Smart Talk With Sailesh Raj Bhan

0
93

Sailesh Raj Bhan is the Deputy CIO – Equity Investments, Reliance Mutual Fund. He has about 19 years experience in equity research and fund management. Bhan manages diversified equity schemes like Reliance Equity Opportunities Fund and Reliance Top200 Fund (a large cap diversified equity fund) since its inception in 2007. The Reliance Top200 fund has built up a sizeable lead over the benchmark and category in the last three years, it has climbed from a three-star rating to four and five stars in the last one year. And this large cap fund has been recommended by Geojit research team for many years.

What would be your advice to investors waiting to enter the market on next correction? They say market seems heated up, valuations are high and macroeconomic situation is not conducive after GST and demonetisation causalities.

We believe India is in a structural growth phase supported by lower inflation, falling interest rates, lower oil prices and policy actions like GST, banking sector reforms, UDAY etc. Given this platform we believe India’s economy can potentially double from the current USD 2 trillion, over the next 6 – 8 years.  Also, earnings growth, which is yet to unfold, can be an important trigger for the markets, going forward. We expect to see a double-digit growth in earnings for FY18 and FY19.

Thus while the current valuations are definitely not cheap, we should also consider that after a gap of 5-6 years big geographies like US, Japan, China, Europe are witnessing a growth rebound. This is very important for markets because not only does a significant part of market earnings benefit from global facing sectors but also typically India’s correlation to global GDP growth is very high.

Hence we believe investors with a long-term risk horizon and appropriate risk can consider investing in equities in line with their overall asset allocation plan.

Pet coke ban has already started reflecting in cement prices. About 67% of the output is used by housing sector. Affordable housing and rising cement prices seems playing a contradictory game. What is your outlook on this industry and the effect of this development on infra dreams?

Cement sector is a direct beneficiary of the Government led capex spends in areas like roads and other infrastructure related segments. The huge focus on Housing for All by 2022 along with drive on affordable housing is yet another positive for the sector. Hence we expect the cement space to benefit from these developments over the next few years.

In the past 3-4 years we had witnessed a downward cycle in the pharma sector. But, in recent months, some small positive signs are coming from this sector. Does this imply that the recovery stage has started? What will be your stock picking strategy towards pharma sector, as the external factors are settling and the stocks are available on a low valuation?

Pharma sector has witnessed a challenging period over the last couple of years and underperformed the broader markets. We believe that this cycle of challenges may be nearing its end and the sector appears poised for a reversion. Within the pharma space our portfolio is well diversified across all key segments like domestic, international and emerging themes like contract research, specialty hospitals, diagnostics etc. While the focus is on stock specific opportunities, we believe the domestic business is a huge growth area given the lower penetration, better awareness and higher disposable income. The sector can deliver over the next few years. Given this optimistic view on the sector we have recently increased our pharma allocation in Reliance Top 200 Fund.

The portfolio P/E ratio of the fund is 26.88 which is 1.38 more than the Bench mark P/E. Does this imply that the fund is on high valuation? Will it have a pullback effect on returns in near term?

Our focus in Reliance Top 200 is to invest in market leaders and companies with leadership capabilities, where the ROE (Return on Equity) potential is higher. This strategy, at times, can result in higher P/E’s. However, the higher earnings growth potential of the fund more than compensates for the same. For example: as of Nov 30, 2017 Reliance Top 200 fund has generated 1 year return of 32.57% vs benchmark returns of 27.24% for the same period.

When we look at the sector allocation of Reliance Top 200 fund, it is noticeable that there is an increase in the exposure towards telecom sector from a market value of Rs.2.98 crs in Apr-2017 to Rs.113.25 cr in Oct -2017.Post a consolidation of players in this sector, what returns can one expect from telecom? Will it be more like an FMCG scenario? Notwithstanding the growth potential in terms of new users in a country like India, will the price war reduce margins in coming days?

The overall allocation for the telecom sector in the fund is only around 2.4% as of Nov 30, 2017. Thus, our exposure in the fund is very small from an overall portfolio perspective. Given the consolidation of players and likely tariff increases, the segment profitability is set improve going forward. Hence telecom space can provide a potential opportunity to benefit from both operating and financial leverage over a period.

Kindly share your views on the recent announcement by the government for recapitalising the PSU banks. How long would it take for the PSUs to bounce back from NPA and MCLR issues? Is it a right time to stagger invest into PSU bank segment?

Banking recapitalization will provide lot of confidence in public sector banks because they were saddled with NPAs. They need capital to facilitate further lending and to take write-off for bad loans. This apart, it will improve the whole environment for growth. PSU banks will now be ready to look over the past problems and fuel growth. This will also make some of the PSU banks turn as lenders for larger infrastructure projects. With fresh fund infusion they can now lend with renewed confidence. This will provide a big kicker to restart the economy.

In the recent years the Government is giving a lot of emphasis on infrastructure sector especially in the capital expenditure as well as affordable housing. New schemes and reforms are introduced to support and regulate this sector.  Construction being one among the top 5 sectors in your fund, what are your views?

We remain constructive on the infrastructure themes in general and construction in particular, which will continue to benefit from Government led capex push. This segment is expected to benefit immensely from the key policy initiatives and developments like speedy NPA resolutions, banking recapitalization, ease of doing business, manufacturing revival, lower interest rates etc.  which in turn can fast track economic recovery. With government facilitating huge investments, it is only a matter of time before private sector investment revives.

What is your outlook on mid and small cap segment? What would be an allocation range for a moderate risk-taking investor?

Within the mid and small cap segment our focus remains to investing good quality businesses with potential to scale up and higher ROEs. While valuations are not cheap, we expect earnings growth to revive meaningfully over the next few years which can further boost the domestic recovery, in turn benefitting the mid/small cap segment. In Reliance Top 200 Fund our allocation is focused on the larger mid-caps and the fund has approximately 20% allocation to this space.

What is the investment strategy and philosophy you follow and how it has helped you in generating returns?

Reliance Top 200 Fund invests primarily in large cap companies or market leaders (At least 80%) with well-established track record across market cycles.  The exposure to emerging leaders or mid-caps is also made in quality businesses with sustainable long term advantages. The key investment philosophy for the fund is ‘Buying Growth at Reasonable Valuations’.

The focus is on identifying growth opportunities at rational valuations and relative valuation is an important tool to decide portfolio allocations. Significant sector calls based on cross sectoral value divergence and allocations to potentially high growth mid-caps with sustainable businesses & long term competitive advantages, are the key alpha generation strategies adopted by the fund. For instance, in the recent past exposures to themes like oil and gas, corporate lenders and engineering themes which were not in limelight at the time when we invested, contributed to the outperformance.  Hence the approach is to be ahead of large market shifts to capture sustainable alpha.

Further the fund portfolio is monitored constantly to ascertain sensitivity to macro variables by classifying the industries into 1) Cyclicals, 2) Semi-Cyclicals and 3) Structural industries.  This allows for better risk assessment and management of the portfolio in line with our focus to generate superior risk adjusted returns across market phases.

 

 

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here