After going through a lot of trouble in the last few years, financials are now turning the corner, says Alok Singh, CIO, BOI AXA Mutual Fund. Edited excerpts:
How would you value conglomerates which have gone debt free? Do you think this deleveraging is positive as far as equity valuation is concerned?
The promoter psyche has changed over the last couple of decades. There was a trend of creating conglomerates by debt financing. In the last four-five years, people are becoming increasingly biased towards having independent companies. We have seen a lot of wealth being created by demergers because it allows investors to have a clear picture of the business and take investment calls accordingly.
Also with so much of liquidity around and equity capital available, there is a bias towards being deleveraged. The trend will continue and will get amplified going further.
Which sectors are you bullish on despite the run-up?
If you look at our portfolios, we have been overweight in pharma, chemical, agro-chemicals and industrials for the last one year. We continue to be overweight on them. Financials have gone through a lot of issues in the last 5-7 years. I think that sector is now turning the corner. Credit cost and funding cost are two basic parameters for their performance. Those are turning positive. The only thing missing is credit growth. With most of capex heavy industries running near full capacities, the next capex cycle is around the corner. This one particular sector, which is also a large weight, I would be more constructive going forward.
So how would you value these companies now? After a long time we are seeing a pick-up over there. Will they surpass their previous peak valuations?
If you look at Nifty Bank, at an aggregate level, the price to book multiple is close to 3. For PSU Bank index, the long- term average is around 1. We are still trading at around 0.5 over there. So there is a lot to catch up before we start talking of new highs. Look at the way the financial surveillance has changed, both in retail as well as in the corporate side. Other regulations like IBC has also come into place. Going forward, things should be much better. If it sustains, I would not be surprised to see higher multiples than the historic averages.
Look at the current environment — global growth is supportive, rates are supportive and there is a shortage of various commodities. Isn’t it the time for a massive growth in GDP?
Most of the guys are talking of a decent growth number, some of which is primarily because of the lower base also. Having said that, a lot of issues are getting resolved and the government is being supportive. PLI is one of the reasons.
All the building blocks for growth are there. The recent commentaries of most corporates, especially when the wave two started receding, are quite encouraging. This means that growth should come in.
The government is supportive of infra. With the monsoon being good, the industry will be able to learn quite fast how to cope up with Covid. The first wave was more dampening than the second one. We do not know if there would be a third or fourth wave but the industry and the economy will be able to handle it far better. After vaccination, there will be a lot of pent-up demand. So whichever way you look at it, it indicates growth. I am not getting into whether 10% or 12% growth is okay but we see growth coming.