Saturday, Jun 24, 2017

Dubai

Concerns are mounting on shares of small and medium cap companies in India as they look pricey depending on their earnings, even as the broader market continued its record-breaking rally.

The BSE small cap index has gained nearly 40 per cent since June 2016, while the mid-cap index has gained 29 per cent in the past one year. This compares with 37 per cent in the S&P BSE Sensex index, which has been on a record breaking spree, during the same period.

“The concern in India is the mid and small cap space. One has to be very careful with their valuations. Majority of stocks in that space are overvalued, but there are selective opportunities,” Sukumar Rajah, Managing Director and Chief Investment Officer — Asian Equity, Local Asset Management, Franklin Templeton Investments told Gulf News over the phone from Singapore.

Adding positions:

Franklin Templeton is positioning themselves very selectively among sectors, and has minor changes to the India fund.

The asset manager is underweight on Information Technology shares due to slowing growth, and has a positive bias on private sector banks. It has an overweight rating on consumer discretionary due to rising middle class, and are neutral on pharmaceuticals.

The asset manager has recently added positions in retailing and real estate or property development companies.

“We didn’t see an opportunity in these sectors some time ago, now with the change in landscape, we see them growing, and becoming large players. We continue to monitor the space to find more opportunities,” Rajah said.

The fund manager has added Aditya Birla Nuvo, Trent, Titan among the retail players, and has added Godrej Properties and Oberoi Realty among the real estate names.

“We are finding value selective opportunities in consumption. Real estate companies will benefit from market share shift from unorganised to organised real estate companies, and the companies that will benefit from new regulations in terms of Rera (Real Estate Regulatory Authority),” Rajah said.

A lot of real estate developers will find it difficult to operate, which uses advances from customers for funding.

Franklin Templeton sees a lot of room for growth for good quality banks, like its top holding HDFC Bank, Yes Bank, IndusInd bank, kotak Bank.

“The private banks will continue to benefit from structural shifts. The state-owned banks are still painful situation, expect SBI, which is relatively well positioned. We see some improvement in Axis Bank and ICICI Bank but they are not that well positioned due to some exposure to corporate sector,” Rajah said.

HDFC Bank, Yes Bank, Kotak Bank continues to be top holdings remains for Franklin Templeton.

Medium term:

The market may feel some short-term pain, but the broad gauge will still give decent returns.

“If you look at market cap to GDP it is close to long-term average. The PE is slightly above long-term average but earnings are below long-term average due to market contraction,” Rajah said.

“We expect margins to normalise over a period of time, so a higher PE should not a major concern for the broad market,” Rajah added.

And the risks to India story have been reduced significantly because the current account deficit and fiscal deficit is under control.

“Structurally the government has done a lot of things to control inflation. For India the biggest stress has been created by higher oil prices. The ability to absorb higher oil prices is much higher than in 1991 or 2013,” Rajah said.

“India is best positioned in Emerging markets to attract inflows, as many risks have been removed by the new government. The story continues to become stronger,” Rajah said.

By Siddesh Suresh Mayenkar Senior Reporter

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