In a chat with ET Now, Rajeev Thakkar, CIO, Parag Parikh Financial Advisory Services Pvt. Ltd. (PPFAS ) MF, says holding on to existing investments but are cognisant of the changing scenario.
Do you think it will be a great 2017?
It will be tough. At least first six months I see it will be tough, the entire story was discretionary spend that has gone for a toss in the last quarter and I do not know when that will recover. Again, increasingly I do not think we have the option of exporting our way to growth so you will have challenges in IT space specifically and maybe even in pharma. I am cautious and not very exuberant going into 2017.
But has that made you change any of your fund holdings because you are the kind of a fund which sticks by long term, does not change your holdings on a monthly basis or so. In the current scenario, have you relooked at any of your investments?
No significant change. We are holding on to our existing investments but we are cognisant of what is happening. We have had a preference for private sector banks in our investments. Increasingly it will become difficult for NBFCs, given that banks are coming into a rate war kind of situation in some areas. Also, when the unorganised players increasingly start coming into the banking space, they can access banks and NBFCs do not have that gap to play with. So there are some developments which we are watching but no change as such in portfolio holdings as of now.
But why is that? The world is changing and the way we will spend, the way we will consume, the way we will export, the way world will be doing trade is going to change. These are extraordinary times and in extraordinary times they perhaps demand a relook at the basic assumptions, your assumptions of 2014-15 will get challenged in 2017?
Absolutely. Change is ongoing. We are continuously taking a relook at what we own and change happens but change happens at not a very rapid pace. Our portfolio is not the same today as it was three years back, there have been exits, there have been additions but nothing major since we last spoke. The only change since we last spoke was a bit of a reshuffle, Bajaj Holding versus Maharashtra Scooter which is essentially the same group so again not that significant.
You own Zydus WellnessBSE 0.09 %, Mahindra HolidaysBSE 0.50 %, these are pure discretionary spends and dependent on how good the consumer is feeling and which way per capita income is moving. There is enough and more anecdotal data which indicates that the economy and consumption will slow down for two or three or even for four quarters. Does it make sense to avoid some of these so called haloed consumption stocks where PE multiples are very expensive?
ZydusBSE 0.09 % is not in the discretionary space, it is more FMCG kind of a thing. Mahindra Holidays sure. Discretionary spends will be down and essentially, today one has to be willing to take the pain. Some of the names are ones where you are convinced about the story three years, five years out but the question then arises do you exit them from a six-month perspective and then try to re-enter? The track record of trying to do these things is uniformly bad. One can never get it to a precision but one has to be prepared for muted results in the discretionary space.
Are you worried at all about what Persistent is going to do considering what we have already seen from Infy and TCSBSE 0.03 % or do you think that it will trickle down to mid-cap sort of division specific names like a Persistent?
Overall, the IT space will see pressure in terms of- increasingly not just for the past but even in the future with outsourcing being a problem in the US.
Focussed players will be somewhat better off. People who are focussed on a vertical and people who are trying to act in the digital space which is growing faster than the overall application development maintenance kind of area so as such we are holding on to Persistent and we think it will...
Is it more a wait and watch approach or are you not worried about Persistent at all?
There is no worry as such. It is just that maybe growth could come off a bit given the pressures on offshoring. Again, the fundamental cost arbitrage that is there does not go away. It is just that visas not coming in makes it difficult to do the onsite piece so maybe some of these players will start recruiting locals and work their way around so it could be a transition problem rather than a fundamental issue.
Now I look at some of your top holdings. Correct me if I am wrong but you do not have a meaningful outlay in NBFCs. Now has it changed post demonetisation or you did not have it earlier as well and if so what is the case because a lot of these names would be available not at a fraction but may be about 10%, 15%, 20% off from the peaks that they have touched. You are not convinced about the growth story?
We have indirect exposure through Bajaj HoldingsBSE 1.32 %, the two Bajaj FinanceBSE 1.93 % and FinservBSE 1.02 %. Some of our NBFC holdings are in the non-fund based things, It is not NBFC but it is linked to the financial sector and does not do lending.
But pure play NBFCs?
Pure play we are looking at some niche players but nothing which is immediately actionable.
Have the fund flows petered down a bit in the last one, one-and-a-half, two odd months and if not, what have you been doing with the cash that is coming in?
In our case, there has not been much inflow, outflow either way. It has been more or less where we were. So there has not been too much of portfolio action at our end.
There are no earnings in the market. Last two years, markets went up, earnings were not there and now earnings may not come in FY18 also. I mean I am sure the assumptions what brokerages are putting out for FY2017 they would be tapered down. So what happens to the market now? Ultimately markets will only go when there are earnings. Earnings recovery is only getting pushed back by one quarter, one quarter, one quarter. So what happens now?
Earnings have not been there as you mentioned, neither have returns been there.
Midcaps have gone up. In Nifty, you may take out the absolute value. It has been flat but stocks have done well.
Midcap is a space where one has to be very dispassionate when one looks at it if only valuations have kept going and earnings have not followed through, there could be severe price corrections coming up. So you cannot have stock which was trading at let us say 15 times earnings go to 20-25-30-50 and it is just story meaning something will happen down the line. You cannot have that as a sustainable investment strategy. And in some cases, you could even see that midcaps have gone way beyond the largecap names. So I take your point, there are pockets where things are not sustainable.
What could be a new pocket that you are looking at right now within midcap?
Not within midcaps, it is essentially sound like a broken record but given that a lot of people have come into the banking system, I think one would be very cautious on NBFC names and it may be better to stick with private sector banks rather than NBFC. So just to give you an example, the mortgage lending business done by NBFCs, in a lot of cases, was at zero spread and their whole game plan was to sell down the loans at a profit, securitize it or sell it down.
Now they will be starting with a negative spread. The way things are going, their cost of funds is nowhere close to ₹ 865 or ₹ 840 or the numbers that are floating around. So I think NBFC as a sector will a) face asset quality pressures given what is happening and b) with banks become aggressive in some of these spaces, loan against property, gold loans, home loans, NBFCs could face some tough times.
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