'Market in right configuration for mid-, small-cap stocks'

Monday 4th March, 2019

Article Details
Publication  Mint
Source  Latha Venkatesh, Surabhi Upadhyay
CCM  133.05
Edition  New Delhi
Supplement   NA
MAV  425,760
Language  English
Page  11
Circulation  93,000

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'Market in right configuration for mid-, small-cap stocks'
Latha Venkatesh, Surabhi
Taher Badshah, chief investment officer-equi-ties, Invesco Mutual Fund, says the small-andmid-cap space, especially auto, looks promising. Edited excerpts:
Did you start your mid-and small-cap fund at the right time? Is the market giving you indications that the worse of the price damage is out of the way?
At least from the point of view that we have got adequate time to think through our positions, think through our stocks and buy them relatively comfortably during this whole phase ,,,f
of the last six iN I fcRVIEW
wouldn't say that the mid-cap and the small-cap market has kind of done much. It did show up for a couple of months and then we have once again caved in. So, net-net, there is not really much on the table from the point of view of absolute returns.
However, clearly from a perspective of building out a nice and neat portfolio over the next 2-3 years, it has given us enough time opportunity to think through and even buy, given the liquidity constraints.
So, that has been the advantage of having launched it a few months ago. It reflects our conviction that this is a right time, not withstanding some of the things which are immediately lined up in terms of events, etc.
Over the next 2-3 years, I think, this is right configuration of the market in which mid- and small-cap, as an opportunity, makes sense. That is basically the faith that we are going ahead with.
We knowthat the February numbers (auto sector) might not be very strong, but what are you doing with auto stocks? Incrementally, we are getting a little more positive, we of course, owe positions, so it is not to say that we were absent from this space. The relative
attractiveness of the space is now getting a little higher, and we know that we will still pass through a few months, or maybe a couple of quarters, which may not look really very exciting from the point of view of headline numbers. But, this is a space, which generally has not seen such a sharp correction in the market for a fairly long period of time, in at least my memory.
So, we have been getting that opportunity in a long time to buy something, wherein couple of things have even turned reasonable cheap. Few other things are significantly off the highs in terms of valuations. This as a sector which still has a fairly decent amount of promise from a consumer discretionary point of view, as a sector. So, clearly, our preference is there. We own a lot
of different names in many of our strategies and both the ancillary, as well as the OEMs (original equipment manufacturers) space, is incrementally is look attractive. So, there we are as far as the auto sector goes.
You also have a small-cap index, and that was the one that actually took your breath away if you remember the index in 2017. It was the best performing index in the world, 60% up in 2017. How would you compare that? Do you think that has a better chance to outperform now? Your own small-cap fund? I would think so. That is exactly the notion with which we went into this, and the new fund offer (NF0) back then in October, 2018, we had seen valuations which had started to correct But even they had gone up to as high as 40% premium to the Nifty valuations at that stage. They were coming off, they had come off to more like a 10% premium by October.
And now, as we see it, we are actually seeing this small-cap index to be at a discount to the Nifty, or the large-cap indices, by modest amount, but still it is now at a discount.
So, that is by and large the sit-
Taher Badshah, chief investment officer-equities, Invesco MF.
uation that what we saw even in early 2014, or late of 2013. Similar kind of conditions, similar kind of anxiety, similarkindof market thought process, push back on small- and mid-caps, and so on and so forth. So, I think I see a lot of similarities from that year itself. Then we know what happened post-2014 up until at least 2017.
I am quite confident that we are seeing number of individual stocks turn cheap. Many of them a lot more attractive now and, in this kind of decline, everything from the good quality, as well as not so good quality, has received the same treatment. So, we have a lot more choice than we probably had in the early part. It is a big change in a very small period of time. I think that is an opportunity. Looking atyour portfolio, you have a lot of NBFC exposure. Correct me if I am wrong, but it looks like you don't want housing finance.
We have basically looked at more of non-monoline kind of NBFCs at one level. So, that is the reason probably why we were among the mortgage space, in particular. We probably preferred more of the large-cap positioning, simply because there will be a lot better place from the point of view
'A number of individual stocks are turning cheap...we have a lot more choice than we probably had earlier. It is a big change in a small period of time'
of the liability profile.
Whether we like it or not, many of these mortgage, the smaller- or mid-sized mortgage entities do have a fair bit of LAP (loan against property) or real estate developer-related exposure as well, which may or may not be very comfortable at this stage of the market.
So, to that extent, I think we have kind of avoided that space because the implication from that part of the book could be quite significant one way or the other. That is actually how our thought process has been, as far as the selection of companies for the NBFCs go.
Would you worry that the NBFC problem can still destabilize?
We are kind of behind that If I j ust look at it in con trast with, say, the banking sector-related problems we have been having for the last 3-4 years, it was a lot bigger and larger part of the banking space was a lot more stressed than NBFCs.
That is a unfair comparison, they have safe liabilities and they have the sovereign's hand so I would think that banks would never go under, they have the sovereign's hand. Here again there is another downgrade by Crisil ofDFHL so I am just
wondering, anyway your thesis is no accident?
I am not saying there will be no accidents, from an overall market perspective it should be relatively little more manageable, we are probably looking like being out of the crisis maybe the problem still remains and we have seen some aftershocks of it as well post the first crisis that we saw.
I am not undermining that the same time, but it looks like probably we will manage this little better than what we had to go as through the pain with regard to the banking sector as such over the last 2-3 years. I don't know whether the pain will be as long drawn as we had in the last three years.
It is a 10% uptick in B^jaj Autos February numbers, your thoughts on this? As far as Baj aj Auto goes they have been kind of reporting fairly steady numbers even in last few months. We will have to look at the split. I am sure exports would have probably played a role as it has been playing a role for some time now. February itself was pretty decent month for lot of steel stocks. Do you have a favourable view on ferrous metals or in general metals?
We wouldn't say that we have a significant strong top down view on this sector, but we have noticed a couple of pockets where value seems to emerging. In all the commodities the call on the cycle is lot more important here. When we look at couple of these bottom up opportunity they look li ke turning value. They seems to be significantly beaten down. Some of them have got even good cash on their balance sheets and so on so they are trading at pretty ridiculously low multiples even assuming that the cycle could probably worsen from here.
That is something which attracts our attention, but are we taking a call that we see a significant up move in commodity prices as of now or going forward over the next one year I don't think we are in that situation at all. feedback@livemint.com