
21:51And even if you look at this calendar year to date, you know, most of the funds that
21:56we are managing are in a reasonably tight range.
21:59So the point being that, you know, one is not going to see a disproportionate high return
22:05coming from micro-cap, small-cap, mid-cap compared to our flexi-cap or large-cap.
22:11And therefore, from a risk-consistent basis, we do think that it makes more sense to be
22:15tilted towards large-caps.
22:18Very lastly, Harish, top sector where you still see some value?
22:25So we've got three sectors which are dark horses.
22:29So I mean, over a three-year period, I would say cement seems to be a very interesting
22:35juncture which hasn't really played out over the course of the last two, three years.
22:39That could be one.
22:40Consumer durables is an area where we've stuck our neck out at the start of the year.
22:44We still think that there is significant steam out there.
22:47The last one I would say is metals, which is an area where today there is a lot of doom
22:53and gloom from China's perspective.
22:56But Indian companies have delivered their balance sheet significantly.
22:59So these are the three pockets which I would say, you know, pretty much nobody is really
23:03talking about in our opinion, and which can, therefore, bring a surprise over the course
23:07of the next three years.
23:09One sector that looks stretched right now to you, Harish, which is best to take profits
23:13off the table if you've made money in it?
23:16I think defense would be that case.
23:19I think most people would agree with you on that.
23:22The stock market has had a rough in the last few days, and stocks like the Darlings of
23:27D Street, like the Masgows and Garden Reach have been selling up.
23:30But great chatting with you, Harish.
23:31Thanks a ton for joining us today on Talking Point.