Sailesh Raj Bhan, CIO, Nippon India Mutual Fund, says The only real sensible place today where valuations are reasonable and sensible is the large cap space and these are those blue chips which have been in a way forgotten. People have difficulty in talking about them today. So there is just no froth, there is no excessive euphoria around those and all and they are very sensible. The larger companies in India are quoting cheaper than the smallest of small companies, which is a reflection of the fact that there is some dislocation of markets and opportunity emerging in the largecap spaces today. Clearly, the relative risk reward or attractiveness of largecap space is way better than other spaces today. That is where sensible value lies and hence people can reallocate capital if they are heavily invested in the small and midcap spaces.
have to talk about the market and we will also be focusing on your large cap fund but then let us understand the market condition right now. So far, the FII selling figures have gone beyond Rs 80,000 crore whereas DII buying has crossed almost Rs 77,000 crore. So in a way it has been neutralized. On Wednesday, we saw a great number of FIIs coming in which is why we saw the markets today also really going up but then we have the festival of elections in India soon. Looking at all these triggers and changing situations, especially the FII trend, how are you reading the market?
We have seen a nearly range-bound market in terms of larger indices for the last two years now plus or minus 5% kind of movement on a compounding basis last two years, which itself reflects the kind of current conditions we are going through, for example, the global challenges whether it is related to the geopolitical side or from interest rates at the levels, where higher for longer kind of a thought process there and also issues, like you said, in India and locally the election will led volatility. Additionally also a little bit of crude lead pressure would also come about.
So if you look at the market construct, which has been there for some time now, has been the fact that global macros are not great, Indian macros are okay and improving and growth rates are a middling or very moderate at the moment in India though this quarter results have been reasonably okay.
So given this framework and constraint we have seen markets plus or minus 5% in the last two years on a compounding basis. Also, we have seen material foreign institutional investors selling. All this leads to a fact that there is no froth at least in the larger side of the market or the largecap space of the market and that makes it fairly interesting and attractive for a medium-term horizon. This segment certainly appears to be sensibly priced given where the macro conditions are and there has been significant selling, taking away the excess froth in the space.
Now considering the scenario you explained, what is on your shopping list in terms of stocks and sectors?
Clearly there is a segment which I would call the forgotten blue chips. These were the set of companies which people loved to own four years back and these were the spaces where people said that we will never sell them forever or buy forever type of spaces and those large businesses today are forgotten blue chips, virtually nobody talks about it and people find it the most painful or the most unloved space. That is where sensible value lies.
This is across large banks, this is across consumer staple businesses though they may still be a little more expensive valued than normal but their earning cycle should get better from here. So a lot of businesses especially in the largecap side have remained in banking, in consumer side and remained flat at least for three-four years, depending on the kind of businesses you choose and these are high quality businesses but they are not in momentum today and hence are being ignored. This is one space which within what is available to us is much better priced and much better on a risk reward basis as we see it.
Let us focus on your fund now. This is the time where you know people are looking at largecaps because valuations are very attractive. Specific to your largecap fund, what are the kind of quality of stocks and companies you are focusing on? If you find the valuations very attractive, you know what is the strategy and what is the sector exposure like?
Primarily we were overweight on financials, utilities, manufacturing and engineering businesses and neutral-ish weight today on consumer staples which is why the space is getting attractive as of now. The other side where we underweight still is IT services which is a material underweight for us given that the near-term growth rates globally are weak and the outlook remains weak even after corrections, that space might still middle around for a long period of time but the clear significant overweights are banks and financials, pharmaceutical spaces then engineering and manufacturing select businesses, where there is relative sensible value and the utilities as we mentioned.
Avery old debate is whether to go the active way or the passive way has resurfaced. People are focusing on passive strategies as far as largecaps are concerned. What should be the strategy going ahead since we will be seeing largecaps coming back in favour. Should it be a passive strategy or an active strategy from now on?
Yes the largecap versus passive strategies or active versus passive has been a debate in the markets for quite some time now. When the market was extremely narrow three years-four years back, passives were outperforming a large number of largecap strategies. But as markets have become broad-based, material alpha is now available in largecap spaces. Our belief is alpha is there irrespective of capitalisation whether it is largecap, midcap or small cap.
It is about how portfolios are positioned, are fund managers taking the right risk, are we taking conviction calls versus benchmark or not? I think that is what determines alpha. I do not think alpha as a construct is not there in largecaps and only there in certain other categories. So this is very clear.
Second, largecaps in India are basically midcaps in the context of global scale and size. Only three companies in India are in the global 100 companies in terms of market capitalisation and I do not think our economy can become larger and bigger without these large businesses demonstrating, delivering, investing, scaling and participating in the new age technology spaces which are there. Some of the best users of technology today in India are actually in the largecap space. They are not in the disruptive smallcap or unicorn space in India.
So largecaps themselves can grow way bigger from where they are today that is one option. Second option is also the fact that indices generally get narrowed at some points of time leaving aside a large number of young companies with Rs 40,000-50,000-crore market caps in largecap space which can become multibaggers over a 5-10-15 year period.
So the space is very spread out. Opportunity is good. Now the valuations are sensible and like I said alpha is a function of how you construct your portfolio versus the index. So it has got to do with how asset managers focus on the category rather than active versus passive. This active versus passive debate has also been there on say online versus offline. You know that online will kill offline. You know today offline is growing as fast as online in India. So a lot of these have become narratives. They work well for two or three years but over the medium term, there is tremendous alpha opportunity in India in large, mid and small cap spaces.
All right so in a nutshell can we also say now it is time to go heavy in largecaps? Maybe if you have made profits in midcaps and smallcaps, it is time to book some profits there and shift that money to largecaps. What will you say?
The only real sensible place today where valuations are reasonable and sensible is the large cap space and these are those blue chips which have been in a way forgotten. People have difficulty in talking about them today. So there is just no froth, there is no excessive euphoria around those and all and they are very sensible.
If you look at it the larger companies in India are quoting cheaper than the smallest of small companies in India today which is a reflection of the fact that there is some dislocation of markets and opportunity emerging in the large cap spaces today. To your question whether one should book profits in mid and smallcaps and move to largecaps. clearly the relative risk reward or attractiveness of largecap space is way better than other spaces today. That appears to be where sensible value lies and hence people can reallocate capital if they are heavily invested in the small and midcap spaces.
Just before the main Lok Sabha elections, is there any specific sector on your radar or maybe a dark horse that you have been tracking but do not have in your portfolio yet?
Sensible value will be emerging where you have some disappointments which might come up in the next couple of quarters. Tech is one space where there has been some disappointment but there will still be some challenges as we get along and there already we have seen one leg of valuation correction of 30%-40% especially in the largecap side.
We may find some more opportunity emerging in that particular space so that is one sector which looks generally interesting and if price corrections are very sharp there could be an interesting opportunity to capitalise on. Consumer staples has been meddling around earnings might improve from where we stand today but there also there is some element of valuation excessiveness a little bit of element of valuation which is still left in that particular category even after three-four years of correction and that is one space opportunities might emerge as we get along as growth rebounds there and these are the two areas where we think there is possibility where one could look at over a period of time.