BackRecovery is about a year to year-and-a-half away
UTI Mutual Fund's Lalit Nambiar believes companies with resilient business models will be able to withstand the new normal and deliver superior returns as the economic cycle recovers
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Lalit Nambiar, executive vice-president and fund manager (equities), and head–research, UTI Mutual Fund, has been circumspect of the weak corporate results that have plagued Indian companies so far despite a change of governance at the Centre. But Nambiar feels that there are now signs visible of pick-up in corporate growth. However, he feels that companies have to be picked up with care and investors should not try to time the markets. This holds true for infrastructure funds as well, he said, adding that the infrastructure theme will play out in a cyclical recovery, but the 2007 frenzy will not be repeated.
Despite hope of company profits improving, things on the ground don’t appear to have changed much. The June-September quarter results have not been any better and it’s been two years now since the slump in earnings has been around. How is the scenario looking to you?
Even from before the last parliamentary election result, we have been focused on the potential of a cyclical turnaround in the economy. We have always maintained that if the new government were to trigger off structural reforms to lift growth to a new plane, it would only be a ‘cream on top’ of the cyclical growth story. Our markets have been driven by foreign institutional investor (FII) flows to emerging markets on account of low interest rates in many of the developed markets and premature expectations of an earnings revival triggered by the promise of a reformist government.
This was essentially market sentiment putting the cart before the horse in a manner of speaking, and corporate profits have consequently been a letdown. Be that as it may, the narrative on cyclical recovery has not changed. In fact, there are now very clear early signs emerging of a pick-up in economic growth. For instance, if one looks at the data, investments in new projects are now close to 50% of the previous high, while in certain sectors such as transport and manufacturing, it is at 70-80% of the previous high.
Essentially, what we are saying is that companies with resilient business models will be able to withstand the new normal and deliver superior returns as the economic cycle recovers. It is crucial to enter some of these names early, rather than try to time entry, which is nearly impossible to do with any consistency.
What kind of an impact will the last round of cut in the interest rate by the Reserve Bank of India have and do you see an increase in government spending?
The yield curve has dropped and its slope has also increased by a bit. So, conditions for a pick-up in credit demand are gradually falling into place.
However, rates by themselves will not be enough to stimulate investment as percentage capacity utilisation levels are still in the early 70s.
Consequently, apart from conducive interest rates, investment will have to be catalysed through policy action and pushed by government stimulus. Our sense is that this government wants to be fiscally responsible and thus spending will be measured and calibrated for maximum impact. Hence, you have greater emphasis on direct stimulus through road projects and Jan Dhan (Yojana) as also direct benefit transfer, all designed to direct money flow towards the very bottom of the pyramid. The multiplier effect of focused stimulus on such a broad population base will mean many more jobs in the informal sector and this might well be far more important for recovery in the near term than foreign direct inflows.
Infrastructure as a theme looks attractive going by the government’s vision, coupled with its ‘Make in India’ theme. But many investors have burnt their fingers in infrastructure funds in 2007? Do you still feel that you will be able to convince investors to come back to infrastructure funds? Or, are they better invested in diversified funds?
That the infrastructure theme will play out in a cyclical recovery cannot be denied. The 2007 experience was a good lesson learned by the market and unlike the frenzy seen then, this time around, investors as well as companies are likely to be far more circumspect about the returns that these projects generate, their revenue projections and execution risk.
More importantly, the space will probably see some of the companies that are not adequately equipped to survive, fall by the way side and a more robust crop of companies emerge to drive growth. While we are certain that the theme will see resurgence, the timeline is difficult to predict and, as discussed earlier, it would make more sense to enter early rather than to try and time the investment.
How important is liquidity to you in terms of mid-cap schemes? Do you sacrifice liquidity if you see good quality companies?
Lack of liquidity should be treated as a cost and it is typically a function of the share of the investee’s equity float held by a fund. In general, if the investment case, after considering all costs including liquidity, is compelling, we would tend to invest. An added filter would be to guard against unhealthy levels of speculative interest in the stock.
There has been a new fund offer boom in the last year-and-a-half, especially in the closed-end space. UTI Mutual Fund, too, has launched a few funds. How would you gear up to face the risk of subdued markets when these funds come up for redemption?
There is little reason to doubt the postulation of a pick-up in the economic cycle. The scenario of subdued markets is a hypothesis, which can be considered at any point of time. But it seems to be a low probability event over the horizon of these funds, so I would think it safe to presume that it will never have to come to that. The broad sense we have is that recovery is about a year to year-and-a-half away, so these funds are well placed to play the turnaround and outperform the markets, providing healthy returns.
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