Co-Chief Investment Officer

Birla Sun Life Asset Management Company

As Co-Chief Investment Officer, Mahesh Patil spearheads Equity Investments at Birla Sun Life Asset Management. With over twenty-three years of rich experience in fund and investment management, Mahesh works closely with a team of six fund managers and nine analysts, managing excess of INR 60,000 crores in equity assets.

Mahesh has been with Birla Sun Life AMC since 2005, where he started as a Fund Manager. Several funds managed by Mahesh have been recognized for their performance and won awards from independent agencies. In 2008, Mahesh was promoted as Head - Equity and subsequently as Co-Chief Investment Officer (Equity) in 2011. He currently manages large-cap funds like Birla Sun Life Frontline Equity, Birla Sun Life Top 100, and Birla Sun Life 95 Fund.

An Engineer from VJTI, Mumbai, Mahesh is a MBA in Finance from Jamnalal Bajaj Institute, Mumbai. He is also a charter holder from ICFAI, Hyderabad.

Q1: The FY2017-18 was largely good for the domestic markets and the industry. In recent times however, the markets are range bound. How are the equity markets expected to in the coming FY and also in the next 2-3 years?

Answer:The first nine months of FY18 has been good for markets due to both global and domestic factors. There was global synchronous growth seen in both developed and emerging markets, lower global inflation, weak US Dollar helping flows into risk assets and improving corporate earnings globally. Domestically, there was expectation that the economic growth and corporate earnings would rebound post the twin disruptions for demonetization and GST.

Starting February, the calm in the equity (and bond markets as well) markets has been replace by volatility and investor anxiousness. It is do with markets believing that Fed would hasten the pace of rate hikes due to strong economic activity pushing up inflation which may in turn slow down growth. This has been compounded by US President initiating trade wars on multiple countries. History has no parallel to this kind of trade restrictions which is leading to uncertainty. The markets do not like uncertainty.

Domestically, the market participants have to adjust their long period expected returns from the market in the new LTCG regime. Due to these factors we could see consolidation in the markets.

Taking a medium to long term view, Indian equities present a compelling case for investment. The benefit of reforms is flowing through as can be seen in the rebound of GDP growth and corporate earnings growth. From a 6.7% of GDP growth in FY18, India would see a 7.3% print in FY19. The Nifty50 EPS growth could be approximately 10% while it would jump to 19% in FY19 before tapering to 15-16% for next three years. Considering some derating due to current level of markets, investors expecting 12-13% returns for next 3-5 years would be rewarded.

Q2: What is your take on the entire NPA fiasco of public sector banks. How deep is the problem and what impact do you feel it will have on India's economy in coming years?

Answer: The pace of recognition of bad loans had picked up pace in the last couple of years which puts India as one of the few countries which have covered a lot of ground. The banking system has recognized gross NPA of INR 11 trillion of which more than 90% has been recognized by the PSBs (Public Sector Banks). However, this is a work in progress which could take a few more quarters. There is no doubt that the recent fraud involving PSBs issuance of LoUs (Letter of Undertakings) has been disappointing and has derailed the path set post mega-recapitalization to the tune of INR 1.6 trillion by the government (of the total INR 2.11 trillion). The chiefs of multiple PSBs have indicated that the focus will be on setting the current lending book right and not on growing the book. The government and RBI would curtail their activities further to prevent any more frauds being discovered later. This would have an impact on the credit growth improvement that was widely anticipated. On an optimistic note, I hope that the learning from the current crisis may pave the way for a better future for the PSBs.

This gives further time and opportunity for the Private Sector banks and NBFCs to chip away at the market share of the PSBs. The banking system is like the oil that keeps the engine running in an automobile and a good banking system is core for a healthy growth of the economy. The system would overcome the NPA issues in the next few quarters with governance mechanisms to avoid recurrence.

Q3: How do you think have the institutional investors, both foreign and domestic, viewing the Indian markets as of today? Are they going overweight or underweight?

Answer: The foreign investors have been over weight on India since the current government came to power in 2014 but the quantum of that has been coming down. The funds that invest in India used to be overweight by 450 bps in 2014 which has come down to 180 bps. Due to dollar weakness and growth differentials over developed markets, the emerging markets have been recipients of capital into equity markets. However, most money went to high beta countries which are dependent on commodities. That is still continuing. The earnings growth recovery was delayed in India due to demonetization and GST. Now that the earnings are rebounding, the premium with other countries has reduced which should make our markets attractive. Meanwhile, the FPIs have to readjust their expectation and operations to the new capital tax regime which could take time.

With retail participation into equity mutual funds increasing remarkably, the mutual funds have been strong participants in the equity markets. The flows in the month of February held up well still clocking above INR 200 billion on a monthly basis with SIP book above INR 6.4 billion. Due to the new tax regime, we could see some slow down in flows but nothing to be too concerned about. We should remember that the SIP book is normally quite sticky (unless there is a global macro event which makes market sentiment negative), the EPFO has been investing 15% of new flows consistently (~INR 20bn) and NPS has also been getting regular flows to invest in equity market (~INR 5bn).

Q4: What are your views on current market valuations especially w.r.t. the large cap and mid cap space? What would you suggest for a person looking to invest fresh money at this time?

Answer: The markets have been trending through re-rating than earnings support. That could change now. The third quarter numbers were closer to 10% in terms of earnings. With more recognition from banks and increase in raw material prices compared to low base last year, there could be drag on earnings in the fourth quarter but growth numbers could be better than third quarter. The momentum of good earnings would spill over into the next fiscal year - FY19. Hence, from a risk-reward perspective, fresh money should find its way into large caps. Investing in large cap funds and multi-cap funds (most of them are running large allocation to large caps) should be considered at this juncture. However, if the tenure of investment is more than three years, midcap funds may also be considered.

Q5: What is the investment and cash strategy followed by your fund-house in present market scenario? Are you looking for new opportunities or are holding on to existing bets?

Answer: Over the last few months, we have been communicating that our portfolios would invest in quality companies at the risk of under performance in a raging bull market. These companies out perform incase of market fall and infact recover faster than the others. This is getting tested as this article gets published. The months Oct'17 through Jan'18 have been testing times in a bull market. The portfolios have done reasonably well in the fall of Feb'18. We have been holding cash in some of our funds which is being deployed in the current correction. We are adding to the positions that we have been having conviction at better prices. In terms of new opportunities, we have been adding to telecom sector with the hope that the new entrant would reduce pricing intensity as marginal addition of market share due to price reduction is at minimum. We have been positive (and adding more) on building materials due to government thrust for housing and market share gain by organized players due to GST. We are positive on rural revival theme and have added quite a few companies in that space. The orders are flowing in infrastructure space especially roads where we have built some positions.

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