I don't see valuations as a concern for markets: Pankaj Murarka
Sep 11, 2014

Author: PersonalFN Content & Research Team

PersonalFN is privileged to bring to you Mr Pankaj Murarka, Head - Equities at Axis Mutual Fund

In an interview with

Quantum Information Services Pvt. Ltd (PersonalFN)

In this interview Mr Murarka shares his view on the shift in political regime with Modi-led-NDA in power, macroeconomic factors, geopolitical tensions, the mutual fund schemes he manages and how the Indian equity market would pave its path.

PersonalFN: The electorates gave a decisive mandate to the NDA Government in the 16th Lok Sabha elections, as Mr Narendra Modi was projected as BJP's prime ministerial candidate. The NDA has conquered 336 seats, while the BJP alone has conquered 282 seats. Now that the Modi regime is here, what are your expectations from the Government?

Mr. Pankaj Murarka: As you rightly said this Government has got a decisive mandate and it's only after 40 years that we have seen a clean mandate emerged in India. Last time we saw it was in 1984, when Rajiv Gandhi got a clean mandate and that was also more driven by the 'sympathy wave' in the backdrop of the demise of Mrs Gandhi. But this time around, the mandate is very clear. The mandate essentially reflects the aspirations of the people of this country, who clearly you know both seen, one our growth actually falling from 9.0% to 4.5% and the kind of governance related issues that we had seen over the last 3-4 years. So, I think this mandate clearly reflects the aspirations of the people and I think that's what this Government now needs to execute the mandate to live up to the aspirations of the people and what do people of this country want. When we say that 2/3rd of this country under 35 years of age, we are adding about 30,000 people to our working age population every day; which effectively means we are adding about close to a million people a month, so effective around 10 million to our working age population every year and this will continue for next 20 years. So for the next 20 years, we'll be adding about 200 million people or 200 million Indians will join the working age population. Whenever that has happened in any country, that country has gone through a significant transformation. And so you need to put all these people to work...and the only way you can do it is through higher growth - and that growth will be across sectors - that is the only way we can put all these people to do. So I think the first and foremost mandate to this Government is clearly to take our growth back to double-digit growth of 10.0% or so; and if this Government executes the mandate during the next 5 years, I think at the end of 5 years we may achieve 10.0% growth. And high growth is the only way through which we may solve all our problems - be it related to poverty, paucity of resources...and so on and so forth. The only lasting solution to all our problems is through growth and high growth.

PersonalFN: Do you think the budget 2014-15 has done enough; because it was said to be quite a disappointment due to awry allocation, while the finance minister did skew to some sectors such infrastructure. Given that allocations are not right and people expecting a vision from Modi-led-NDA Government, do you think growth will reach double-digits in time to come? Also it had a mild shade of populism due to the Government's commitment to walk tight on the path of fiscal consolidation.

Mr. Pankaj Murarka: The double-digit growth was more in the context of 5 years. I believe that if this Government executes the mandate which it has been given and live up to the expectations of the people, then India can go to double-digit growth in 5 years' time...so that's not a yearly phenomenon. As far as the budget is concerned, I think probably you need to give them some time. They had little time; they had just a month in office before they presented the budget. Plus there was a budget which was already there; so in 6 months' time to start preparation for the next budget...so it was more like an interim kind of a budget...and probably we'll get the full picture in time to come as what the Government intends to do in the next budget, which will be real one. Secondly, I think from an India policy perspective, it is high time we deemphasise budget. Budget is a policy statement which you make at one point of time. What is more important is we need to work through the year, keep doing things through the year rather than trying to make all those announcements at one point of time of the year and then there is no follow-up on most of the things that are announced or to please and make those big political statements. So I think what is more important on what the Government really does all through year, rather than focus too much on the budget. Budget is supposed to be nothing but a statement of accounts of the Government and how they intend to do it. But over the years politicians have used it has a platform to make announcements on their policies...and so on and so forth. Those policies need not wait for the budget day. Why do you have to announce everything on the 28th of February? Any day is good day to make those announcements, right? So I think we need to change this whole perspective in terms of the way we have been used to doing things.

PersonalFN: The Prime Minister's speech on India's 68th Independence Day celebration was perceived to be quite historic. He talked about improving governance in a democracy such as our which has been submerged deep in corrupt practices so far. Do you gather much substance from his speech? How do you see things improving?

Mr. Pankaj Murarka: I'm hopeful that things will improve and change. So as always, I'm an eternal optimist and I firmly believe that things can change if we want them to change. So if we wish to, then things can certainly change. At least the Prime Minister did try to make a couple of those statements in his speech in terms of wanting to change things in a very significant manner. So I think if a concerted effort is made there is no reason why things cannot change...and things can improve significantly. It is high time we have been hiding to review transparency and all Government dealings or issues of policy making and so on and so forth; and making them far more participative and transparent that what we have been used to. Because at the end of the day if we want to achieve aspirations, let's accept that it's the job only of the Government...it is collective effort. And unless and until we get into this whole mind-set of collective sharing of responsibilities, then collectively trying to make polices and try to execute them; we are unlikely to get there because you need contribution from each section of the society - be it businesses, other lower sections of the society... and so on so forth. In his speech he did touch upon new ideas, in term of how his thinking is and what he is. But the key lies in execution and in India the track record on execution on public policy unfortunately has been somewhat poor over the last so many years.

PersonalFN: How do you perceive the current health of the Indian economy? Which macroeconomic variables are worrisome and in which fear has been shunned?

Mr. Pankaj Murarka: Currently it's been the third successive year, where on a full year basis we'll have a sub-6.0% growth. Probably it's been the worst that we have seen in the last 10-12 years. So, clearly the economy is on the low point of its growth for various structural, cyclical factors which have impacted our growth over the last 3 or 4 years. Having said that we still are in the worst point in our growth... and things can only improve from hereon. Meaning, all the macroeconomic headwinds that we had a year back are now stabilising and some of them are turning into tailwinds. Our external accounts are far more stable, the currency is far more stable, we thing worst of inflation is clearly behind us and we think it will start moderating towards the end of this year and going into next year. So, we'll see a significantly more accommodative central bank next year than what it has been in the last 3 years. So we think from a macro perspective we have been on the course of fiscal consolidation now for last 2 years and we need to carry forward that process further to get to still logical conclusion of getting our fiscal deficit under 2.0% or thereabout. So that's a process, but from a macroeconomic process I think India today is looking far better and healthier than it was a year back.

PersonalFN: Do you think the RBI should shift its vigil from inflation and consider growth or be accommodative, as what even the erstwhile Government had been harping out?

Mr. Pankaj Murarka: This is a big question which has been debated globally; so there is not right or wrong answer. But as true monetarist RBI is just doing the right thing. Lower inflation over the medium term to long term, itself is the biggest impetus to growth because that effectively means lower interest rates. High inflation affects the middle class and lower section of the population the most; because they spend a significant amount of their income on their daily living because their savings are low and when you have higher inflation they are the ones who are the most impacted. Lower inflation is therefore in the larger interest of the society and the country. And if we can achieve stable low inflation in the medium term to long term; I think that can be the biggest impetus to growth. So I would rather support the central bank in what they are doing.

PersonalFN: Coming to markets...Since September 2013 the Indian equity market has run-up rather sharply (after the BJP announced Mr Narendra Modi as its prime ministerial candidate), resting hopes of "acche din" as that was propagated ahead of polls. But from then until now, macroeconomic variable, as you said such as growth, inflation, fiscal deficit...have been quite weak. So are you of the opinion that markets have run-up ahead of fundamentals in the backdrop where trail P/E of the market is sailing over 20 and valuations are justifying that?

Mr. Pankaj Murarka: First of all I don't see valuations as a concern. The fact remains that the markets are somewhat ahead of the market economy, but that's always the case. Markets tend to be 4 to 8 quarters of the real economy and that's what we are witnessing. While from a near term perspective markets might look optically expensive to you on a P/E matrix; but if you look at slightly from a medium term perspective, then I'll don't think they'll look as expensive because we need to take cognisance of the fact that we have not yet seen growth recovery in our economy - we just in very early stage of that. Today corporate profits-to-GDP are somewhere around 4.5-5.0% of GDP... and this number used to be 7.5% four years back. Today corporate profits are suppressed because they've been impacted by low utilisation and low demand, higher rates and high inflation. As our growth recovers, one will see acceleration in demand and corporate profits will grow at much higher rate. And when you look at a more normalised basis, then markets don't look very expensive as one would perceive them to be. So I think valuations are still reasonable. On a forward earning basis, markets are trading at about 15 times forward earnings; which is just about the mean valuation where the markets have traded in the last 15 years. So don't see valuations as concern.

PersonalFN: Now in context to the global economy... Do you see the Federal Reserve carrying out an early interest rate hike in the backdrop of signs of economic vigour depicted by the U.S. economy? And if at all that happens, how do you the impact of such an event panning out on the Indian equity market?

Mr. Pankaj Murarka: At least the data that came out in the minutes of the last Fed meeting that was released last night does not support this hypothesis where they really concerned about space of recovery in the U.S. economy. So it doesn't look that the Fed would move ahead of the curve or ahead of expectation. The current expectation is that, what markets are pricing in is first rate hike coming in sometime towards the fag end or later part of 2015 or early part of 2016. So I think market has priced in that expectation. Just in case if Fed happens to move ahead of that, then there could be an adjustment to all risk assets globally... and emerging market equities and Indian equity markets will be a part of that.

PersonalFN: And how much do you think could be the magnitude of that?

Mr. Pankaj Murarka: It's difficult to gauge the magnitude of that. But if the expectations move that the Fed is going to move ahead of what today the expectation is, then I'm sure there will a re-adjustment to pricing or risk assets globally... and emerging market equities and Indian equity markets will be a part of that.

PersonalFN: The geopolitical tensions in Ukraine, Iraq and Gaza have thus far unscathed the Indian equity market as they are near a new high. But going forward, can geopolitical tension cause much damage, because those being in the backdrop as well have really not affected the Indian equity market so far?

Mr. Pankaj Murarka: I think because markets did not perceive these events to be significant enough to have an impact on global growth dynamics. They'll have some impact on the respective economies. For example the Rouble has depreciated some 15-18% since the Crimea issue, but they are more region specific or country specific issues and unlikely to have impact on global growth in any meaningful manner. So markets have clearly overlooked that.

PersonalFN: The Chinese and the Brazilian markets have run-up as compared to Indian markets in this calendar year. FII activity has also slowed down. Is it a sign that Indian markets are feeling tired in this backdrop?

Mr. Pankaj Murarka: No I don't think so. FII flows in India are quite robust. YTD (year-to-date) I think we have already seen U.S $18 odd billion dollars flow to Indian equity markets, which is a pretty healthy number. Brazil, they go for elections later this year...October or November...and there also the expectation is about a significant change in Government. So that's been the story in emerging market this year. India had a new Government with a decisive...the same thing happened with Indonesia, and investors are looking for something similar in Brazil; so that's the driver from Brazil. In case of China, you see China's equities have really underperformed over the last couple of years as compared to the emerging market equities. But people are now getting probably more confident. It seems that growth is stabilising in China. If investors are getting more comfort on that, then I'm sure that the Chinese equities will catch-up.

PersonalFN: Okay coming to your strategies in equity funds...From a market capitalisation point of view, the stocks in the mid and small cap domain have rallied ahead of those in the large cap in the rally of the market. Now given that, do see further steam left in the mid and small cap domain and what strategy you are following while managing:

  • Axis Midcap Fund;
  • Axis Small Cap Fund; and
  • Axis Equity Fund (which follows flexi cap approach)

Mr. Pankaj Murarka: It's very natural in any economic cycle or any bull market for mid caps and small caps to deliver higher returns than large caps; because being smaller companies they are able to grow at a much higher rate than large cap. And also in any downturn, mid caps and small caps get beaten down very badly or mercilessly; so as result once when they recover, one you have a P/E re-rating and the second is they end up delivering higher growth. So, it natural for mid cap and small caps to do much better in terms of returns in a bull market and vice versa. So I think this is not surprising, but a very natural phenomenon...and I think we are still in a very early stage of a growth recovery. So when I see from a medium term perspective, I still think mid caps will keep continuing to do well for some time to come. When you see in context of last 1 year you see that mid caps have run-up quite a bit and so and so forth; but when see in context of last 3 years and 5 years that might not be the case. So we have to see it in the backdrop of how mercilessly they were beaten down 3 year priors to last one year. So I think mid cap and small caps will keep outperforming large caps at least for some time to come.

PersonalFN: So what is the strategy which you are following for the mid and small cap funds (namely: Axis Mid Cap Fund and Axis Small Cap Fund) which you are managing?

Mr. Pankaj Murarka: Our focus is very simple. We like to invest in mid cap companies which we believe that over the period of time they have the potential to become large caps. So what we essentially looking for is companies which can deliver sustainable high growth and deliver that high growth for a long period of time. At the same time when we invest in businesses we are looking for certain sustainable competitive advantages within those businesses, because that's the only way they can grow profitably at a high rate on a sustained basis for a long period of time. And we believe that when mid caps grow at the reasonably high rate over a long period of time; that's the period in the life cycle of any company when the largest wealth creation happens for all stakeholders...and that is what we intend to capture in the mid cap and the small cap. One thing which we consciously avoid is investing in unsustainable businesses. We just don't want our investee companies to go bust in the down cycle. So we are taking slightly more medium term and longer term view than just you know invest in high beta names or stocks which can make quick gains for us.

PersonalFN: So you which are those qualitative aspects which are looking at since you said you are not looking at those companies which show chances of going bust. So any specific aspects you are looking at while stock picking?

Mr. Pankaj Murarka: We believe that we have a very sound understanding of businesses, so we are looking at their business models with a very microscopic view in terms of what they are doing, what are their niche capabilities, edge they have over their peers or competitors. We are certainly looking at the quality of management; we are looking at their track record of what they have done. We looking at the qualitative aspects of business in terms of return on equity and return on capital employed, their cash flows...and more importantly what is it in their business which sets them apart to sustain this high growth at a profitable level. Unless a business has a competitive edge and the management of the business has capabilities, competence and a strategic focus, it is unlikely that their business can grow a sustained basis at a higher rate for a long period of time. In every cycle we have scores of new companies that emerge or mid caps that emerge, and then in the next down cycle 90% of them cease to exist. You see, there were so many IT companies that came to existence during period 1997 to 2000, and in the next meltdown 90% of those didn't even survive. Between 2005 and 2010 we had scores of infra companies that came to public markets...infra and power companies...and a lot of them are not around. And I'm sure many of those which are still around, of that many of them will not be around in another five years. So, the point is, how we identify those companies which are not going to survive a downturn and not invest in companies which are more play on just the up-cycle and where the businesses are completely unsustainable.

PersonalFN: So typically which are the sectors which you see in value in the mid and small cap domain?

Mr. Pankaj Murarka: We are seeing value across sectors, so it's not specific to any particular sector. Today I see good investment opportunities across sectors. And as I said our basic view is that, if this Government does what is expected to, then India's growth rate goes from 5% to 9-10% in 5 years' time. If we see such a significant recovery in our growth, where our growth doubles, then I think there will be opportunities across sectors. What we essentially looking for is, entrepreneurs who can capture growth in their specifics business and these businesses exist in all sectors of the economy; who are prudent and one who have a strategic view, have an edge over everyone else, who are prudent risk takers and not take any and every risk, who can manage the risk of the business and who make efficient allocation and utilisation of capital and who can treat minority shareholders like us in a fair and just manner.

PersonalFN: Axis Small Cap Fund launched in November 2013 any specific reason for it being launched in the upward move of the markets when the mid and small caps were already accelerating?

Mr. Pankaj Murarka: That was just the right time to do it. The whole idea is, in any downturn the mid and small caps suffer the most because they are small businesses and in the downturn they get impacted disproportionately. Over the last four years between 2010 and 2013 we have seen many of the small caps had fallen by 80-90% and the small cap index itself was down some 50-60% from the peak. And we clearly saw through it in terms of the upcoming recovery in the economy and we said small caps will be the big beneficiaries of that. We always wanted to do that fund and as Axis our philosophy has always been to do the products at the right time; because we think that's very important. The key thing is we did a 5 years lock-in in small cap fund. And we stated investors upfront that they should come into this fund only if they have a 5 year time horizon; because we think small cap is one such category where investors have to a slightly medium to long term time horizon because at the end of the day the fact remains that it's a high risk category.

PersonalFN: Mr Murarka, finally, what will be your advice to Indian equity investors especially to the retail investors whose are once again evincing interest and entering Indian equity market at all-time highs?

Mr. Pankaj Murarka: My sincere advice would be investors should look upon equity as a serious asset class and not a cyclical asset class, wherein they just come in and try to time it with the markets. Over a long period of time equity is the only asset class which can beat inflation and they should invest into equities in a very disciplined manner...and stay invested over a long course of time like they would stay invested in any other asset class like fixed income or real estate; where when they buy it they don't think of exiting it or selling it - they think that they've just bought it for their lives. So, investors should invest in equities in a very disciplined manner rather than trying to time economic cycles and be driven by news flows and emotions or some frivolous advice.

PersonalFN: Mr Murarka, many thanks for your valuable time and insights. We are sure our readers will benefit from your views.


About Mr Pankaj Murarka: Mr Pankaj Mururka has over 12 years of experience in the equity markets. Before joining Axis Mutual Fund as a senior fund manager in November 2009, Mr Murarka has worked with Pipal Capital Management Pvt. Ltd. (as a principal officer), DSP Merrill Lynch Ltd (as a portfolio manager), Rare Enterprises (as head of research & fund manager) and Motilal Oswal Securities Ltd. (in equity sales). He is commerce graduate and is a Chartered Accountant (CA) from the Institute of Chartered Accountants of India (ICAI).

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Axis Midcap Fund:
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  • Investing predominantly in equity & equity related instruments of mid size companies with focus on relatively larger companies within this category
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* Investors should consult their financial advisers if in doubt about whether the product is suitable for them


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Axis Equity Fund:
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Note:- Risk is represented as:
(BLUE) investors understand that their principal will be at low risk
(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk


Axis Small Cap Fund:
This product is suitable for investors who are seeking *

  • Capital appreciation over long term
  • Investment in a diversified portfolio predominantly equity and equity related instruments of small cap companies
  • High risk (BROWN)

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them


Note:- Risk is represented as:
(BLUE) investors understand that their principal will be at low risk
(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk

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