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Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund, speaks with Mint about the market run-up, overvalued sectors and whether size is a concern for PPFAS Flexicap Fund.


The Sensex has touched 60,000; are we in a bubble?

In any economy where profits and GDP are growing, you would expect the market to reach all-time highs. Even if you put money in fixed deposits, the value of the money in them will be touching all-time highs every day. I am not so concerned about the level, but rather the pace of increase. I am seeing pockets where valuations are extreme and where quality of the paper is not so good in the initial public offering (IPO). At the same time, there are stocks and sectors that are still undervalued and where one is finding opportunities. The market is not in a bubble, but is in overvalued territory.

The cash value in PPFAS Flexicap is 7%, which is not high by your history. You are not very cautious on this market.

When we start out, we don’t say we want 15% or 20% cash because the market is at this or that level. Our starting point is to find stocks where we have conviction and can deploy money. Whatever is left, is in cash. Typically cash in a fully deployed scenario is 3-5%. We have been getting ideas to deploy money and that is why cash is not at a very high level.

Are there sectors that look overvalued?

Mid-cap IT has had a very strong run-up. The IT pack has benefited from the pandemic and from automation. The pace of digitization has increased. Hiring is at a record level in IT companies. Some mid-cap IT companies are looking excessively valued. Wherever we are seeing valuations stretched, we have been trimming our position.

When we last spoke face to face in June 2019, the PPFAS Flexicap was at 2,000 crore and now it is at 14,600 crore. Is size a problem?

When we launched in 2013, we were at 300 crore and now we are at 15,000-16,000 crore. Naturally the flexibility of a 300 crore fund is different from a 16,000 crore fund. The good part is that a lot of the companies we are investing in are very large ones. For instance, in the overseas component, with companies such as Amazon or Alphabet, our size does not really matter.

Flexibility becomes a challenge in the small- and mid-cap space. But there the overall market size is also increasing. What was a small- or mid-cap five years ago has also changed. Mid- and small-cap companies have gotten larger. If you look at the portfolio, we have been able to deploy money in companies such as CDSL and IEX. In addition, we have eased the restriction on the number of stocks in our portfolio from 25 to 30. So, in the small- and mid-cap space, we can have a 2.5% allocation to a stock instead of a 5% allocation.

Is there a level at which you will say that the PPFAS Flexicap Fund is too large, especially considering the Securities and Exchange Board of India’s (Sebi’s) $1 billion limit on mutual funds to make international investment?

We’ve been doing the numbers, and as on date, as of the current size, which is roughly 16,000 crore, we have deployed about $460 million overseas roughly in terms of outward remittances. We still have more than half of the $1 billion limit to go. So, I would think that at 30,000 crore plus fund size if the limit is not revised, then the existing format may not work.

How does India compare with the US market, especially US tech stocks?

The Indian tech space is extremely valued in terms of the valuation multiples. So, comparable companies in India get a far more premium valuation than what some companies in the US would get. So, if we are to compare companies, like-for-like, then US is cheaper. Some people may argue that Indian growth rates are higher or potential may be higher, but that is a debatable point, and purely on a valuation term, US is cheaper.

Finally, coming to the PPFAS Conservative Hybrid fund, what was the thinking behind it?

The objective of the conservative hybrid fund is to meet the fixed-income needs of investors. So, we would typically have around 12-13% in equity, 9-9.5% in Reits and InVITs and the rest in debt securities. Now Reits and InVITs are also cash-flow generating assets where you have quarterly payouts from the underlying asset cash flows and which currently are yielding 6-8% depending on the issuer. We are largely managing even equity to meet cash flow needs and some amount of capital appreciation rather than just looking at it as a growth asset. Now, it so happens that currently the best cash flow yielding assets are largely in the PSU space, and some in the private sector space. Sometimes this comes as dividend yield, and sometimes companies also use the buyback route to return cash to shareholders, and even that should be fine to us. But essentially, cash should be returned to shareholders, given the investment objective that is there for the fund.

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