We are positive on PSU space as valuations are attractive: Anish Tawakley

There is value in selective pockets within the PSU universe, said Tawakley

Valuations are not cheap and the near-term outlook remains uncertain for equities, says Anish Tawakley, head of research and senior fund manager, ICICI Prudential Mutual Fund. In an interview with Samie Modak, he spells out the investment themes that investors can consider. Edited excerpts:

Do current valuations offer more comfort? Or changing dynamics, especially on the interest rate front, call for further de-rating?

Even though the market has come off highs, Indian equity, valuation wise, is still not in the cheap zone. Further, we believe in the near term there will be uncertainty, largely owing to the volatility in crude oil prices and geo-political developments. So, investors should moderate their near-term return expectations and keep away from investing for short term gains. But, from a 3 to 5-year horizon, an investor can start to build positions. Since a bulk of clean-up in the economy has already occurred in the form of correction in real estate prices to a point where we believe genuine demand could emerge, corporate capex cycle is likely to pick-up and bank balance sheets are in good shape. So, from a medium to long term perspective, both, the economy and market are likely to deliver.

Between large, mid- and small-caps, which offers better risk-reward?

We prefer large caps at this stage. Post the FPI sell-off, large cap valuation has become reasonable.

How does one play the market? Is it a good time to deploy a large lump sum?

Given the near-term uncertainty, it is better to stagger investments through a systematic investment plan (SIP) if an investor is considering investing into equities. Another option for lump-sum is to invest in a dynamically-managed asset allocation scheme. Such a scheme will deploy money in a manner wherein the investor can take advantage of equity market volatility.

Was October 2021 or January 2022 a good time to shed some beta as valuations had reached all-time high levels?

The equity allocation in our asset allocation scheme (BAF) during October 2021 and January 2022 was 35.3 per cent and 32.8 per cent respectively. As equities corrected in subsequent months, we have increased equity exposure to 38.5 per cent as of June 2022. 

Value as a theme has gained traction. Is there more steam left? The value screener invariably throws public sector undertakings (PSU) stocks. Are there other pockets that offer value?

There is value in selective pockets within the PSU universe. As a fund house we are positive on this space because valuations here have been attractive for a while now. In these stocks, there is better margin of safety, most of these names offer better dividend yield than broader markets and many of the sectors in the PSU space are witnessing a change in cycle due to economic activity picking-up or dedicated focus due to geopolitical tension.

What are the key themes that you see playing out over the next 2-3 years?

If the economy does well over the next 2-3 years, domestic cyclicals are likely to do well. These would include deposit rich banks (which can capitalise on credit growth), industrial, capital goods and automobiles. Meanwhile, FMCG would be a space to avoid since these companies operate at very high margins and have the potential to mean revert. Also, some of the unsecured consumer lending space looks vulnerable given the strong growth seen over the last few years. 

Is housing one such theme? Which allied sectors will benefit? 

It is imperative that urbanisation and housing deliver for the Indian economy to do well. No country has grown its per capita from $1,500 to $5,000 without urbanising. The role of the urbanising housing sector is critical for four reasons. First, it provides employment to unskilled labour, second, as more people have access to cheap urban housing, it lowers the cost of labour for the manufacturing sector. Third, once people have houses, it creates demand for manufactured goods. And finally urbanisation makes it easier to deliver social services (education and healthcare) to people. So it has huge social benefits as well. In the coming years, urbanisation will lead manufacturing in the economy. In effect, cheap housing will create demand for manufactured goods and will make available low-cost labour for manufacturing to be competitive. This has been the case with China as well. The role of urbanisation in China manufacturing is critical as over the past 40 years, the urban population in China has gone up 4.5 times (from 200 million to 900 million) while the rural population has declined from 800 million to 500 million.

What’s in store for banking stocks? They have underperformed despite the Street being bullish on this space.

We continue to remain positive on deposit-rich banks with credit growth gathering space. In an environment where rates were low and the system was flush with liquidity, deposit franchises did not come into play. However, as liquidity tightens and rates increase, the earnings power of strong deposit franchises will become evident. At the same time, one should be mindful of the potential negative developments in the consumer unsecured lending space.