covid second wave: Expect things to be back to normal by next fiscal year: Mahesh Patil
You are handling your NFO and it looks like a well spread platter. Tell us a little about this fund and what are the categories of stocks and sectors in it?
The multicap NFO is a new category which Sebi has introduced. Here one needs to have a minimum 25% in each of the categories — large cap, midcap and small cap. So while it is a multicap, positioning wise, it is like an aggressive flexi cap fund with a minimum of 50% in midcap and small cap. But typically that varies between 55% and 65%. So that is the positioning of this fund.
We believe that at this point of the cycle where we are, economic growth will definitely recover after the short-term pain that we are going through. Structurally we are positive on economic growth over the medium to long term. In that period, we see that the market breadth includes the midcap and small caps which do well in that period. We have seen a similar period from 2004 to 2008 and again in 2013 to 2018. In such a scenario, a slightly higher allocation towards mid and small caps — which this fund offers — should do well to generate that additional return. So that is in terms of the positioning of this fund. We are looking at it as a large cap focused, small cap focused and a midcap focused fund with the best ideas from our internal research analyst team getting reflected in the stocks. It has around 15 odd large cap stocks, 15 odd midcap stocks and 15 odd stocks in the small cap space.
The broader themes which we are looking at where we see a good trend going forward are; a), the move from unorganised to organised. Post Covid, it has gained acceleration and many sectors — be it retail apparel, footwear, consumer durables or home improvement — we see the trend continuing. The per capita income, as it goes up the penetration levels in this sector, will also improve. That is the structural theme which we are looking at. Most of the stocks in these sectors are in the midcap and small cap space.
b)The second important theme which we see playing out is the focus of the government on the production linked incentive (PLI) schemes across sectors. We see a decent interest coming up and it opens up for the domestic as well as the global market many companies in consumer electronics, textile, auto ancillaries as well as pharmaceuticals spaces. As a corollary to that, we should see a pickup in the private sector capex and that should drive demand for industrial capital goods companies which we have been also looking at.
c)Specialty chemicals is a theme which has played out well in the last three years but there is a long runway there. India’s share of the specialty chemical market is just about 3-4% compared to China’s 30%. A big shift is happening from China to India and that benefits some of these companies. Indian companies have done well in that space. That is another long term theme which we are looking at.
d)Finally the theme of digital disruptors. The whole space of digitisation has gathered momentum after the Covid crisis and many companies which are focussed on that are likely to see the benefit coming through. IT is not only the IT sector which is benefitting in terms of more business, but also some of these digital disruptors and enablers where we see good growth in the coming years.
These are some of the themes which we would like to see play out over the next few years. We would look at opportunities in these sectors to be a part of this multicap fund.
Where do you stand on the entire reopening trade? Would you say that a) they have corrected enough from last year and can be bought now? b) Should you consider buying hotels, hospitality or aviation?
One thing is clear. Compared to the first phase, at least there is visibility. We know there is a vaccine and many other companies which are coming up with vaccines and so the supply issue should get addressed in a month’s time.
Some medications are also coming in to address Covid. There is a nasal medicine which is more effective. There is a clear roadmap and one can expect a return to a normal environment six to nine months down the line. There is a good chance that we should be in a normal environment in the next fiscal year. That is the time when some of these recovery plays should see a strong comeback.
However, one needs to keep in mind that there is going to be an impact on the balance sheet of some of these companies because they might incur losses. So within that sector, companies which have got a stronger balance sheet and are able to withstand the second wave, will come back with vengeance in the next fiscal year. So depending on the valuation and what they offer, the market will definitely look at FY23 numbers and then try to value these companies. The correction can be an opportunity but one has to be careful and look at companies with strong balance sheets because otherwise they will have to raise further capital and there could be an equity dilution. FY23 will be a year where you will see definitely a bounce back in some of these sectors.
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