The March 2018 quarter results are said to be better than previous quarters. There has been an improvement in business sentiment and pick-up in consumer demand in the March quarter after major disruption post demonetisation and implementation of the goods and services and tax (GST). Do you see a recovery in corporate earnings in future?
The overall recovery in profits has been broadly in line, excluding corporate banks which dragged down the earnings owing to accelerated provision related to the February 2018 Reserve Bank of India (RBI) framework on asset quality. Excluding the segments of state-owned banks and private corporate banks, the sales and profits grew at about 16% and 14%, respectively. The transition impact from GST, demonetisation, RERA (Real Estate Regulation and Development Act), etc. is normalising, and there is pick-up in rural demand. Export-oriented businesses like commodities have also seen a sharp turnaround. Overall, on the low base of financial year 2018, we expect (compounded annualised) earnings of about 18% over the next two years.
How do you see the banking sector? While there is a scare of bad loans, most broad-based benchmark indices have a large weight of banking sector stocks. How do you strike a balance?
In the last few years, the weightage of retail-oriented banks has increased steadily in the benchmark indices, at the expense of state-owned and corporate banks. Most banks have two segments where they lend money—retail and corporate. We have been largely investing (about 70% of banking exposure) in retail-oriented banks.
These banks have gained market share from the weaker state-owned banks, and also due to financialisation of savings. These banks’ earnings will continue to grow at more than 18% over the next few years. Having said that, the worse in corporate banks is behind us.
Since you say that the worst in corporate banks is over, are you buying more of those stocks?
At an aggregate level, overall gross non-performing asset is about 12%, despite write-off of about 5% of loans in the last five years. Most of the bad loans recognition is almost done. The initial signs of bad loan recovery are good, although most of these are from the steel sector. Beyond the steel sector, we may not see too much success and the key is to watch stress-asset resolution within the power sector. Overall, bad loans have been almost fully recognised, and the worst of new NPA formation is behind us.
Considering the above, we have about 30% of banking exposure into corporate banks, which also have retail franchise. The call is based on attractive valuations, arising from the stress in their corporate segment. Over time, we anticipate valuation multiples to revert to mean on two counts: (a) recovery in stress portion, and (b) proportion of retail and small and medium enterprises (SMEs) to the total lending book will increase. Overall, we expect recovery in “return on equity" over the next two years, which will improve valuations.
In the ongoing scheme recategorisation exercise, why did you make Mirae Asset Emerging Bluechip Fund, which was a mid-cap fund, a large- and mid-cap fund? Mid-cap valuations have become high and the size of your fund is also growing.
No, not because of valuations. The scheme has, for many years, held around 30% in large-cap stocks. Although it has been a mid-cap fund, large-cap stocks have been present here. We could have either let it remain as a mid-cap fund or we could have moved it to the large- and mid- cap category. We chose the latter because that would involve minimal changes to the existing portfolio. As per the Securities and Exchange Board of India’s definition of a large- and mid-cap fund, it has to have at least 35% of its portfolio in large-cap stocks and at least 35% of its portfolio in mid-cap stocks. Since Mirae Asset Emerging Bluechip Fund fitted the large- and mid-cap category, we moved it to this new category.
Mirae Asset Emerging Bluechip Fund has done well in the mid-cap category. However, now it will be pitted against a whole new set of funds, some of whom may have a higher large-cap stocks allocation and so on. The definition of this category is very wide. Do you think this scheme may lose some of its legacy?
That’s true to an extent, but the category is a new one. It will evolve over time and we will see how funds in this category evolve as well. There are some funds in this category that have moved from large-cap and multi-cap categories. A couple of funds like Mirae have moved in here from the mid-cap categories.
So yes, the past performance of all these funds would be meaningless for now. But over time, as the category evolves, ideally these funds should have a more proper balance of large- and mid-cap stocks at about 50% each, give or take some.
Mirae Asset Emerging Bluechip Fund has become a large fund now—around Rs5,500 crore. You stopped accepting lump sum subscriptions since October 2016 and put a cap on systematic investments plans (SIPs) in December 2017. Now that the fund has got some flexibility due to its moving to a new category, would you start accepting fresh money?
Let everyone understand and get a grip of this category (large- and mid-cap). By moving into a new category (large- and mid-cap), the scheme’s capacity has increased. We might open the fund in future. Our SIP and systematic transfer inflows are satisfactory.
Why is Mirae launching a pharma and healthcare fund? What triggered this launch? What’s the pitch for a retail investor to choose a pharma fund from Mirae?
The healthcare opportunity in India is secular and large, and valuations are reasonable. The reasonable valuation is on account of multiple headwinds in the last two years, which in our opinion are receding. Healthcare includes pharmaceuticals, hospitals, medical insurance, medical equipment, fine chemicals and other allied sectors. Overall, we are positive on the sector.
Mirae hybrid equity fund declared dividends three times last year (2017), but so far this year no dividends have been declared. Any reason?
Some other balanced funds have continued with their dividend declaration in 2018 as well. Subject to booked profits, we have in the past declared dividends roughly at about 5-8% of net asset value (NAV) every year, across all funds. On a yearly basis, we would try to maintain the same trend, including the hybrid fund.