Infrastructure stocks look attractive: Kenneth Andrade, Chief Investment Officer, IDFC Mutual Fund

In an interview with ET Now, Kenneth Andrade , Chief Investment Officer, IDFC Mutual Fund , talks about the Indian market and his favourite sectors. Excerpts:

Characterise the current market environment for us. Are you cautious, are you fully invested, are you sitting on cash?

From a perspective of what we have been doing as basically looking at the environment currently and with realigning our portfolio into based on the results that just went by and the expectations into March, we have got significant amount of events that have been happening across the entire globe. So we are looking at spaces where we could actually trim our positions which are vulnerable to these moving parts. So that is what we have been doing. We have in the process created some kind of cash in the entire process where we have been looking to redeploy that in the next month or two. So in context where the markets are currently held on moving parts, it is very difficult to take a call on the market and build portfolios, but sticking with where the convictions are the highest and realigning our portfolios accordingly.

What is your view on infrastructure that is one space which has really been beaten down? Do you think a bottom is in place for most of these stocks and would you now be a buyer into it?

We have just closed our product in the infrastructure space. This is in line what we think is probably a nice time to take an allocation into that entire sector. What we would see coming with the March-end results and also balance sheets coming out you probably heading into the worse quality of balance sheet that you have seen over the last decade in these companies. Now that creates a significant opportunity. One, most of the companies will have to reassess the environment around them and rebuild their strategies to improving financial health of the business. Two, the space itself as we see it will be more consolidatory space rather than an expansionary environment. Now this is exactly the opportunity that we are playing for. In a consolidatory phase company has become a significantly more responsive to creating cash on their balance sheets through operations rather than looking at the external environment to raise cash now. This is good for an equity holder. On the other hand you will not see dramatic improvement or increase in balance sheet sizes and you would see balance sheets actually consolidate. So our view is somewhere in 2012 and 2013, you would see this entire balance sheets effectively consolidate themselves and that exactly the opportunity that is there. So we are going into the entire premise and this is a consolidation period for the entire industry and that is where the equity investor would make significant amount of return compared to an expansion phase which you had in the last 3 or 4 years wherein the equity investor were more at the receiving end in the space. So yes, in a way we do believe infrastructure valuations and business opportunity is there. These are appropriate time to start investing into the business.

What is your view on commodity prices? One side you have the Fed which is pumping the economy by QE2 and the Japanese bank also is now planning to inject about $85 billion, given the way how both central bankers are now planning to pump in more money will commodity prices go up more?

Most of our portfolio is extremely light in terms of commodities. A very large part of the allocation in our local portfolio or domestic portfolios are more playing the consumer economy in India, latter part of it is started and small part of that is effectively on the infrastructure side of the entire business. Now in line with what we are trying to do with the consumer part of the economy and the infrastructure part of the entire economy and if this plays out over the next 2 or 3 years, it may not make for an interesting view in commodities. One, the consumer part if consumers are going to determine volume growth in the entire business, the consumer economy is not very commodity intensive. Secondly, if we believe that infrastructure is going to be more of a consolidation play and rather than an expansionary play, again this may not be a very good thing from a commodity perspective. Now that is in line with what we are doing in India or most of our portfolio are doing in India. If you step back and look at the 12th five year plan which the Chinese economy has just come through with again the shift and the focus is towards enabling the consumer in that respective economies. If that holds true again, we probably may not have an environment which is very conducive for further commodities business. It is not like commodities are going to fall off the place where going to be a base demand for commodities which will continue to exist and there will be couple of commodities which are consumer intrinsic, which depend upon the consumer and end consumer and these are copper etc. They largely go into the electrical business which is again related to the consumer environment, consumer economy. So I guess we have to pick and choose as to which part of the commodity business you want to be with. So I guess something like crude, the demand will be reasonably tight and this is structural in nature given the fact that 35% of the world?s population which is a Chinese and Indians are earning double digit growth in their per capita incomes. So that is basically you will probably need to pick and choose on commodities rather than owning a basket of commodities in this environment.

You have bought consumption-oriented businesses for the year gone by which is the year 2010 and that worked like a charm for you. What is your big bet for the year 2011?

Well, little bit of infrastructure which seems to be basing out and the business still has reasonably amount of momentum still in the consumer part of the economy. So we would expect going into this year the two themes to effectively play out unlike a single theme that we have bought through 2009 and 2010.

In the near term though what is the call on the rate sensitives, in particular autos, because they seem a little edgy ahead of the policy?

With autos you also need to realise that they come out extremely high base and the environment that you see at this point in time is also a environment where rates are not coming down, which is what you rightly said. So I moderate my expectation from that sector, it probably would not do what it did last year, it could be a pocket of strength but again like you basically cannot say that it is going to be an entire sector that is going to do well you will have to pick and choose and that goes down to what markets might look like for 2011 and may be a very large part of 2012. You would need to pick and choose you may not find one particular segment of the market that gives you all the outperformance that is there.

If I look at your latest declared portfolio holding, you have exposure to Asian Paints , Shriram Transport and Exide. Your top holdings change in coming months?

Cannot see any reason to change that.

Why do you like paint companies? Why do you like auto companies at a time when the country is experiencing inflation? I am sure that will hit consumption patterns.

I guess these are all consumer businesses and in line with just talking about the consumer economy, the underlying part of the portfolio if you go across the top 10 companies or even the top 15 companies in the portfolio that we construct, all of them are industry leaders by themselves, all of their balance sheets which are non-geared and all of them are growing faster than index level itself. So even if you hit an inflation point or even if you hit a point over the next year or 2 years, where you see a slowdown coming in the entire system, our belief is that given the financial strength and the dominance of each of these players in their industry, they will only gain market share. So we effectively come from a position that these companies are already extremely strong and even if we hit a patch which is a slowdown, these guys will only increase market share. If the contrary of that happens and the market effectively expands also, then they will grow, with all the companies in this portfolios. So either which ways the portfolio is that we have constructed so far should withstand itself in an environment which is growing and even if the environment consolidates or slows down, these guys should come out reasonably stronger than what they are.

You also own textile stocks Arvind Mills , Shri Lakshmi . Textile stocks have never created wealth for any investor. Why do you like textiles?

Well, it is likely a contrarian in that space. We like the manufacturing business because they have reasonably run out of capacity at this point in time. Secondly again in line with our putting a portfolio together a very large part of that entire portfolio is oriented towards the largest guys in the entire business. Cash flows are extremely strong. So another year of these kind of cash flows and the financial health of these companies will be significantly better than what they appear to be and what they appear to be is also significantly stronger than what these companies were over the last decade. All of them are available in between 3 to 5 times cash payback and there is not much too debate as far as valuations are concerned except for the fact that there is lot of policy risk in the textile environment. Apart from that, we are in the sweet spot as far as that industry is concerned.

Source: http://economictimes.indiatimes.com/opinion/interviews/infrastructure-stocks-look-attractive-kenneth-andrade-chief-investment-officer-idfc-mutual-fund/articleshow/7699894.cms

‘Valuations are below long-term average'

When we last spoke to him in July 2010, Vetri Subramaniam, Head, Equity Funds, Religare Mutual Fund, took the unconventional stance that stock valuations had already run up too much and that mid-cap stocks were unlikely to outperform. Now that both these calls have proved correct, we caught up with him for an update on the markets and how the Religare funds are navigating them.

Excerpts from an interview:

In July, you took the view that market valuations had captured much of the upside and that there was a risk of earnings downgrades to Indian companies. Have those downgrades happened?

I think the risks to earnings of Indian companies have gone up in recent months, with high inflation and fears of further monetary tightening to curb that inflation. I don't yet see that fully reflecting in the consensus earnings estimates.

Rising commodity prices for instance, have really increased input costs for companies across-the-board. You are already seeing signs of margin pressures in the earnings of the past quarter.

Smaller and mid-sized companies and companies operating in highly competitive segments may find it difficult to pass on those increases to their consumers.

There is also the risk of an increase in interest rates. Indian companies, especially small and mid-sized ones have always been quite sensitive to higher interest costs.

The way I see it is that the change in the global scenario calls for an upgrade in the earnings estimates for the commodity companies in the index basket and a downgrade in the estimates for the users of those materials.

However, as cyclicals typically enjoy lower valuations than other sectors, the overall PE multiple of the market has trended down.

Is this correction then a good opportunity to invest, for people with a five year view?

Yes, I think so. Valuations currently are below their long term average. The Sensex is now trading at 14.3 times one year forward consensus earnings. Assuming that the consensus estimates will be cut, which we believe is likely; earnings are still likely to grow at about 15 per cent in FY12 versus consensus estimates of 19 per cent growth.

Based on this reduced estimate the market is at about 15 times one-year forward earnings which compares well to the 15-year average PE multiple of 14.5 times. From this level of valuations, investors can benefit not just from the growth in corporate earnings but also an expansion in PE multiples at some point in the future.

How will rising oil prices play out for listed Indian stocks, if sustained? Are you altering your sector weights owing to this development?

The rise in oil prices is more negative for the Indian fiscal deficit than it is for Indian corporate earnings due to the lack of pass-through. But the public sector oil marketing companies will likely do poorly even though the government will provide them with compensation.

The cost structure of the airline companies would also be negatively impacted. The pass-through of the hike to petrol and diesel prices would be incrementally negative for the auto sector. We have made slight adjustments in our sector positioning based on these views.

Religare Contra Fund has a good three year record, but has underperformed the markets in 2010. What explains the slowdown in performance?

Religare Contra is typically the kind of fund that has a “value” approach to stock selection.

After the correction in 2008, the broader markets were trading at very attractive levels, with a large number of stocks available at throwaway prices.

The initial part of any up move, after a big correction is usually led by value stocks and Religare Contra capitalised on that. However, as the rally continues, growth stocks begin to outperform, and that is when the environment becomes more challenging for value stock pickers.

Even recently, though, you will find that this fund has contained downside quite well whenever the market corrected. That will continue to be its key advantage as we head into more volatile market conditions.

The top sector choices in many of your funds include technology and financials. Can you explain why?

If you look at our sector weights relative to the benchmark, you may find us a little underweight on financials. On technology stocks, yes we would be somewhat overweight, basically on account of the improving global environment which suggests good volumes and pricing for IT companies. In some of our funds, materials have a significant overweight position as well.

The call there is that if the global environment continues to improve, metal prices would continue to rise. With many metal companies seeing huge volumes coming onstream, volumes would remain quite strong too.

What is the outlook for Religare PSU Equity Fund?

PSUs did do well for a period, but premium valuations were not the norm. Only a few PSU stocks with very low liquidity enjoyed premium valuations. At this point of time, PSUs are vulnerable to a further fall because they are dominated by rate-sensitives and oil marketing companies. However, from a valuation and growth perspective, the PSU is one portfolio we think is quite attractive.

The growth expectations for the PSU basket too are quite resilient compared to the rest of the market. PSU stocks also enjoy advantages of low leverage and fairly strong cash coffers, except for the oil companies where the subsidy related issues really reduce visibility.

Which fund would you buy from your bouquet of funds in today's market environment?

The Religare Business Leaders Fund is very well positioned because it has the kind of companies that can survive these challenges. Large companies which don't have debt issues and have a lot of pricing power. They may not suffer margin damage that smaller companies do when input costs rise.

The other fund which we would recommend at all times is the Religare Growth Fund, given its balance between large cap and mid cap companies.

If the markets were to go down sharply from here, the Religare Contra portfolio too will get much stronger. It's a good fund to contain downside.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article1531983.ece?homepage=true

Avenues for NRIs to invest in

If you are in India, it is raining attractive investment options. With interest rates moving steadily up, even cast-iron investments like bank deposits today offer you a 10 per cent annual return. The stock market has fallen to more reasonable levels and top performing mutual funds investing in Indian stocks have recorded a 17 per cent annual return in five years.

Plus, there are mouth-watering one-off opportunities like the Coal India offer and SBI's bond issue, offering 9.75 per cent interest. However, if you are a non-resident Indian (NRI) looking to pep up your portfolio, can you participate in these options? If so, can you repatriate the returns from such investments?

There are restrictions on the avenues in which NRIs can deploy money in India. The SBI's recent bond issue was closed for NRIs, though not all public sector bond offers and corporate bonds are closed for this category of investors.

Non-resident Indians can subscribe to IPOs and also take up shares in public sector enterprises that are being disinvested by the government. Repatriation is allowed provided taxes are paid. We spoke to few tax experts and money managers to put together the following dos and don'ts for NRI investors.

BANK DEPOSITS

Non-resident Indians can open and operate specialised bank accounts in India classified as NRE, NRO and FCNR accounts. While FCNR (foreign currency non-resident) is a foreign currency account and can be opened only as a term (fixed) deposit account, the NRE/NRO (non-resident external/non-resident ordinary) accounts are denominated in rupees and can be opened either as a savings account or a fixed deposit account.

Before approaching a banker, you have to be clear about the purpose for which you are opening the account, as that decides the type of account. If you want to invest in India, you need to have a bank account denominated in Indian rupees — basically either a NRE or NRO account. Again, if you intend to repatriate the income arising from such investments, you need to make that investment only from a NRE account.

A NRO account is basically for making payments on dues in India and receiving rental and other income from your property here, if you own any. It allows credit of funds from your overseas account too. However, what needs to be noted here is that funds in this account have several restrictions on repatriation. Money in this account can be repatriated within a limit of US$1 million in a year on paying the applicable charges to the banker.

A FCNR account , however, saves you from forex rate fluctuations by allowing you to hold the foreign currency without converting it into Indian rupees. Now let's move into the more interesting part — interest income.

A NRE/NRO savings account earns an interest of around 3.5 per cent p.a. currently and this is on par with savings accounts for resident Indians. On a term deposit of maturity period over one year but less than two years, a NRO account will get you 9 per cent p.a. interest while a NRE deposit will get around 2.5 per cent interest — the differentiation is probably account of the source of the deposit. On a FCNR account that is denominated in US dollars, Kotak Mahindra Bank gives an interest of 1.79 per cent p.a. for deposits with maturity period over a year but less than two years. Interest rates here are based on LIBOR rates for the respective currency.

Debt instruments

On paper, NRIs are also permitted to invest in corporate deposits, non-convertible debentures, government securities and PSU bonds issued in India, both on a repatriable and a non-repartiable basis. However, in practice, companies or issuers need to specifically enable the ‘NRI window' in an offer (with permission from the Reserve Bank of India).

Quite a few of the recent PSU bond offers or non-convertible debenture offers did not open their gates to NRI investors. Under the corporate deposits category, a couple that are currently open to NRI investors is DHFL's Aashray deposit (from Dewan Housing Finance Corporation) and the deposit offer from JK Tyres. Running through the application form for each deposit will tell you if the offer is open to NRIs.

EQUITIES

Regulations allow non-resident Indians to invest in primary market (initial public offers) and also in stocks traded in the secondary market. However, for investments in equities in the secondary market (as also convertible debentures), a non-resident investor is required to open a Portfolio Investment Scheme account — also called PINS account — with a bank. The RBI monitors all transactions of NRIs in the secondary market through this PINS account. Individual banks report on transactions in this account to RBI.

Information in the RBI website states that an NRI investor can purchase shares up to 5 per cent of the paid-up capital of a company. Aggregate investments by all NRIs in a particular company, however, cannot exceed 10 per cent (this limit can, however, be raised by the companies by passing a special resolution). A PINS account is basically an NRE/NRO account. Transfers to/from NRE/NRO accounts, foreign inward remittances, and debit/credit from the stock broker are the only transactions allowed in a PINS account.

When non-residents want to make investments in equity shares, they thus need to apply for a PINS (Portfolio Investment Service) bank account, in addition to opening a new NRO demat and a trading account with an Indian broker, says Mr B. Gopkumar, Head-Broking, Kotak Securities. NRI investors, however, need to note that brokers may have internal restrictions on the clients to whom they may offer broking services, based on geography or other considerations. Make enquiries before you plan your investments.

Real Estate Property

Investment by NRIs in immovable property in India is permitted provided it does not fall under the definition of agricultural land. Mr Sandip Mukherjee, Executive Director, Tax & Regulatory Services, PricewaterhouseCoopers, says: “Non-resident Indians are permitted to acquire any immovable property in India, other than agricultural property or plantation or a farm-house under FEMA regulations”.

Now that you can parcel off residential real estate through funds designated as real estate funds, can NRIs invest in them? Mr Mukherjee states: “While the RBI had expressed its concerns that investment by NRI and FIIs could be tantamount to indirect foreign investment in the real estate sector, the Finance Ministry held that there was no specific restriction imposed upon NRIs to invest in real estate funds.”

Sorry, no entry!

There are certain investment classes that are completely sealed off for NRIs by the regulator. These include investments in Public Provident Fund and post-office saving schemes, says Mr Vineet Agarwal, Director, Tax and Regulatory Services, KPMG. From RBI's document on - ‘Facilities available to NRI for investment in India', it is further clear that even on a non-repatriation basis investments are not allowed in money market mutual funds and bearer securities (that includes Kisan Vikas Patrika).

The document however states that investments in National Savings Certificates are permitted on a non-repatriation basis through a NRO account where the source of income is from India. A resident investor who subsequently becomes NRI can, however, hold the above instruments till maturity, adds Mr Vineet Agarwal.

Source: http://www.thehindubusinessline.com/features/investment-world/article1531980.ece

Getting smart with gold savings

Are you gripped by a burning desire to own gold, like that posse of outlaws in Mackenna's Gold? No? Even if you aren't , the returns notched up by the yellow metal makes it a hard-to-ignore investment option today. Gold, in Indian rupees, has served up a 20 per cent annual gain in the last five years, trouncing the stock market's 12 per cent annual appreciation. That's why investment options to own gold in paper form have mushroomed in the form of jewellery savings schemes, futures contracts in the commodity exchanges and gold exchange traded funds that are listed and traded much like stocks.

Gold fund of funds

These paper-gold options however, are for investors who already dabble in commodities or stocks. What if you wouldn't touch stocks with a barge pole and would yet want to invest in gold? Mutual fund houses have come up with a new avenue recently - Gold ‘fund of funds' that don't require you to have a demat account to invest. Kotak Gold Fund and Reliance Gold Savings Fund, the two new products collect money from investors and use that to buy units of Gold Exchange Traded Funds (ETFs). While Reliance Gold Savings Fund invests in Reliance Gold ETF, Kotak Gold Fund does likewise with Kotak Gold ETF. As Gold ETFs mirror the market price of physical gold, your investment gets to jive to every gold price move!

No demat

Why would you want to take this convoluted route, while you can buy Gold ETFs on the stock exchanges? Two reasons. First , if you don't own a demat account, taking the fund-of-funds route is more cost-effective. Suppose you were to open a demat account just to invest in Gold ETFs, this will entail expenses - a flat annual maintenance charge of between Rs 100-900, brokerage charges of 0.05 to 0.50 per cent and a one per cent annual recurring expense charged by the ETF manager. Which means that on an investment of Rs 10,000 a year, up to 10 per cent (if you drive very bad bargains with your broker) of the annual return may be swallowed up by expenses! Now, compared to that, you can buy the Gold fund-of-funds from fund houses, at an annual recurring fee of just 1.5 per cent, leaving you with much higher returns.

However, this comparison is slightly flawed because we are applying the entire demat charges only to your Gold ETF holdings. In practise you may have to open a demat account anyway, to hold stocks, bonds and mutual funds, not just ETFs.

Auto-pilot

Gold fund-of-funds also score over Gold ETFs on affordability and convenience. Both Kotak and Reliance Gold Fund offer a monthly systematic investment plan (SIP) facility.

This allows you to make gold investments for as little as Rs.100 a month (over five years) in the case of Reliance Gold Fund or Rs.1000 (for 6 months) in Kotak Gold Fund.

SIPs are also a sensible way to invest, with gold prices are hovering at a record high by averaging your purchases over many price points.

Taking the SIP route is far easier with the Gold fund-of-funds products, as you can issue post dated cheques or an ECS mandate.

Fee and returns

If you've decided to opt for the Kotak or Reliance Gold fund, what are the returns you can expect?

Suffice it to say that returns from these funds will closely track the gains in the actual market prices of gold in India, before adjusting for the fund's costs.

Gold as of today has delivered a five-year return of 20 per cent, three year return of 19.6 per cent and one year gain of 23 per cent.

However, expecting such high returns to sustain over the next five or 10 years may be unrealistic. The final returns that you earn from these funds may be between 1.5 and 2 percentage points lower than the gold price returns, on account of fund management fees and tracking error. Both Reliance and Kotak have capped the overall expenses on their gold funds at 1.5 per cent a year. Now that is not exactly cheap, given that these funds do not actively manage money. However, this is still the most cost effective option to hold gold today, as others - jewellery (making charges, wastage, lower purity) and bars from banks (12-15 per cent premium) – impose far stiffer costs.

Tracking error

A final advantage that the Kotak or Reliance products offer over plain Gold ETFs is their ability to shadow gold prices more closely (lower tracking error) . Retail investors trading Gold ETFs on the stock exchange often find their market prices straying far away from their NAV. Because ETFs are not heavily traded, buying or selling a large number of units may impact their price.

You can't do much about these distortions as a small guy. But investing through the Kotak or Reliance Gold funds allows you to take the institutional route.

These funds will be able to buy gold units directly from the ETF at their NAV, helping them minimise tracking error. Kotak Gold Fund (open until March 18) expects its tracking error to be capped at 2 per cent, with a likely level of 1.5 per cent a year. Watch out for the following when you invest:

With gold prices at a record, ‘safety' is illusory. Take the SIP route.

Hold for at least 5 years to make the most of the SIP.

Opt for growth, not dividends. Gold doesn't provide regular income.

Don't put more than 5-10 per cent of your savings in gold.

Source: http://www.thehindubusinessline.com/features/investment-world/personal-finance/article1532005.ece