Chandresh Nigam, managing director and chief executive officer, Axis Mutual Fund, says it is a great time for investors looking to build a portfolio as he sees potential in companies with strong business models, and transparent tax-paying firms with a focus on growth and innovation. "We see opportunities across the market cap spectrum," Nigam said in an interview with Fortune India.
Nigam also believes there has been a significant price correction in the mid- and small-caps space in the past two years. "We see limited downside from here for these companies," he says. The Axis Mutual Fund CEO is also optimistic about the growth cycle picking up in the months to come. "We believe that the worst is over and things should look up going forward.” Edited excerpts:
Low consumer spending has affected sales across industries, and outlook for domestic demand remains bleak. Do you expect corporate earnings to recover, or is there a risk of an earnings downgrade in FY21?
Corporate earnings displayed mild positivity as green shoots in consumer demand and corporate tax cut effects bore fruit at least sentimentally. Despite weak economic macro, companies with strong business moats have continued to sustain growth and lead in their respective market places. The festive season has seen some early green shoots as our analysts point out improvements in select consumer, discretionary and durables, sales. We believe that the worst is over and things should look up going forward.
Even as consumption is under pressure, the private investment cycle is yet to pick up. Capacity utilisation remains subdued, and commercial lending has declined over 85%. Are we looking at a prolonged period of the bottoming out process before we see meaningful signs of economic recovery?
Multiple structural reforms over the past few years have reshaped the Indian economy. This has caused short term pain. Given the extent to which policy action has changed the way business is done, corporate India, as well as consumption has been impacted. The synergies of these changes should start kicking in over the next few years primarily driven by debottlenecking and transparency in business operations. The changes reflect in the ease of doing business metrics published by the World Bank. The slowdown today is reflective of legacy issues winding down and should normalize as we go forward.
Classic examples of this happening are in the banking space where RBI’s emphasis on transmission of rates is driving interest rates down while the insolvency code and NPL (non-performing loans) clean-up are making banks’ balance sheets healthier. The tax system has seen a major overhaul with GST changing indirect taxation and the huge corporate tax cut a fillip for direct taxes.
The Reserve Bank of India has cut interest rates five times this year, but the benefits haven't really trickled down to sectors that are struggling with liquidity issues. How soon can these issues be effectively addressed?
The issues plaguing the investment sector and corporate capex have been long-term structural issues that take time to resolve. The government on its part has taken a series of steps to resolve the deadlock and close out legacy issues. Resolutions through the bankruptcy code have started and we have seen incremental relief to bankers and financial creditors. Given that all these things take time; the movement should be seen as a positive step.
The RBI on its part has kept the liquidity taps open while mandating banks to lend to end-users more proactively. The incentive is to disburse more at rates that are market-linked. All these are positives in the current environment.
Now, inflation has inched up to a 16- month high of 4.62% in October. Do you expect a further rate cut in December and in the coming months this fiscal?
The inflation spike this month has been largely on account of food prices spiking. This is largely seasonal and should not raise alarm bells. Core inflation continues to remain comfortable. Food prices should moderate as the supply from import substitutes stabilizes prices over the next few months. As a fund house, we believe inflation will remain within the RBI band till the end of the financial year. Given that growth metrics remain weak, the focus of monetary policy will be skewed towards boosting growth rather than containing inflation.
Given the underlying weakness in the domestic economy, are foreign inflows mainly driving the market? Can the market sustain the strong momentum in the coming months and what is the potential one-year upside for the Sensex from its current level?
Markets today are at all-time highs but there is a stark dispersion in the way stocks are moving. The current rally continues to remain narrow as market participants err on the side of caution. Foreign investors continue to remain bullish on the India story given the relative global context. Despite the current market levels, underlying stocks continue to remain well below their highs. As the economic sentiment revives, and the market broad bases itself, we should expect markets to perform normally.
What was the strategy that helped you to outperform peers and buck the industry trend in times of market volatility and several macroeconomic challenges?
At Axis, we primarily follow bottom-up stock selection approach with a minimum 2-3-year view on stocks. We retain a bias towards high quality and growth with strong fundamentals and these are hallmarks that are the key lookouts for our fund managers to select companies for their portfolios. There are four principles that the investment philosophy at Axis is driven by and these are: Strong corporate governance/Strong promoter pedigree, Secular growth rate of the sector; which is anywhere around 1.5 to 2x of GDP, Strong business model; which demonstrates its pricing power in the product category and the business it is in, and ultimately good ROE’s and cash flows. Our portfolios are based on this philosophy and have been continuing with it since our inception in 2009.
You have been upbeat about the financial services segment, and your key investments include banks and NBFCs. What is your outlook for the BFSI segment in the coming months?
Banking & finance as a sector is a relatively large sector. Our exposures across funds have been largely focused towards retail-centric private sector banks and select NBFCs with strong brand presence and market pedigree. Well managed books have been favoured by the market in light of concerns over asset quality in the aftermath of the IL&FS default. As a sector we remain constructive on this space but will remain stock specific in our investment approach.
Which sectors are you overweight in terms of growth potential and returns to investors in the next 12-18 months?
We see opportunities across the market cap spectrum. Companies with strong business moats and credible and transparent business practices have been able to weather the storm and come out leaner and primed for the growth cycle. As the economy recovers from the growth shock, such companies will be in a sweet spot to capture business opportunities in their respective sectors.
On a broader note, mid and small caps, in general, have seen a significant price correction over the last 2 years. We see limited downside from here for these companies.
Given the economic slowdown, would you say large-cap funds have made a comeback and over the next year do you think there is a case that large caps may outperform small and mid-cap funds?
Markets have been negatively impacted over the last 18-24 months on the back of tailwinds both on the global geo-political side of things and domestic macroeconomic factors. During this period, the market has clearly rewarded quality. The flight to ‘safety stocks’ had led to narrowness in the market. Today, we see some broadening of the market. To that effect, we believe that we are in a stock pickers market and it is a great time for anyone looking to build a portfolio.
I would like to go one step further than to pick a category of funds. Across market capitalisation you have seen winners and losers. A common theme amongst the winners has been strong business models, transparent tax-paying companies with a focus on growth and innovation. Our call is to invest in such companies.
Given that the aim of equity mutual funds is to perform consistently over long periods of time, thus generating long term wealth, structural growth stories rather than cyclical short term stories are our focus points in our equity portfolios.
When do you target to launch your fund of funds focused on China? What's the investment thesis for sector exposure and returns?
We have filed a draft with the regulator. Once we get the necessary approval, we will come back to you with more details.