Mr. Venugopal Manghat
Head – Equities, L&T Investment Management
Venugopal Manghat is Head - Equities at L&T Investment Management. He manages L&T India Large Cap Fund, L&T India Value Fund, L&T Business Cycles Fund and L&T Arbitrage Opportunities Fund. Venugopal also manages the equity component of L&T Equity Savings Fund and L&T Monthly Income Plan. Venugopal has an experience of 21 years in equity markets in India. Prior to joining L&T Investment Management, he was Co-head of Equities at Tata Asset Management. He has worked for more than 16 years with Tata Asset Management Limited having joined as a Management Trainee and has worked in various capacities including as dealer for equity & debt, as research analyst for equity & credit, as Head of Research and managing some of the key equity and hybrid schemes for the company. He started his career as a research analyst on the sell side before joining Tata Asset Management. Venugopal holds a Bachelor of Mathematics and an MBA in Finance.
Q1. The Q2-FY18 Q2 GDP growth figures was a welcome 6.3% over the previous quarter 5.7%. Can we now safely conclude that the tide has finally turned after Demo and GST impact and that the figures will be a climb here onwards?
Answer: Q2 GDP growth was in line with expectations of stability, post the temporary disruption in economic activity. This was against the backdrop of demonetization and implementation of Goods and Services Tax (GST). The Indian economy seems to be transitioning from the impact of economic reforms to a higher growth trajectory. In that context, it does seem that the worst is behind us. Industry wise data shows manufacturing growth accelerating to 7% from 1.2% in the previous quarter, suggesting normalization of industrial activity. However, part of it could be due to the early festive season. This sequential recovery in GDP growth is expected to continue in the second half of the year with momentum improving on account of a favorable base and pent up demand.
Q2. After disappointment in the Q1-FY18 earnings, the Q2-FY18 earnings did brought a change in mood with about 45% results above expectations. What has been your assessment of the corporate earnings, especially w.r.t. the GST impact?
Answer: September quarter was the first after GST rollout. Nevertheless, it was much better than the previous ones in terms of earnings growth and saw a continuation of the improving trend. Cyclicals and some of the beaten down sectors like public sector banks, telecom etc delivered qualitatively better results. After several quarters, Nifty earnings saw double digit growth and positive surprises out-numbered disappointments. This improved performance could be partly attributed to restocking and the early onset of festive season. However, I believe that corporate earnings will improve further in the second half of the year.
Q3. The government has been pro-actively working to make GST process simpler and also has reduced rates. What your assessment on GST adoption and acceptance, especially in the MSMEs and the unorganised segments of the economy?
Answer: From the numbers released by the government so far, it looks like compliance has been low. Activity levels too were subdued as businesses adjusted to the new regime. Like any new tax regime, the first year of adoption generally sees less compliance. There have been teething troubles, confusion on rates, lack of preparedness, etc. The MSME segment seems to have taken the bigger hit as they were probably not ready for such a change. However, with the government working to resolve the issues and correcting rates proactively, I believe implementation will get streamlined over the next few quarters and the benefits will be more visible. The unorganized sector has been impacted the most, given that they were working with a significant tax advantage. The shift from unorganized to the organized segment has begun, though it is a gradual process.
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: Current market valuations seem high due to the fact that earnings growth has been very subdued for some time now. In fact, earnings growth of corporate India is probably at its lowest level. The ratio of corporate profitability to GDP is at a multi-year low. Nonetheless, the market has moved up on the back of a favourable global equity market environment and expectations of earnings recovery. Increased liquidity in the market from domestic investors has resulted in valuations moving up even though earnings have not caught up. Given the higher risk appetite and strong surge in domestic investor liquidity, midcaps have done much better than large caps and this is reflected in the valuations. Hence the risk – reward equation in the short term from the midcap index may not be entirely in favor. Nevertheless, midcaps have outperformed large caps over longer time horizons, given the phase of development of the economy and evolving market efficiency. For an investor wanting to invest fresh money, he should have a five to ten year time horizon in mind. I would continue to be more positive on the midcap side.
Q5. What is your sectoral outlook? Which are the three sectors you will be more interested in and three which you would like avoid at this point of time?
Answer: Globally, in line with improving economic growth conditions, cyclical sectors seem to be gaining as a theme. The Indian market is also reflecting similar trends. Some of the defensive sectors like IT and pharmaceuticals are facing challenges which could continue for some more time and their growth rates are likely to remain low. The consumer staples sector, though steady, is at heady valuations. The Indian economy seems to have started improving from the trough in terms of growth. In line with this thesis, I would be more positive on the cyclical sectors, both domestic and global. Having said this, I believe the market continues to reward good investment ideas. Adopting a bottom up stock specific approach to investing would be better.
Q6. 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: We do not use cash as a strategy. In any market condition, we look for opportunities all the time and hence cash is held only to take advantage of such opportunities when needed. At the same time if existing bets offer potential, we hold on to them and are happy to increase weightage.
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