21 Nov, 2014

Market Outlook 2014-15, L&T India Prudence Fund – Mr. S N Lahiri (CIO, L&T Mutual Fund)


Venue Board room, Chandigarh office Date November 18, 2014
Subject Market Outlook 2014-15,L&T India Prudence Fund Time 1600 Hrs
Details  Discussion with Mr. S N Lahiri (Chief Investment Officer, L&T Mutual Fund) Duration 45 mins


Internal Iqbal Singh, Pankaj Sharma, Akaljot Singh, Jagjit Singh, Vishwapreet Singh, Jagdeep Singh
External Mr. S N Lahiri, Vikas Ahluwalia, Rajiv Sharma


  • Market Outlook 2014, L&T India Prudence Growth Fund


  • Mr. Lahiri started the discussion by saying that he would like to structure the discussion in three parts:
  • The Economy, Corporate India and Market Valuations
  • The Economy
  • Mr. Lahiri said that, since the elections and the huge mandate, the one thing that has changed since then, is the Sentiment. And this is encouraging. There was an Expectations overload. One must realize that it takes time.
  • Mr. Lahiri said that this will not be or is not a 2009 like V shaped recovery. Recovery from the present state of affairs will be gradual.  GDP growth of 7-7.5% will not happen very soon. It will happen brick-by-brick, rather than in a big bang manner.
  • So for a structural recovery, govt. is required to undertake reforms, and the investment cycle needs to kick in. This is about 2 Qtrs down the line.
  • Govt. has some positives going for it. A strong mandate, reducing inflation. Also govt. has taken a bold step in maintaining the minimum support price. Indian Currency is stable and expected to remain stable. Ban on Gold imports, and slowing imports mean narrowing CAD.
  • So India is on a slow cyclical recovery. Monsoons have been quite ok and the second crop is expected to be good. We are seeing low commodity prices therefore imports will be cheaper.
  • Govt. has done Diesel de-regulation. It is engaging world leaders. It is working on Financial Inclusion. Direct benefit scheme. It has worked on Clearances – Environmental and Forest, and is making them Online.
  • Going forward, a lot is expected to be done. Govt. is targeting GST by April 2016. It is undertaking Coal Sector Reforms, expected to undertake Land Acquisition and Labour Sector Reforms. Working on Make in India.
  • So, our Economy is a Work in Progress. And, all in all, there would be Fiscal Consolidation.
  • Next Budget will provide the Govt. an opportunity to demonstrate its intent.
  • Corporate India
  • Mr. Lahiri said that, what they have observed for FY 2015, the numbers have largely been in line. Meaningful earnings should go up in Qtr 4 of FY 2015. We have a delayed acceleration of earnings growth.
  • We expect 18-20% earnings growth numbers in 2 years time.
  • Markets track these numbers very closely. Market expects revenue growth to bounce back from present (3rd lowest in 20 years) to 20% levels soon.
  • Margins at 14.5% to start improving and tending towards mean. Interest costs look like having peaked and should come down.
  • We expect mean reversion in terms of Corporate profits. And GDP also should revert from 4.5% levels to 5.5%
  • Market Valuations
  • Markets have been trading at slightly higher than long term averages. To get supported here, we need:

1. Earnings: which we expect them to be good/ improving

2. Flows: Domestic and Foreign. We expect these also to be ok. Good thing is that Domestic flows are also increasing.

  • Valuations are expensive relative to one year back, but wrt 20 year averages we’re not expensive. Historically, at elevated levels Sensex PE has been at 24-25 times. Today we’re at 17 times.
  • The run-up in small & mid-caps have reduced their valuation gap wrt large caps.


  • We’ve had a good run post elections. Domestically, pace of recovery could’ve been better. Lower crude prices have been very beneficial.
  • In terms of lead indicators – 2 Wheeler sales, Commercial Vehicle sales, & Cement volumes, we would say that they’re not solidly up, but its ok.
  • As a fund house, L&T is focusing on buying quality companies.
  • Risks:

1. Global growth outlook outside of US is quite challenged.

2. Govt.’s disinvestment plan which will start in Mid Dec 2014 means a lot of issues coming in. This would pull liquidity out of the market.

  • Portfolio Positioning:
  • Positive on:

1. Private Banks – best leveraged play on the economy

2. Cement

3. Equipment suppliers

4. 2 Wheelers

  • Neutral on:

1. IT

2. Pharma

3. Oil & Gas

4. 4 Wheelers – selected

  • Underweight:

1. Commodities – The Commodities Super Cycle looks over for now for some time

2. Telecom

3. Consumers

Question and Answers session:

Q1 Mr. Iqbal Singh: Sir, we’re holding your fund as 5% of our portfolio and would like to continue at 5% if your AUM can grow.

A Mr. Lahiri: Yes, Thank you. Definitely, we expect our approach to pay off.

Q2 Mr. Iqbal Singh:  Sir, you have major exposure after Pvt. Banks in Cement. Could you elaborate ?

A Mr. Lahiri:  As the economic recovery sets in, Cement will be a beneficiary. If we see historically, cement players have added capacity without leveraging themselves. Present capacity utilization is about 60-70%. As the demand picks up , the major  players are beneficiary of operating &  financial leveraging.

Cement growth rate is about 1.5 times GDP growth rate.

Cement is used in Rural Housing, Urban Housing and Infrastructure.

So clearly it should do well in the times to come.

Q3 Mr. Iqbal Singh: Sir, you have talked of EBITA beneficiaries and bottom line. Which other sectors would be the beneficiaries?

A Mr. Lahiri: First is the Auto sector. India can become a hub for cars export, so clearly there is a tremendous traction in outsourcing demand.

Second is the Agricultural part. Improving yields would help:

1. Crop protection companies

2. New implements companies

Q4 Mr. Iqbal Singh Logistics companies ? Because of E-Commerce boom, valuations of many logistics companies have gone very high. What is the ground reality ?

A Mr. Lahiri Wrt valuations, the cart has gone ahead of the horse. They’re too high. Wrt Business, L&T also owns Blue Dart, and as a business they’re growing 35% Q-on-Q. We expect them to continue to grow.

Further, Logistics is a very capital intensive business, so its not so easy also. However, it remains a huge opportunity in India.

Snowman Logistics is the leader in cold chain logistics in India. Yet for a country of India’s size its revenues are only Rs150 crores. Which are peanuts for India.

As a country we waste 40% of our produce while the final produce reaches at mandi. So there is great opportunity in logistic management.

Q5 Mr. Iqbal Singh Could you share your view on the fixed income side ? 25% of your portfolio is in Fixed Income. What is your call on the Interest rate cycle ?

A Mr. Lahiri: Interest rates have peaked, Yes, but in my opinion, if we’re keeping expectations of a rate cut soon, then we’re likely to be disappointed. Possibly, we’ll see a cut of 0.5% in June 2015, not before that. This is my personal opinion , I may be wrong in  my assessment. 


Tags: , , , , , , , , , , , , , , , , , ,

About :