Valuations in this segment back to 2013 levels

Krishna Sanghavi

Head – Equities

Canara Robeco MF

  • Canara Robeco’s Small Cap NFO comes at a time when Krishna says valuations in small caps (the profit making ones) have actually gone back all the way to 2013 levels
  • A steep 27% correction in CY18 coupled with healthy earnings growth and an improving macro scenario make a compelling case for investing now in the small caps space

Click here to view presentation of Canara Robeco Small Cap Fund

WF: Your presentation makes an interesting point about small cap valuations today having come down to levels last seen in 2013. PE data from market indices however suggest otherwise. Can you please take us through how the two data sets are different and the rationale for using a truncated data set to analyse valuations?

Krishna: We have considered only the positive EPS for the purpose of illustration based on data as on 28-12-2018 from Bloomberg. PE data from market could vary as it captures aggregate earnings (both profit making as well as loss making companies).

WF: Your presentation talks about small caps doing better in favourable times. Why do you believe Indian markets are set for favourable winds, particularly when global headwinds and forthcoming domestic elections seem to be weighing on the minds of many experts?

Krishna: We are looking it as an improvement over what the macro outlook and indicators were in January 2018 vis-a-vis January 2019. As mentioned, quite a few indicators that were unfavourable in 2018 have turned favourable in 2019. On domestic front, elections too have been clearly highlighted as being a highly unpredictable event causing anxiety and at the same time fruitfulness of having invested 6 months pre-election and outcome post 18 months of the election have been shown for past 7 elections. We do not think the headwind of elections is a material event for earnings. Corporate Earnings are more a function of economic variables rather than elections.

WF: Some experts suggest that the steep correction in small caps in CY2018 implies the end of a 4-year bull market from 2014-17 – and not a healthy correction in a continuing bull market. How would you react to this observation?

Krishna: We would like to say that earnings matter more for markets and that we are discussing our outlook on markets post a reasonable correction of 27% in small cap index in CY18.

WF: For 3 years, market experts’ expectations of pickup in corporate earnings have been consistently dashed. What gives us reason to believe that this time, the expectations of earnings growth is for real?

Krishna: The earnings growth expectations are taken from one of the sell side broker firm. We would like to believe that earning expectations are more likely to materialize based on the growth path i.e. composition of growth between FY19 & FY20. It is more driven by Banking sector (further by a substantial turnaround in financials of corporate lenders, more as back towards normalcy post the asset quality led troubles of past 2-3 years).

WF: What are the sectors that you will look to be significantly overweight in the initial portfolio that you will cast for this fund?

Krishna: We would not be able to comment on our likely portfolio. However, we can guide that we would not exceed 25% per sector. Also, we are looking at the portfolio construct to be an outcome of a bottom up stock selection process rather than top down.

WF: What would you say is the key investment argument for this NFO, at this point of time?

Krishna: Valuations !! post a reasonable correction of 27% in CY18 and improving macro.

The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Subject to current Tax laws. For personal tax implication investors are requested to consult their tax advisors before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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