Though a late mover, Bajaj Finserv AMC still has an advantage considering the long runway for growth for the mutual fund industry in India, says Nimesh Chandan, CIO, Bajaj Finserv AMC. Read on to know his views on the markets, valuations and the just-concluded results season.
Edited excerpts:
Bajaj Finserv is a late mover to the mutual fund space. With existing fund houses covering a broad spectrum of investment styles and philosophies, what do you bring to the table?
The mutual fund industry in India has many years of growth ahead. We see the mutual fund industry having much higher penetration in developed markets like the US and Europe as well as Asian economies like China and Singapore. So, I think in India, even while the journey has been so great, we are just at the beginning. We believe we are bringing some differentiators to the market. In our investment philosophy, we talk about how we’ll do better than the crowd and create long-term wealth for our investors. There are only three ways you can do better than the crowd — one, have superior information; two, through superior analytical or quant models that help you process that information; and three, a behavioural edge in terms of how you react to the output of the quantitative models. So, we try to combine all the three and create an edge. If you see our products, our first equity fund launched in the flexicap category is based on a strategy called ‘megatrends investing’. Here, we identify megatrends that will unfold over the years and zero-in on companies that can benefit from them.
You have an ongoing NFO on the consumption theme. But the just-concluded earnings season as well as commentary has been quite disappointing for this space. What is your outlook for consumption?
For companies in this space, the longer-term story is very attractive, though they are having some challenges now. For most FMCG companies, you’ll find the commentary saying that while the rural growth has been quite good, it is the urban growth that has been slow. This could be a temporary issue. On the urban side also, incomes are growing. Actually, the structural driver for the consumption space is India’s per capita income growth. India’s rising middle-class and people moving from necessities to aspirations and then luxuries define the theme for consumption space. We are trying to capture four megatrends within that. The first is, ‘consume more per capita’ – as income rises, the frequency of consumption and the penetration of certain products go up. This will mainly be applicable for the rural side. The second is ‘consume better’ – as people move from unorganised to organised, they will consume better brands. The third part is, ‘consume well’ – brands and products that allow customers a certain option in wellness and healthcare will be part of our universe under this. The fourth is ‘consume easy’ – where trends like the latching on of quick commerce will be captured.
While things were looking good for banking, Q2 results of certain banks have evoked very sharp selloffs in the market in recent times. How big a worry is unsecured lending for banking stocks?
While growth and margins are important, credit quality is a key factor to look for when choosing a banking or a financial services company. The most important pillar among these three is the asset quality. We are not overweight on the banking sector, but wherever we have invested, we have a good, concentrated bet. These would be, say, certain private banks who have improved on asset quality in this quarter and delivering good growth and margins. We have only one public sector bank, which we believe is a leader, and would deliver better numbers even in this environment. That said, in Q2, some of the companies in NBFCs and in banks have seen pressure on asset quality, which has come mainly from microfinance exposure.
I don’t think it was a sudden or an unexpected outcome. In the last two quarters, there were signs of certain slowdown in collections on the microfinance side. So, I would say some of these risks were probably unnoticed by the market when we were in a bull run, and those are showing up now.
Nimesh Chandan has been part of the mutual fund industry for 17 years, where he has managed products across market capitalisation and themes, and developed models on Sustainable Investing, Quant Investing and Asset Allocation.
He is also a keen follower of Behavioural Finance. He was earlier associated with Canara Robeco AMC as Head – Investments, Equities.
Has your Nifty earnings outlook changed now, compared to the beginning of this year?
More often than not, estimates that analysts make at the beginning of the year are revised downwards. So,whenever we forecast, we try to add a bit of cautionin the estimates that we see in the market. Typically, we would be 4 or 5 per cent lower than what the market estimate is and from Q3 onwards, you tend to get clarity on how the year will be. So, majority of the changes in consensus estimates also happen in the first half of the year. This year is no different and we will see downgrades.
In the last two years, for most companies, the top-line growth has been in high single-digits. However, margins have helped a lot of companies to improve their profit growth. This quarter onwards, there is certain convergence between the two and overall, there has been a slowdown in earnings. I think the market consensus now is at about ₹1,080 for Nifty earnings for this year-end, and about ₹1,200 for the next year. Our own estimate today is about 2 per cent lower.
How are you looking at valuations today?
We look at intrinsic value rather than just giving a PE multiple. On the Nifty, we’ve been a little cautious the moment Nifty went above 24,400 earlier. It’s now around the number that we have as a fair value. In mid- and small-caps, the expectations are much higher and that’s the worry. Also, even if the companies meet expectations, they don’t give enough compounding to the investor, because they will just be growing with the earnings growth rate / just matching the growth rates of profits.
