Aniruddha Naha is the Head Equity at PGIM India Mutual Fund
Aniruddha Naha, Head-Equities, PGIM India Asset Management, is confident that India can manage inflation as well as rising interest rates, which have been a worry for investors, and the country’s growth story is on track.
The fund manager with more than 18 years of experience in the equity and debt markets says clean balance sheets and strong cash flow augur well for the economy.
Naha, who manages PGIM India’s flexi cap, small cap and midcap opportunities funds, does identify six factors that will influence Indian and global financial markets.
Inflation, rising interest rates, the global debt burden, geopolitical concerns and the energy crisis in Europe and earnings trajectory would be the trends to watch out for, he tells Moneycontrol in an interview. Edited excerpts:
Do you believe the Indian equity market will outperform the global market over the medium to long term?
The Indian economy is well positioned in terms of growth potential. India is well positioned in terms of managing inflation and rising interest rates. While globally, high debt in the rising interest rate environment is worrisome, India has been able to manage debt to quite reasonable levels. The robustness of clean balance sheets and strong cash flow generation augers well for the economy.
Corporate balance sheets haven’t been as clean as it is currently, for quite a long time and this is across market capitalisation. The lending balance sheets of financial institutions have also seen a good clean-up in terms of asset quality over the last couple of years and now asset quality doesn’t seem to be a problem in the near future. They have additionally raised capital and strengthened the balance sheet.
When we look across sectors, capacity utilisation levels are improving, the Production Linked Incentive (PLI) schemes have incentivised corporate India to create a manufacturing ecosystem within the country and even the corporate tax rates have come off to 25 percent. This augurs very well for corporate India to go ahead and invest in the country, which should keep the economic activity level elevated and markets buoyant.
The near term might be volatile purely due to global cues but the medium to long-term growth for the Indian economy looks far more robust, courtesy clean corporate, lending balance sheets and strong cashflows.
Do you expect outperformance in PSU stocks to continue moving forward?
Public sector undertaking (PSU) stocks, including PSU banks, are well capitalised and have strong and in many cases monopolistic business propositions. PSU banks have come out of the vicious asset quality cycle and are well capitalised.
The valuations of the PSU pack are also reasonable compared to some of the other pockets of the market. If the businesses continue to operate with growth, profits and cashflows as ultimate goals, these companies can continue to deliver good returns over the long term.
Do you see a significant recovery in domestic cyclical sectors in the second half of FY23 as we have the Union Budget in February?
There has been a continued focus on infrastructure and manufacturing under the current dispensation and this will continue both at the individual company level and also through Production Linked Incentive (PLI) schemes being formulated by the government. Corporates today have both the enablers of capex working in favour.
The clean balance sheets give them the strength to go ahead and plan and execute capex and the balance sheet should help them get incremental debt funding, as and when required. The strong demand and better capacity utilisation also incentivises the corporate/ promoter to expand.
The government has clearly focussed on driving infrastructure growth through roads, railways ports, etc. This enables demand for commodities. The visible recovery in real estate demand is one of the major drivers for cement, which should see a recovery led by real estate and infra demand.
In such a scenario, as long as the focus continues to be on growth through manufacturing and creating infrastructure, one can expect cyclicals and the full value chain to do well.
What are the factors that will influence the market for the rest of the financial year?
There are major macroeconomic indicators which will have a bearing on the Indian as well as global financial markets.
In the near term, elevated inflation, rising interest rates, the global debt burden, geopolitical concerns and the energy crisis in Europe, where winter has set in; would be significant trends one should look out for.
Besides, the earnings trajectory over the next two quarters would influence the market.
Do you believe that the profitability will shift from commodity producers to commodity consumers? If yes, then what are the themes to play?
There are two conflicting forces playing out in the market. The first is the conflict and disruption in the supply chain, which has kept commodity prices elevated. The second being the fear and early signs of a recession, which could impact demand and hence the prices of commodities.
At this point, it is difficult to gauge which of the opposing forces (will) prevail in the future but the fear of a recession is clearly making commodities jittery. The strengthening of the US dollar has also put pressure on the commodity basket.
Assuming that the worst in terms of the geopolitical conflict has played out, the recessionary fears are more likely to impact the future; a collapse in demand and prices of commodities could follow, which could materially shift the bargaining power to the commodity consumers.
India is a commodity consumer and a fall in commodity prices benefits companies across sectors—from cement, chemicals, home building products, fertilizers and chemicals and many others—as they all consume commodities as their raw material input.
Do you think the new-age tech companies are available at reasonable valuations and is this the right time to pick these stocks?
We have been conservative on new-age tech and platform-based companies due to a lack of positive cashflows and weak balance sheets. Along with that, the valuations have been expensive and most don’t fit into the normal valuation framework of P/E (price-to-earnings) and P/BV (price-to-book value) as their profits are negative. We will take a look at them, once they start generating positive operating cashflows on a sustained basis.
In view of their recent performance, how should one invest in midcap and smallcap stocks for a longer period?
The midcap and smallcap segments have high growth potential companies which over time could graduate from a smallcap to a midcap and then probably to a largecap. It is this journey which creates the maximum wealth. Midcaps and smallcaps have reasonably clean balance sheets, which make them resilient to a down cycle.
The earnings growth potential of these companies is strong and there is good visibility over the next two to three years. Even over a longer time frame, there are lots of sectors like IT product companies, real estate and home-building products, chemicals and agrochemicals, industrials, discretionary consumer baskets like footwear, branded retail, etc, which are primarily in the mid and small-cap segment and given the growth potential and per capita GDP growth which India will experience, these sectors have the potential to drive long-term growth.
Undoubtedly midcaps and selective smallcaps have done well but investors who have a longer time frame of more than three to five years can definitely invest in these segments through a staggered approach. A SIP/ STP should be able to facilitate the same.
In our midcap fund, we triangulate the portfolio-building process by focusing on risks, growth potential and valuations. While evaluating risks, the focus is on historical operating cash-flow generation, the cleanliness of the balance sheet and the corporate governance of the company. While evaluating growth, other than the opportunity size, the focus is to select businesses which are either well capitalised for growth or have strong capabilities in terms of technology/ knowledge competence, which should drive growth in the future.
Finally, valuations play an important role. We believe in Growth At a Reasonable Price (GARP). The way we define GARP is through the PEG ratio. We are cognizant of valuations and any business which doesn’t fit the GARP criteria is either skipped or sold, in case we own it.
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