We have been adding private banks, IT services and pharma holdings: Raunak Onkar

Instead of looking at the headline numbers and obsessing over them too much because every month there will be new headline numbers coming in and just like the investors are reacting, even businesses will have to react to that information in real time. I do not think I have any predictive answers or abilities to guess what the US CPI numbers are going to be,” says Raunak Onkar, Research Head, PPFAS Mutual Fund

What is the market pencilling in? Some are saying that there is a high probability that India CPI peaked out yesterday with a reading of 7.4%. What is the view on US CPI? Do you see market bracing in the end of the rate hike cycle assuming that we are almost at the fag end of the peak inflation readings or not yet?
Actually it is very hard to predict. Month on month, we keep getting the inflation numbers and the interesting thing about inflation numbers is if you fast forward to another year, this year’s inflation numbers will be next year’s base. So, we have to think from that point of view whether the inflation cycle continues over a longer period of time and for that, when you go company by company, sector by sector, the inflation matrix really affects different sectors differently.

So instead of looking at the headline numbers and obsessing over them too much because every month there will be new headline numbers coming in and just like the investors are reacting, even businesses will have to react to that information in real time. So I do not think I have any predictive answers or abilities to guess what the US CPI numbers are going to be.

Are there any indicators you are keeping an eye out for? Let us talk about the view on valuations. The fear is that if borrowing costs and rates continue to head higher, they will impact the earnings visibility and the earnings trajectory of companies the world over. The US has faced that quite a lot. Do you see that scope in India as well or do you see the resilience in the Indian market due to the resilience of underlying earnings?
We are not seeing too much of a correction in the commodity sector. However, traditional businesses with longer term earnings cycles have already corrected in many of the services businesses or even other areas.

So on the interest rates, definitely, as the interest rate cycle is on an upswing, we will see valuations getting depressed across the board because it will be incrementally harder to raise money and do M&A by having leverage. All those factors which would have caused earnings growth in the longer run to be muted.

Definitely the valuations have to be suppressed but in many cases, the valuations have already corrected. They may not be in a very attractive range but they are still corrected from what they were at the peak.

The reason I am coming back to valuations is because you guys have been tracking US market valuations for the longest time and may be the first mutual fund to actually start investing in US markets after 30% fall from top. What is your view on the valuations in the US market to start with? Until the last two years, everybody was crazy about investing. Now nobody wants to invest when the prices are down 30%?
It depends on the businesses you want to invest in. If you know that the business that you are investing in has a longer term trajectory and the growth might be affected, cyclicality is bound to happen but the business still has the longer term matrix in place and the business model is sound and they do not need outside capital to grow.

I think the valuations are looking far more attractive for those kinds of businesses. We have seen corrections in many of the sectors. The biggest corrections have happened in areas where the businesses do not have capital generation business models and do not generate their own cash flow which can fund their future growth.

Many of these companies were dependent on external funding or external capital raised through equity dilution. That cycle has actually come to an end and those businesses will definitely get hampered in their growth stage if they are not able to use internal cash flow to grow. Those cases have seen valuations crash quite substantially but in cases where the companies do not need to rely on capital markets to raise funds, those companies valuations have become very attractive and if the RBI mandate had been there, we would have definitely added to our positions as well.

Let us talk about India. Where have you been the biggest buyers in the last six months as far as the Indian market is concerned? Where do you think earnings could surprise in the next two years and valuations are still not pricing in big earnings recovery?
The window of the next two years is difficult to predict from an earnings surprise point of view. We have to wait and watch and see how the numbers evolve but the areas where we have been actively buying in our own portfolio have been in private sector banks where we own three private sector banks. In fact, HDFC Bank we shifted to HDFC Limited because of the merger announcement but ICICI Bank and Axis Bank remain part of our portfolio. We have also been adding to our IT services holdings and pharma holding.

In capital market businesses, where they are non-lending businesses, we have added those businesses in the fund.

Are you buying AMCs, tech backed brokerages or even platforms and exchanges?
Yes, we have MCX, IEX, CDSL in our portfolio. We also have Motilal Oswal which we have been adding over a period of time and that is the only AMC we own directly. If you own ICICI Bank, you end up owning the underlying subsidiary AMC business as well. In that way, we own through residual shareholding of this company.