Equities might be around current levels next year; demand, purchasing power need to come back: Kenneth Andrade, IDFC MF -

In an interview with ET Now, Kenneth Andrade, CIO, IDFC Mutual Fund, shares his views on markets. Excerpts:

ET Now: There is a section in the market which believes that the economic recovery in the first year of the current administration is slow. Is the criticism valid? Are you also disappointed, given the fact that earnings are yet to pick up?

Kenneth Andrade: I think it was too early to expect earnings to pick up. Whatever this government has done is left on implementation, but corporates have to follow through.

ET Now: So how will the second year of the government be different from the first?

Kenneth Andrade: As far as investment world is concerned, we look at the policy initiatives and we see how corporates follow them up. They do not have the balance sheet to follow it up. So, 2016 is not going to be very different from what you saw in 2015. And going into 2017, we need to see how demand actually picks up. So, capacities are there on the ground. They got created over the last 10 years. Demand and purchasing power have to come back, which will reflect in profitability. None of that is happening at this point in time.

ET Now: What lies ahead for the markets in the next year?

Kenneth Andrade: I do not think 10% is a retracement. It is just a normal correction that you get. As far as equities are concerned, our view has been that you would lose significant amount of capital but there will be a time element to it also. Market might just be around these levels, slightly lower or slightly higher but it will take time for it to actually evolve itself.

ET Now: And that some time could drag for the entire year?

Kenneth Andrade: It could be. We probably are in the minority as investment manager. We still think we are somewhere in the 90s in the previous investment cycle. A very large part of the population and investment community thinks we are in the early 2000s. We have to repair our balance sheet before we get going.

ET Now: Let us talk about companies which probably do not need that. If Janet Yellen's comments are anything to go by, the belief is that the US economy is stronger than what a lot of people believe, that would mean that the companies with exposure to the US markets could potentially do well? Are you playing the export theme because one, there is this commentary, two, their balance sheets are not under distress. Is that a good theme to play for the next 12 to 24 months?

Kenneth Andrade: If I look at our portfolio construction, we are still very domestically focussed and if you look at large international opportunities that are there, you probably get it for one or two sectors in the universe. One, you probably get it through IT, some little bit of ancillarisation of automobiles is there and then you get pharmaceuticals. Except for IT, which is largely cyclical, you add leverage into capex into the international environment.

That is the call that you need to take. But all said and done, valuations are also slightly trailing towards the higher side in this space. So, it is an equation of where you see larger growths coming in, how valuations stack up. We own IT but we are looking at companies that are doing things a little differently.

ET Now: So let us pull out your portfolio. Your fund is up 9% this year that is fantastic given that markets already have given a negative return. Your top holding is Page Industries, followed by SKS Micro Finance, Blue Dart, Vardhman Textiles, Ashok Leyland, Container Corporation. There is no similarity, what theme are you pursuing?

Kenneth Andrade: We always liked large companies. We like consolidators. We like businesses that come together and demonstrate pricing power and that is essentially what reflects in the portfolio.

ET Now: Are you not bothered about the PE multiple for a Blue Dart or for that matter a Page Industries? Blue Dart is trading at a PE multiple of 110 based on FY17 estimates?

Kenneth Andrade: We go through that very regularly. Our larger holdings would have another similarity with our large holdings that they will be trading at premium valuations to the entire portfolio. You take my top 10 bets and compare it with those of five-year back and they would be all between number 11 to number 20. We let the top 10 play itself out. They are good execution companies. They do not have too much financial risk. They do have a little bit of execution risk, but we are happy to play with that.

ET Now: Maruti and Idea are the only Nifty or rather bigger names over there. Why Idea, do you not believe that Rel Jio could be a threat whenever it comes about?

Kenneth Andrade: That is the only new competitor in that entire space, but if you look at it historically, that is an industry which has been consolidating quite fast. If you look at any business which consolidates fast, you will usually have the emergence of new player in the entire business, but my sense is that it will be very tough for Rel Jio to take it on.

ET Now: If you are indeed saying that the export-oriented themes are quite pricey, what do you find attractive now? what is it that could form a part of the 11 to 20 holdings right now? Which is the theme that you are playing?

Kenneth Andrade: There is no particular theme out there, but one thing we completely avoid is the infrastructure part of it all, whether it is liabilities or assets. We think that businesses require too much of capital to generate too little return. There is nothing there for the shareholders, there is everything there for the bankers out there. We are happy to sidestep that business.

ET Now: So banks are out?

Kenneth Andrade: You might just get a valuation part, but that might come. There is nothing structural in it. We might see a bank that will come into the portfolio over a period of time, but that will happen only if we find attractive valuations. On the asset side, it is a little easier to handhold these companies going forward, because they have no leverage. Banks for some reason are leveraged as disproportionately high at this point in time. They are grappling with way too many issues.

ET Now: Not every bank has an issue. PSU banks, by and large, have their own problems, but there are some good banks?

Kenneth Andrade: There might be one or two, which is why I do not rule it out. We have banks within the portfolio, but they are largely because of a strategy. So, there are a couple of banks which have demonstrated the ability to grow over the last decade and a half, but we do not think there are fair valuations at this point in time.

ET Now: What is the best way to bet on an economic revival? Because, if the economy comes back, banks and financials will do well. That is heart of your market also, 35%-36% benchmark weightages towards financials?

Kenneth Andrade: If I could answer that question a little differently, going by RBI data, 67% of all leverage in the banking system goes to corporate India and all of it goes to infrastructure. You cannot solve the problem by pumping more money into the same problem.

If you look at the entire business, you have an infrastructure business that is there. Equities have lost money, the banks are writing off NPAs. The government is not getting enough of money from the infrastructure assets and worse case consumers are paying more. So look at the value change, it does not make money for anyone.

ET Now: What is it that you are betting on on the asset side, which you think could revive as and when the economy comes back?

Kenneth Andrade: Consumer leverage will be back and that is more structural in nature than we have ever seen before or rather seeing right now. It is a long-term call that you have to take, but if banks have to deleverage or banks have to get into new spaces, that 67% loan book to industries is unsustainable. You have to break it down.

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