Executive Director & Chief Investment Officer HDFC Mutual Fund India
As on January 23rd, 2015
Prashant Jain has got collectively over 20 years of experience in fund management and research in Mutual Fund Industry. Prior to joining HDFC AMC, he has worked with Zurich AMC from July 1993 on June 19, 2003 as Chief Investment Officer and from 1991 to June 1993, remained associated with SBI Mutual Fund as Fund in-charge. He holds Master in Business Administration Indian Institute of Management, Bangalore.B.Tech (Mechanical Engg.) Indian Institute of Technology, Kanpur
(Source: http://www.moneycontrol.com/elite/profile/prashant-jain-309.html)
Post the Lok Sabha elections, the markets have risen fairly significantly. Do you think it still holds fair value for the long term investor?
A popular observation about the markets is that the S&P BSE SENSEX (‘markets’) have run up nearly 60% in last one year! A more pertinent observation is that the markets are up only around 35% from the pre Lehman crisis levels over the last 6 years! In fact, between 2009 to 2014 markets are up nearly 60% % compared to the nominal GDP growth of over 100%.
Therefore, despite the run-up in equity markets, P/E’s are reasonable and are still below long term averages. (Refer Chart 1) Corporate profit margins are significantly below the long term averages (Refer Chart 2) and are expected to improve as capacity utilization and as business conditions improve.
In a nutshell, apart from improving growth outlook, there is room for PE multiples to expand as growth rates improve and as interest rates move lower.
What impact do you see on profitability of India Inc. on recent fall in crude oil prices?
The main impact of the fall in oil prices will be felt by the government through lower subsidies and by the consumer. Other than oil marketing companies, the direct impact will be limited on companies but cost pressures will abate aiding margin recovery in general.
As seen from the table below, the real impact of crude price fall will be felt on Current Account Deficit (CAD) from Q1CY15 and beyond. The savings should be nearly 2% of GDP on run rate basis at current oil prices.
Lower CAD in turn should lead to stable INR and both should aid lower interest rates, which is good for companies.
The HDFC Midcap Opportunities Fund had an AUM of over Rs.8,000 crores as of Nov 30, 2014. Do you think it still has the flexibility to take exposure to smaller companies in Midcap space?
Focus on size of funds is misplaced as all funds are small in India relative to the markets. In any case larger funds have done better than smaller ones on an average.
The table below makes an interesting reading.
Source: NAV India, Data as on 31st December, 2014, Internal Calculations
It is interesting to observe from the above table that the percentage of AUM outperforming their benchmarks is higher than percentage of schemes outperforming their benchmarks. This implies that larger schemes have done better compared to smaller schemes.
It is true that HDFC Midcap Opportunities Fund is large compared to its counterparts. While this makes investments in small cap companies a bit difficult and time consuming, it is not a meaningful handicap. HDFC Mutual Fund’s investment style of investing with a long term view and of long holding periods / low portfolio turnover minimizes the impact of size on performance. A disciplined approach to investing & focus on long term is what has enabled HDFC Mutual Fund to deliver good performance across funds irrespective of size and across several market cycles.
Finally, large funds have lower expenses, which is a real and recurring saving for the investor.
Midcap stocks have delivered impressive returns compared to largecap companies. Do you think Midcap stocks are expensive compared largecap companies?
Given the large number of midcap companies, while there will be exceptions, at a broader level, mid caps are not cheap compared to large caps. This suggests that the higher returns that mid caps have delivered compared to the large caps in the last 3-5 years are unlikely to sustain in the future over medium to long term.
How do you see the global economy performing in medium to long term horizon. How can they impact India's growth story?
We have consistently maintained – even at the time of Lehman crisis, that oil prices matter more to India in the medium to long run than global GDP growth. This is because oil imports are a massive 5% of GDP of India and India’s share of global trade is so low that growing exports is more dependent on execution rather than on growth of global economy. Hence, given the sharp fall in oil prices, the impact of external factors on India is positive, even adjusting for the weak global economic outlook.
In fact, India is in a unique position in the world. It is one of the few countries that is fighting inflation, that benefits immensely from lower commodity prices and, expected to see lower interest rates and faster economic growth. India is all set to emerge as the 6th or 7th largest economy in the world around 2020, and there is a good chance that it may start to grow faster than China in the next few years and thus can be the fastest growing economy amongst the large economies.
What key factors do you think will help shape India's growth story from here on?
The same factors that have supported growth for the last few decades – demographics, availability of skilled and cost effective manpower, natural resources, entrepreneurs, low penetration of consumer goods etc
Further, India is a key beneficiary of lower commodity prices, especially crude oil. Fall in commodity prices should lead to a sharp fall in CAD, inflation and lower fiscal deficit as well. A strong, growth oriented and business friendly government bodes well for economic growth and for businesses.
What wish list, expectations do you hold from the budget session?
The expectations are high from this government and the wish list is therefore very long - reduction in unproductive government expenditure, subsidies only to the deserving, better business conditions, simpler laws and faster government clearances, simpler taxation, higher tax/ gdp ratio, lower fiscal deficit etc etc.
Finally, this budget will also be a precursor to GST and should thus lay the groundwork by simplifying and rationalizing the tax laws. In my opinion this budget promises to be a different and an exciting one.
Given the hopes & promises that the new government has, which sectors do you feel will deliver value and performance going forward? Will the manufacturing segment finally take off in India?
The broader markets are themselves trading at reasonable valuations. (Refer Chart 1) Given the likely improvement in GDP growth, improvement in corporate profitability and the likely fall in interest rates there is room for multiples to improve apart from growth in profits. While there are no noticeable excesses in the market, P/E’s of FMCG, IT and pharma are rich / fair and it is the other sectors that have room for multiples to rise generally.
As far as manufacturing is concerned, the capability, the potential, the competitiveness, supportive government – all the ingredients are in place. However, given the long lead times in the sector, the actual results will take a bit more time to show in my opinion.
In your opinion, what are the qualities of an ideal equity fund manager that would make him successful over a long period of time? What reasons do you attribute to your own success?
Hard work, lots of common sense, ability to work in a team, belief in the ability of the markets to correctly price an asset over the long term and at times to some extent luck / destiny all have a role to play. There are several individuals who have done well in HDFC AMC and in the industry. In my opinion all of us owe this success to not just the factors mentioned above, but in large measure to the support of the teams of which we are a part of and of the sell side analysts as well.
DISCLAIMER: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any on investments made. Past performance may or may not be sustained in future. Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
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