Smart Talk with Miyush Gandhi

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Miyush Gandhi is the Fund Manager for Canara Robeco Emerging Equities. Gandhi is a Bachelor of Commerce and Master of Business Administration. He speaks to Geojit Insights on Canara Robeco Emerging Equities Fund and current market scenario.
Canara Robeco Emerging Equities Fund is a 5 star rated fund by Geojit and has been recommended by us in large and midcap category for many years.

In the last three months banking has emerged as the top sector in Canara Robeco Emerging Equities Fund’s portfolio, from a meager presence of less than 4% to 25.74%.  Looking at this increase, what is your outlook on banking sector keeping in mind the Yes bank issue which you exited in the month of September?

We would like to evaluate BFSI (Banking and Financial Services Industry) as a sector rather than looking at Banking and Finance separately. The business outlook for the participants in BFSI sector has changed post the ILFS issue and the liability side challenges for the NBFCs. The revised outlook indicates to a slowdown in growth and/or profitability for NBFCs and acceleration in business for banks with better liability franchise as they gain market share at the cost of NBFCs. Some large corporate banks are now seeing the end of the asset quality issues, aided by some successful resolutions under IBC, coupled with new management in some cases.  As growth picks up and asset quality stabilizes we expect ROEs for these corporate banks to improve and valuations to revert to historical levels.

Six months back finance was the top sector in Canara Robeco Emerging Equities Fund’s portfolio. But, in the past months you have reduced the exposure towards this sector drastically. What is your outlook on this sector as there is a tension prevailing in the market regarding the default risk on the bonds issued by these companies?

Post demonetisation, wholesale funding rates fell considerably due to surplus liquidity in the banking system. As most NBFC’s are dependent on wholesale markets for their funding requirements, we saw both loan growth and margins improve for the sector. However, that sweet spot has changed post the ILFS default issue. We would like to wait and see implications on the liabilities profile (on both quantum as well as cost of borrowings) as it can impact the growth and or profitability. Going forward we do expect NBFCs engaged in with retail lending to fare better than those in wholesale lending as the underlying retail asset quality in intact.

Looking at the past six months portfolio of  Canara Robeco Emerging Equities  fund, even during  the down side market  your debt and cash exposure has never been more than 5%  compared to your peers. Is this a part of any investment strategy which you follow?

We believe, as a policy to remain invested in equities identifying better investment ideas rather than using cash holding as investment strategy. Our cash is restricted to around 5%.

What are the entry and exit strategies which you follow while constructing the portfolio of your funds?

We follow a combination of top down and bottom up approach towards constructing the portfolio. Inputs from various sources are used to formulate views on the factors affecting the economy and the sectors that are likely to get benefits/impacted. Companies are evaluated on the BMV framework (Business strength, Management quality and Valuations vis-a-vis growth) to identify the ones that are best positioned to benefit from the expected macro outlook. Entry parameters are monitored on an ongoing basis and any material change in either of the parameter warrants for a fresh evaluation. Exits are mostly a function of material change in those parameters.

What is your current overview on categorisation and rationalization of mutual fund industry, as it has been a few months since the regulator came up with this move? Did it affect your strategies?

The move by the regulator will go a long way in helping retail investors in investing in schemes that meet their investment goals more accurately, as the scope of investment is well defined and uniform across the industry. It will also make evaluations of funds easier and objective. While it may appear to reduce the flexibility in the hands of the fund manager to some, we don’t expect it to impact our portfolio strategies in any material way.

What are the challenges which you face while selecting a stock for your portfolio from a limited number of 250 stocks? Why AMCs do not think beyond this common bunch?

The challenges of selecting a stock are the same, whether it is part of the 250 stocks or otherwise. Stock selection process is always a bottoms up exercise, based on our assessment of company’s ability to perform in expected macro environment. We keep evaluating companies across market cap spectrum and we already have investments in quite a few companies that are beyond the 250 list. Of course, the aggregate investment in these companies would be within regulatory limits prescribed.

The rising cost of working capital has hit corporate earnings severely. This quarter earnings, though improved on better volumes, poses a concern in the coming months. What are the cautions investors should take?

Rising raw material cost tends to impact reported margins as well as return on capital employed. Hence it is important to focus on companies that have pricing power or are backward integrated as they are less likely to get impacted from rising costs. Companies in the B2B segment where competition is heightened to be more impacted in such environment.

GST collection is improving and it is a welcome news for the coming fiscal. How better can it get? What would be its positive effect on economic variables?

GST collections are budgeted at 12 lac crores for the full year while the actual collections are running lower than the required run rate. We are seeing a month on month improvement in collections and normally 2H is seasonally better from economic activity perspective and hence GST collection should increase going forward. However, we may not meet targets. In terms of impact on other economic variables, as GST is a value added tax, a like to like growth in GST collection will be a good indicator of economic growth in the country. Higher collections will also lead to lower fiscal deficit and lower government borrowings.

Valuations of mid and small cap stocks have come down. But still investors stay away from entering at current levels? Do you expect more pain in the NBFC or any other sector? How much deployment one can do at current levels?

Confluence of factors including lower raw material cost and lower interest rates, led to rerating of mid and small cap companies in FY15 till FY18. As both of these factors started reversing, valuations have also taken a reversal. However, we do not expect valuations to go back to historical levels as growth is better. Going forward we expect stock returns to be more led by earnings growth, which will accrue over time and hence one should look at gradual deployment of funds via SIP.

What are the long term macro impacts of trade war on emerging economies? Is India less affected than other countries? Why?

Talks of Trade wars will have more medium term impact as capital expenditure decisions will get reviewed due to uncertainties around duties and taxes. In the longer term companies and countries will bring about necessary adjustments in their business models and manage the trade war led changes. India being a net importer of goods, the net trade balance with most countries is not material and hence not a concern. In fact this could be a positive for India as global companies try to diversify their sourcing base outside of China.

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