Mumbai: The head of equity investments at Reliance Mutual Fund, Madhusudan Kela, sees the National Stock Exchange benchmark index Nifty setting a new high in the next 12-24 months on account of higher fund flows and improving economic fundamentals. Asked in an interview whether the Nifty can retest its previous lows, Kela says he does not see the index breaching the 3,800-4,000 levels unless “something globally happens.” Edited excerpts:
Right pick: Reliance Mutual Fund’s Madhusudan Kela says the real challenge lies in identifying the mid-cap firms for extra earnings.
Do you think now that we have formed a base for the Nifty we should not look too much southward of 4,000?
Yes. Going by what is being presented as of now and going by the trend of last six months, I would argue that the 3,800-4,000 level must hold...
Do you see the Nifty retesting the 3,900-4,000 kind of levels and, if yes, what could get it there because it is not going there, it is just taking support at a higher levels of 4,300?
Too many people are waiting, I am also one of them because we keep getting money and we definitely have some cash.
A lot of cash or a lot of it has been deployed?
No, I don’t think there is a lot of cash now. We have deployed it. For the last three-four months, we (have been) deploying it. I think the only thing which could take Nifty to that level is if something globally happens. The last two-three weeks for the monsoon have been reasonably good. So there is something which has to go wrong globally for the Nifty to go back to 3,800-3,900 levels.
June, July, August we have spent in this broad range of 4,000-4,700. Do you think we are ready to break out now or would that be surprising to you?
For various people, market means various things. For a day trader, it is very important to time it for the day. For investors, we look for a consistent period of outperformance. Whether 4,700 is taken out in the next two months or it is taken out next month—that is less important to me than saying that are we really heading for a new high in the Nifty in next 12-24 months. I think we are heading for it.
Twelve months or 24 months?
Twelve to 24 months. The direction is very important and the most important thing for forming that judgement is you see the amount of liquidity which is being thrown in the world, which is running into trillions of dollars. Now, you are starting to see the real economic fundamentals also start to move up. Every data point which we have been observing for the last three months in the West has surprised and is optimistic. It is better than what the world was expecting. So if you have a slow but decisive fundamental recovery and money coming into emerging markets because of the dollar being weak, then we should definitely head towards a new high in the next 12-24 months.
In that sense, where are we compared with the last bull market? If you look back and think about 2003, 2004, where have we reached if this is indeed a multi-year kind of a bull cycle which has begun again in your eyes?
I think markets have seen a very sharp rise. Let us accept that because, in March, we were at 2,500-2,600 and now we are at 4,500-4,600, so it is like 80-90% rise. I do not think that there is too much beta. Can the pace of the rise which has happened in the last six months continue? To me, the answer is no. But will you have opportunities? This is the most interesting phase of the market where you take those stock-specific bets, and the market is very sceptical about the run and valuations have run up. So, people do not have conviction to buy. This is the time if you can get those ideas and create alpha for your portfolio, I am finding it to be very interesting place to be in.
You are saying that the easy money on the Nifty might have been made?
Stock-specific, there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs5,000-15,000 crore market cap, that could go up three-five times over the next few years.
When will mid-caps recover? We have had a big run in the Nifty but many mid-caps or even non-index large-caps are trading at 20-30% of their peak value. If you are saying that in 12-24 months the Nifty will get back to a new high, when will these stocks outside the index get back to their old highs?
Market is narrowing, so now everything will participate. You need a sizeable company. A company which is having Rs2,000 crore market cap was like a mid-cap. Now, that Rs2,000 crore has become Rs6,000 crore and Rs8,000 crore for many mid-cap names. If you compare it with the peak, obviously, they have not recovered to that extent, but if you see the leadership, if you see companies which are able to perform and create wealth, those companies are getting narrowed. As the market matures, obviously, they will get even narrower. I don’t think one should expect a big-bang, full-fledged recovery in mid-caps. I see a lot of mid-caps performing. That is where the real challenge is: that are you able to identify that real alpha in this market to make that extra buck which is to be made out of this market.
There was a lot of risk associated with the kind of stocks that you are talking about in 2008, balance sheet risk, etc. Do you think the time has come now for investors to say, “I will not hide in a cocoon because I have a fear of losing my money, I will go out and take a little bit of risk now and buy these kind of stocks that you are talking about”?
I think people by and large will resort to this because if you look at the world, it is such a big paradox because so much liquidity is being thrown. At one end, people are struggling to protect their capital. In America, if your money is in dollars and in the bank, your money is getting lost. So emerging markets have done 50-100%. Similarly, index stocks have gone up like 50-100-150% in large companies and now some of them look richly valued from (a) 12-18 month perspective. People have no choice but to look at qualitative mid-caps. Let me make a distinction here. Just because we made a lot of money identifying these small companies and they became multi-baggers, not everything which is small will become a multi-bagger. So these are characteristics of these companies. If you bet money there, some of them still have a lot of value.
You have been deploying a lot of cash over the last two-three months, you have been buying mid-caps yourself aggressively in your portfolio.
Yes, we have been buying companies which have growth characteristics. In our scheme of things, if I think that the Nifty goes to a new high, can this particular company, if I am buying it at 10-12 P-E (price-earnings) multiples and has a 30-35% kind of earning visible growth over the next three-four years, can we buy those kind of companies which are still at a discount? Everyone is not able to raise money, you are getting these opportunities, promoters themselves are wanting to sell some of these companies to you because they need capital.
We went through a phase when the first big rise in the market happened when a lot of fund managers, including hedge-fund managers, underperformed the index because large-caps did so well. Do you think in the next year or two it could be turned around, where people with good portfolios beat the index quite a bit?
Absolutely. That is my firm conviction, that you will end up beating the broader market if you do the right stock-picking and hold it with conviction.