Fund Manager Speak: Prudential-ICICI's Ajay Srinivasan.
(Prudential ICICI has emerged as the second largest private sector mutual fund in a short span of 15 months under the leadership of Mr Ajay Srinivasan. Nirmal Jain and Tushar Pania of Indiainfoline in an exclusive interview with Mr Srinivasan, discuss inter alia mutual fund industry in India, economy, stock markets outlook, Prudential's plans and his top investment picks. The interview is divided in 3 parts viz stock markets, mutual funds and Prudential's plans.
For Mr Srinivasan, Prudential ICICI AMC assignment was a sort of homecoming. He had started his career, after graduating from IIM Ahmedabad, with ICICI in the project appraisal team. From there he moved on to ITC group's financial services division where he eventually worked towards the joint venture with Threadneedle UK. He was responsible for launching Top 200 Fund, which was ranked as the best performing fund by Micropal during his tenure. From there he moved over to his present assignment. More heartening than the fund's corpus of Rs. 2 bn is the fact that most of its schemes are performing well.)
Part I : Stock Markets
Q: How do your define your stock market investment philosophy?
We invest in companies that are or have the potential to be big players in their market and are expected to remain so in the future. Where the management quality has to be good, and the business the company is involved in, is enduring. More importantly, the company has to have a consistent track record of above average Return on Capital Employed (ROCE) and Return on Net Worth (RONW). Also, the management should have a clear vision and strategic plan for future.
Q: Where do you see Indian stock markets headed towards?
We are very bullish on equities. There are reasons for overall bullishness first economic recovery is becoming visible. Secondly, a number of companies have become far more competitive with restructuring. Thirdly, for the first time in corporate India shareholder's value has become an important issue and the promoters are concerned about their stock price. Last but not least, liquidity will drive the market up. Today interest rates are ruling low and it is not likely to rise substantially in the near future. This makes equity investment very attractive.
Q: Don't you think that the increase in the international oil prices will have a significant negative impact on economic growth?
I agree, there will be some impact, since the oil prices have more-than doubled in less than six months. It will lead to higher inflation and the rupee will have to depreciate. However, I do not think that this will reverse the process of economic recovery. Besides the positive factors outweigh the negative ones.
Q: Which sectors do you think will perform well?
We expect some of the economy-related sectors to do well. Cement, capital goods, telecom besides pharmaceutical, FMCG and software. However not all the stocks in these sectors are attractive. You have to careful about the management quality. In cement we feel that the growth will come from boost in the housing sector in rural areas and an increase in prices. However if the diesel prices go up cement stocks are bound to be affected. Capital Goods sector looks interesting and as the demand in the economy picks up they should do well. We like aluminum sector as the demand is strong and international prices are firm.
Q : What are your preferred stocks in these sectors?
Grasim looks like a good buy even at the current prices since we are bound to see further restructuring in the company. Gujarat Ambuja and India Cement are other cement stocks that we like. But there will be a correction due to diesel price hike. In capital goods, Cummins is a good story as the company will be a sourcing base for Cummins worldwide. Ingersoll Rand is also attractive as it has a wide product range. In aluminum, we prefer Nalco over Hindalco as the latter could see some equity dilution. We are bullish on both Zinc and Copper where we feel Hindustan Zinc and Indo Gulf are good bets.
Q: What about oil and gas sector?
Oil & Gas marketing companies are better off than stand alone refineries. We are also bullish about exploration & production companies such as ONGC who will benefit from the increase in oil prices.
Q: Your views of last year?s super performing FPS trio- FMCG, Pharma and software?
In the pharmaceutical sector we are very selective. As far as the MNCs are concerned, one has to be cautious of 100% subsidiaries where their superior products can get diverted to, stunting the growth of the listed companies. We like Indian companies viz Ranbaxy, Dr Reddy?s, Cipla, Sun Pharma. Amongst MNCs, Glaxo, being the leading player merits investment and also it is focussed and unlikely to set up a 100% subsidiary. Glaxo is HLL of pharma industry.
FMCG is a sector that we like. However the top line growth last year has been slightly depressed, as the demand from the rural areas has not been good. Those companies who have invested in distribution channel are the ones that will do well. HLL scores a point over the rest. Besides, Nestle?s food business is likely to see big growth.
While picking up software you have to be really selective. The last quarter separated the man from the boys. You have to be very careful as obsolescence in this field is very fast. The speed of change in this industry is very fast. The industry has very low entry barrier and there will be a substantial increase in the supply of paper from the IT industry. Stocks that we like besides Infosys are NIIT and Sonata Software.
Q: In today's market, how would you weigh Banking and Finance in your portfolio?
Banking & Finance is a good play on the economy. But not all banks are expected to do well. We foresee a cut in the interest rate in October which will help all those banks that have a big exposure to securities. The banking industry has to change rapidly, assimilate technology and disintermediation will be the way of life. Banks have to shape up to this challenge. HDFC Bank is a good buy, but it is currently expensive. Corporation bank is another good pick. SBI Bank too looks good, but it has to address the challenge it is facing. Technology is a key and those who will invest in technology will be winners. HDFC is a good stock but due to its holding pattern, the stock remains underpriced.
Q : In Autos, you prefer the leader or the Number 2, in various product categories?
Telco is preferred over Ashok Leyland. It will have upside due to the restructuring, despite the fact that Ashok Leyland has gained market share, Telco will gain as it restructures its business. We also expect the company to hive off the car business. TVS has been aggressive in marketing and conservative in accounting and is our preferred bet over Hero Honda at current prices. At current prices, Punjab Tractors looks attractive in the tractor segment though M&M will have a big upside due to IT business.
Q: Other sectors such agrochemcial, fertilizers?
Last year was a good one for the agrochemical and fertilizer sectors but with a number of regions not receiving adequate rainfall this year will not be good news for these industries.
Gujarat Gas is another stocks that has made huge investments and will see fruits of the same over the next few years.
Q: Stock markets of late have been very volatile. Why so and what needs to be done to make it less volatile?
The market currently is highly volatile as it is still information driven and it will continue to remain so as long as we don't have long term players. For the markets to go up on a sustained basis we need long term players investing in the stock markets. Unless money from insurance, pension and provident fund are invested in the stocks market, it cannot go up on a sustained basis. In a year's time we expect the government to permit pension/provident funds to invest in equities. Project Oasis, headed by Dr S. A. Dave has done substantial work in this regard and the new government will have to take a decision.
I feel that the provident fund investment could be split into two parts viz mandatory and voluntary. While compulsory contribution could continue to be invested in the traditional instruments the voluntary part could be used for some investments in equities. Of course this will require a separate regulation and regulatory mechanism.
Q: Do you feel that the equity cult that was growing in the country has been affected?
Yes, the equity cult in the country had suffered a setback until recently. It has been affected by factors like a number of managements that destroyed shareholders' wealth. Today however things have changed and the fund managers are willing to pay a premium for good quality management. Even the fund managing community has come of age. Both the companies and the funds have become more transparent. Every one is increasingly realizing that you are answerable to shareholders and investors. The equity cult will and has to return.
Part II : Mutual funds
Q: How successful have the budget sops been in reviving the mutual fund industry?
Yes, the Budget this year gave the mutual funds a place in the capital market it deserves. Mutual funds have been performing well since 1996, have introduced new products and have become more transparent and the tax incentives announced in the 1999 Budget made mutual fund as an investment option has become more attractive. The Budget truly recognized intellectual capital in pharmaceutical, software and finance (asset management industry).
Since then we have seen several new products being launched by the mutual fund industry. I feel that the trend will accelerate and the industry will grow between 25 ? 30% per annum. While the equity scheme will grow, the debt scheme I feel will continue to attract more money. There has been a huge retail response to equity scheme though from a small base. Around 70 to 80% funds received by the mutual fund industry in the last six months are towards debt funds. There has been a distinct shift and money is flowing from bank FDs to debt funds. In due course, inflows to equities will increase. A similar trend was witnessed in the USA where the funds to equity mutual fund from households jumped from 28 to 50% in the last 10 years.
Q: Has there been a shift in investors' preference from public sector to private sector mutual fund?
The private sector mutual fund has seen big growth in the last six months and against 6-7% market share a couple of years ago, it is now 13 to 14%. Consequently the public sector and UTIs share has come down a bit over the last 2 years.
Q: Do you think investors are fully aware of the advantages that the mutual fund offers and is willing to invest in this sector?
The regulator and the government have given the mutual fund the place it deserves and now it is for the investors to give the mutual fund the place it deserves in their portfolio. By a rough estimate there are one million people out of 100mn who have invested in mutual fund. The investors can be divided into three categories; one who knows nothing about the mutual fund, they constitute about 50 to 60% of the population. Then there are those who know some thing about it but not enough to invest, they form 30 to 40% of the population and then there are those who have bought mutual funds in past, they constitute 10% of the population. We are targeting the 90% of the people who belong to the first two category. But the question how do you educate all the investors about the mutual fund for someone has to take initiative and spend the kind of money to educate them.
Q: Mutual funds have been permitted to invest in GDRs. Will this move help Indian funds to invest in the international market?
Permitting mutual funds to invest in GDR is a good thing, which the FII can anyway do. However, I do not see how this will attract Indian mutual funds to invest in these securities as the volume is not large and there is not much scope for arbitrage.
Part III : Prudential plans and strategy for growth
We are investing in distribution network. We are in the process of improving our distribution system. We are also educating our distributors. We have increased the number of banks through whom we were distributing from 2 to 10. We are also looking at the Internet and though the possibility of transacting through the net is not easy now we are bullish on the using the net in the long term. We are looking at a system where very soon the distributor will be in a position to access all the information required from the net and he can print his statement of account from the net. Net will change the way we service our customers, the way products are designed and everything else.
Our mission is to be a leader in all the segments that we are in.
There are four elements of the strategy that we plan to follow
building brand
building a strong distribution network
build unique customer service proposition and
build performance which will draw the investors to us
-Courtesy: Probity Research |
