As a house you represent a portfolio centred around quality. It was high PE or high price to book but had promise of growth. But is the basic growth assumption getting challenged now with the kind of holdings which your fund managers currently have?
Amongst our safe flagship funds, the top sectors are basically private sector banks and insurance companies. We have a bit of auto, white goods, consumers and oil marketing companies and we have taken a bit of knock out there. But these are the key ones. Of course, there is IT and we are never into the deep end of infrastructure or cyclicals but we do have some amount of linkage with capex. This is where we are in terms of our sectoral allocations.
In terms of NBFCs, we mainly had HDFC and Bajaj Finance in our portfolios and the rest were either not there or we had marginal exposures. We have seen the result season play out as it shapes up now but so far, things are holding up.
How challenging is it getting for your fund managers to deal with all the questions and anxiety which must be prevalent in the market and your investors right now?
Communication is always the key task of what we do in terms of maintaining transparency, line of contact and communication. That is critical. I am banking on this result season and maybe the next one for some amount of choosiness or some amount of discerning behaviour to come back in the market. If you ask me, last year or so, has been challenging on two fronts. There are errors of omission and errors of commission.
Errors of commission are widely tracked but errors of omission also have to be noticed because of the way the index has behaved. A good part of the movement was centred around a few stocks — some of them cyclicals. From our perspective, we do not find those fitting with our investing philosophy. We typically hold stocks for four-five years and we would rather wait through a time correction rather than making dramatic changes. That is how we are looking at this. From here, we would see a significant amount of outperformance. I expect the market to be a bit more discerning and that always suits us.
Is the market terrain forcing you to rethink some of your core investments? If the basic delta with some of the companies is changing because of low interest rate regime, will your portfolio approach also change?
Of course, there is a sense of interest rates going up and that always results in some amount of PE compression. When you look at quality and growth-oriented companies, what you are banking on? When you have quality and when it is relative to the market, even if it is relative to the market, if it grows better and these are quality businesses, the worst outcome will be time correction and two-three quarters down the line or a year down the line, the earnings would act as a back stop.
If you are not in quality and if you are seeing huge disappointments in growth, I do not think even a concept of back stop really works. You can actually have huge capital corrections. The way I see it, with our kind of strategy, the worst outcome is that you hold a bit longer but there are more high beta or more riskier strategies where the worst outcome is a significant capital correction, if we get at the wrong end of the cycle.
For example, last quarter Page had a 22% volume growth and a 40% PAT growth. Similarly, if other consumer businesses results shape up, FMCG businesses will see double digit volume growth. Whatever we are hearing of the rural economy and the elections spend and all those things, were not under severe questioning at this point in time.
As far as the private sector banks are concerned, right now, a lot of financials are under cloud. But all financials are not NBFCs. We had no exposure to the DHFLs or Indiabulls of the world. We would stick to quality and I do not see why private sector banks and insurance companies need to be smashed by 30-40%. In hindsight, it is true that they were expensive but I do not think one can make a case that they are embroiled in whatever is happening right now.
In fact, some lag effect will be seen in private sector banks market share and their business momentum because in last two to three years, a lot of business moved out of the banking system into the capital markets. Instead of putting money in banks and banks doing the lending, people have started putting huge money in mutual funds.
For example, debt mutual funds in last five years have moved from Rs 4.5 lakh crore to Rs 16 lakh crore in terms of corpus. Debt mutual funds saw huge inflow. They started lending to NBFCs and financial institutions and that is where credit got completed. Now, private sector banks are back on the liability side as well as on the asset side.
With some lag effect, right now, everything is under a cloud. That is why I started by saying that market is being indiscriminate. If we are patient, we will see significant outperformance.
What is the approach Motilal Asset Management taking amidst the NBFC turmoil?
I mentioned a couple of large names which we have currently in our portfolio and the others are marginal right now. But I accept the point that a couple of years back, we had significantly higher exposure and beginning middle of last year, we started reducing it dramatically. I am talking in general across our PMSes as well as our mutual funds. A couple of them even indicated that there is an issue with the asset quality and that they would like to slow down in terms of their growth and those stocks got knocked down first.
We read some signs and we were not zero but we had dramatically reduced exposure and right now, we do not hold any of the names which seemed to be embroiled in trouble.
We have always had zero exposure in DHFL, Indiabulls, etc. We did not have any of those stocks since our inception. We have had exposure to more of the hard core mortgage related names, that is one. Second, I accept your point that in the last three to four years or five years, because of the shift from banks to capital markets because banks have not been growing and a lot of the activity got shifted into capital markets. It led to the belief that NBFCs had a great highway going forward.
But the events of the last two-three months coupled with the showing up of asset-liability mismatches and rising interest rates, means some of that hypothesis has gone for a toss. It is not playing out as was originally anticipated but I would like to say that we caught on early and our exposure are pretty much negligible by the time the new scenario came up.
As mid and smallcaps fall 30-40-50-60%, one gets tempted to pick these up. Should one be a contra buyer here?
I would stick my neck out and say that there are some small caps and midcaps that have become attractive. The market mood may not favour them for another two-three quarters and one did not know how long this would persist but we must accept that ultimately over a five-seven-year timeframe, if you buy the upper end of smallcap or good quality midcaps, they do end up outperforming.
After a fair amount of correction, there are a few stocks which are showing value. I would not shy away from saying that some cherry picking can be done. Of course, the expectations need to be kept in check. Why I corrected myself on the dramatic bit is because most people do not seem to remember that in 2017, the smallcap index went up 57% and from that level, this year it is down 35%.
If you do the arithmetic, it is where it was a year and a half back. In the intervening period, look for the companies whose fundamental performances have held up.
How are PMS flows moving?
The net flow is still positive and this is not something for me to claim. These are numbers which are published on the SEBI website. Only thing is that when you see this publicly available data. you need to have some insights to segregate the impact of mark to market and the impact of inflows and outflows.
Definitely, September was quite a bad month in the sense that the mark to market impact across portfolios was quite significant. You would see a lower AUM, but if I were to genuinely report just the inflow minus outflow, then it is still net positive. Definitely, the volume of inflow has declined compared to what it used to be six, nine months or 12 months ago but if I actually do inflow minus outflow, we are still net positive. These are typical market cycles.
What do you mean by genuinely report?
I am responding to how you put the question because there is a belief that there are outflows and that is why I was trying to clarify to you. We have Rs 15,000 crore of assets and let us say in a month, the value drops by say 7-8% or 9%, then on Rs 15,000 crore we would lose Rs 1,000 crore by way of mark to market, and it would come across as a decline in AUM. But that is part of the game. It is equity and so mark to market can happen.
When I said genuinely report inflow and outflow, I meant that you keep the mark to market aside and just focus on how much money we receive and how much money we pay out. The number is net positive.
Do you feel that out of all the earnings that you have seen thus far, it indicates that Q2 may not be as bad as one was anticipating?
It is going to be a bit unfortunate. We have been waiting for earnings to look better and our sense is that Q2 earnings will look better than what Q1 was or what it has been in the past. But the fact is that people would still like to see how the next two quarters shape up because in the background, so many things have happened and even if we see a good Q2 in certain pockets, people will worry whether Q3 and Q4 will sustain or not.
Definitely Q2 numbers are looking better than what it used to be in the past but then people would like to caveat it and be a bit choosy and see which parts of this is going to sustain forward. It is very clear that some of the financials or some of the interest rate sensitives or the heavily-leveraged companies including NBFCs, are going to be impacted.
For example, if you are selling down your portfolio, one has to see at what yield you are selling down, how it is going to impact the NPA levels on the residual or how this is going to impact the real estate firms, how is it going to impact the demand and oil prices and its impact on auto demand.
One has to caveat some of these things because we do not know whether Q3 will shape up as well as Q2 or not. There are bit of clouds right now, no running away from that but on your specific question, this quarter is looking better than what it has been in the past.