Time to invest in low-debt firms in these sectors; and what to expect from CAMS, Chemcon IPOs | IIFL Interview

The rally in stock markets so far seems to have overlooked the risks to earnings and economy, said R Venkataraman, MD, IIFL Securities Ltd. In an interview with Surbhi Jain from Financial Express Online, Venkataraman said that this is the time to invest in good quality companies with low debt, since such companies will perform better in the medium term. Venkataraman also shares his thoughts on the recent and upcoming IPOs, after the 151-times, and 74-times subscriptions for Happiest Minds and Route Mobile public issues. Two more IPOs are set to open for subscription next week. Venkatraman says even as CAMS and Chemcon Speciality Chemicals are good names, investors should not expect them to offer similar returns as that of Happiest Minds. For the broader markets, he expects the momentum to continue for some time in small cap and midcap space.

1. How has been Indian share market performance as compared to other global markets? What are the key triggers on the card?

While there is a significant influence of lower interest rates globally and in India today and looking forward, risk premia also seem to have sharply collapsed, and the recent rally from 9.5k onwards has seen a significant broad-basing of PE re-ratings. In a recent study we did, we found that virtually every sector had re-rated in the last year on normalized forward earnings. Normally we would worry that fundamentals being poor would imply that Nifty would retreat, but today we would say that quality companies with low debt would shine in the medium term and this is the time to be discriminating and pick them up, instead of worrying about a Nifty collapse.

2. What is your near to medium term outlook for BSE Sensex and Nifty 50? Where will markets go from here?

The rally in equity markets so far seems to have overlooked the risks to earnings and economy. However, we believe, in the medium term the fundamental factors would be more important and even if the rally sustains the breadth could get narrower.

3. With two new IPOs lined up for next week, do you see them replicating Happiest Minds Technologies IPO response?

The IPO momentum is very recent. Most large fundraises have been by the larger companies through QIPs rather than IPOs. Both the names are good, but investors should not expect similar returns as Happiest Minds. CAMS is a good investment from a long-term perspective.

4. Midcaps have started outperforming after two years of underperformance, small caps are up 78% since March, where do you see them in the coming days?

Most small-cap and many midcap stocks are still trading at significant discounts to all-time highs; therefore, the momentum may continue for some time.

5. Post SEBI’s ruling, what options AMCs have? If most multicap funds reclassify as large-caps, then would they have to sell all the small caps they hold right now?

Currently, about 73% of multi-cap fund assets under management (AUM) of Rs1.5 trillion (US$21bn) are large cap stocks. It is widely anticipated that the mutual funds would have to rebalance the portfolios by increasing allocation to Mid Cap stocks (17% of AUM as of Aug-2020) and small cap stocks (~6% of AUM as on Aug-2020). However, the mutual fund industry is expected to make a representation to SEBI to relax some the guidelines either by way of lower allocation to small cap companies or by extending the deadline for compliance beyond January 2021. While it is unclear if SEBI would accept the industry requests, the mutual funds could consider some of the other alternatives like reclassifying multi-cap funds into other fund categories, if SEBI refuses any relaxations.

The clarification issued by SEBI (SEBI Clarification Circular) on Sunday evening also points out that portfolio rebalancing is one of the options available to mutual funds and the MF could consider options like merging with existing schemes. Hence, the currently expected rally in mid and small cap stocks, due to rebalancing of multi-cap fund portfolios may not necessarily
materialize.

6. Which sectors seem to be attractive right now? What are your overweight and underweight stocks?

Our house view is positive on Pharma sector, cement, steel and banking stocks, while one may select overvalued stocks particularly in the consumer segment.