In conversation with Cheenu Gupta-Fund Manager of Canara Robeco Equity Tax Saver

Recently, we caught up with Ms Cheenu Gupta—Fund Manager of Canara Robeco Equity Tax Saver to understand how the fund is positioned at present. In this exclusive interview given to Ventura Securities, she has touched upon macro and micro economic indicators and their effects on the positioning of the fund.

Besides, being the Fund manager of Canara Robeco Equity Tax Saver, Ms Gupta also manages Canara Robeco Consumer Trends Fund, Canara Robeco Equity Hybrid Fund and Canara Robeco Small Cap Fund.

In the absence of any significant earnings recovery; has market rallied too fast? If yes, why do you think that is…what’s driving the rally?

The earlier part of the rally in September 2019 was driven more by large caps. Here, post the tax cuts announced by the government, resulting in a stimulus of ~ Rs 1.45 lac cr (mentioned by the government), major benefits accrued to large cap companies. The extra cash available with the large cap companies translated into higher earnings (~10-12%), which justified a 10-12% increase in market capitalization for those companies. The later and the more recent part of the rally is driven by mid and small cap companies which were trading 15% and 30% off their peaks, about a month ago. Valuations in the mid and small cap space (because of these corrections) became quite attractive and we see this rally more as a catch-up on those valuations.

What are the broader macro-economic trends that could weigh on Indian markets over the next 12- 18 months? Any specific theme you are following based on these trends?

The expected recovery in GDP growth does not seem to be V-shaped. With the current slowdown in the economy being reflected in a slowdown in tax revenue collections for the government, there would be limited scope for fiscal stimulus, especially with government’s focus on having a controlled fiscal deficit. Hence the extent of recovery in GDP in FY21 is one of the key parameters to watch out for. Secondly, in recent times, inflation has been higher on the back of rising food prices, with the core inflation still in the comfortable zone. The slew of interest rate cuts by RBI (135 bps) last year have resulted in lower interest rate benefits for the corporates. Whether the higher inflation going beyond the RBI comfort zone reverses this bonanza, with the RBI being forced to reverse its interest rate cut trajectory would be the other major watch out.

 Which pockets of the market may outperform over the next 3 years?

Cooperative banks have seen one of the toughest times with GNPAs even for private banks such as ICICI Bank and Axis Bank rising to ~10% levels. Over the last 2 years, we have gradually seen some reduction but the journey has been long drawn – fresh troubled corporate names have kept on surfacing in watchlists or slippages almost every quarter. We now believe that we are almost at the end of that cycle and to an extent that is visible in some improvement in earnings reflected in some uptick in their stock prices.

However, valuations are still in a comfortable range here and the new managements are doing a commendable task of getting various income engines (including subsidiaries) firing for these banks. Secondly, consumption still continues to be an interesting theme with rising per capita income and supportive financing options.

Our per capita income has risen rapidly from ~Rs 55,000 in 2010 to ~1,40,000 in 2019 and as per industry estimates should rise to Rs 2,90,000 by 2025. These numbers put India at the cusp of a consumption cycle.

Of late, rural consumption has seen some slowdown on back of some lackluster growth in rural incomes, but we believe that should reverse soon. Staples consumption driven by penetration and discretionary consumption driven by brand awareness and aspiration should continue to offer attractive investment avenues even in the coming years. Additionally, Infrastructure and Cap goods / industrial companies are more of a cyclical play and could do well in next 3 years.

 Do you expect any revival in the Capex Cycle in the foreseeable future?

The Capex cycle is bound to recover after a lull of 6-7 years. In fact, private capex has been on the sidelines for almost a decade now. Recently, the Government has outlined its ambitious 5 year infrastructure capex plan. This year there were some limitations to government budgetary support to the capex plans on the back of constrained government finances. However, once the economy rebounds, we believe the government priority would be towards the outlined infrastructure plan. That along with private sector capex coming back can see the revival of the Capex cycle in India in the next 2-3 years.

From 50-55 until August 2019; the stock count has gone down to 30-35 of late. Is there any specific reason for increased portfolio concentration?

Post the strong electoral mandate received by the government, we believed that the government was in a strong position to tackle the economic slowdown through fiscal and monetary stimulus. However, the lack of any stimulus in the budget, made the fiscal- prudent stance of government amply clear. With the sharp slowdown witnessed in the economy, as highlighted by the lower GDP numbers, we realized that the growth would be difficult for the midcap and small cap companies. Usually, in tougher times, it’s the larger companies which gain market share. Midcap and small companies see better growth in prolific times. Hence, we consolidated our holdings with the market leaders and companies with relatively healthier cash flow positions. This helped us restrict sharp losses in the portfolio and increase weights in our higher conviction bets.

 In recent times you have substantially reduced the exposure to companies present in the consumer food segment and have increased weightage of insurance and retail plays. Is it a top down or bottom-up call?

We have always believed in consumption as a strong and long term potential theme in a country like India. If we broadly divide the households in India into 4 categories such as low income, lower mid-income, upper mid income and high income categories, the core categories aspiring for consumption are the lower mid-income and upper mid-income households. The percentage of households in these 2 strata is rising rapidly. You would be surprised to know that as recently as in 2005, this number stood at 30% households, whereas in 2018 this number has already moved to 54% of households and as per projections for 2030, this is expected to reach 78%. This opens up a vast target audience universe for all these consumption companies and the scope for growth is significant. Not only this, with 50% of the population being <25 years age, we see rapid change in consumption habits – faster shift towards branded categories and open to spending backed by leverage for mid-large ticket consumption such as homes, consumer durables and even holidays on EMIs. Household debt in India is still far below global levels and hence, we are very optimistic on consumption plays and retail financers including well managed private banks and NBFCs. Insurance and asset management companies are similar plays on financialization of savings of Indian households and increasing awareness about protection through insurance and equity as a means of investment. We see great potential in this space.

Value Vs growth what describes Canara Robeco Equity Tax Saver?

India is primarily a growth market. In any emerging economy, growth avenues available to companies are far higher than in a mature economy. Also, our investment philosophy as a house is far more growth and RoCE focused. The average growth and RoCE of our portfolio companies are superior to the benchmark. So broadly, the fund is positioned in the growth space. At the same time, we are open to considering some value plays in well-run companies, especially where growth has receded for cyclical reasons.

Theories of a bubble in quality have been floating in the market for quite some time. How do you see quality Vs valuations playing out for some evergreen stocks?

By virtue of good execution and earnings delivery, any company which looks expensive today can become cheap in 1-2 years’ time, stock prices remaining the same. To illustrate, a company which is trading at 30x P/E, on delivering 30% earnings growth (and stock price remains the same) will

become 21x in a year. So we believe that a company which has good growth opportunities and can capitalize on the

same with better execution will reward the shareholders much more than companies which have uncertain business growth environment and patchy execution despite the latter having cheaper valuations. If in future, for any of the reasons, the growth profile or the return ratios of the company seem to change significantly, we keenly review our holding in the company.

You have restricted yourself only to large-size private sector banks so far. Do you see any value in PSBs?

PSBs are indeed a valuable resource to the country and lenders of the last resort. They play a critical role in financing the core agriculture and infrastructure needs of the nation. However, when it comes to their internal controls and systems, they are still in the process of enhancing those and putting those in place. The government too has been focusing on them and their initiative of bringing about consolidation in the space will go a long way in making them powerful institutions. SBI has time and again proven its prowess with its deeply enhanced presence and deep penetration even in the remotest areas of the country. From an investment point of view, we await these changes to come about and would then be happy to evaluate them from portfolio perspective.

Do PSUs, in general, appear attractively priced? How do you expect the disinvestment-linked re-rating stories playing out in the foreseeable future?

PSUs are indeed attractive from a valuation perspective. However, we are yet to see consistency when it comes to execution performance. Rerating plays on back of disinvestment are more of event based and should be assessed for their merit in investment on case to case basis. We would refrain from playing it as an overarching theme.

How long do you believe the large cap outperformance will continue? Do you expect mid and small caps to catch up soon? In that case how would you position your portfolio?

Mid and small caps have underperformed large caps since quite some time. They had almost peaked at around January 2018. So, it is more a matter of time (‘when’ rather than ‘if’), when these mid and small cap valuations start catching up. The recent relief rally seen in the space is a glimpse of that. Since last 2 years, price correction in mid and small cap names have made their valuations attractive. Hence, we have been keenly evaluating opportunities in the space and are happy to add on more mid and small cap names in upcoming months.

Disclaimer: This interview is solely for the informational purpose. It shouldn’t be construed as a recommendation to invest.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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