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"Only 20 of 150 portals will survive" - Views on News from Equitymaster
 
 
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  • Feb 3, 2000

    "Only 20 of 150 portals will survive"

    With a BE in Industrial Engg. and a PGDBM in IIM (B), Mr. R. Sukumar was the Head of Research in the Indian Opportunities Fund jointly managed by Martin Currie and Indbank before shifting to Kothari Pioneer Mutual Fund. At present, he is the Vice President (Investments) and Fund Manager at Kothari Pioneer AMC. Ravi Mehrotra has done his PGDBM from XLRI and put in a stint at Prime Securities, managing a proprietary equities and bond fund. Currently, he is the Senior Vice President and Chief Investment Officer at Kothari Pioneer AMC.

    In an interview to equitymaster.com (EQM), Ravi Mehrotra, Sr. V.P. and CIO & R. Sukumar, V.P. & Fund Manager, Kothari Pioneer AMC spoke about the stock markets and1 Kothari Pioneer's latest internet offering Fund.

    EQM: Today long positions in the market stand at Rs 37 bn with badla rates of 32%. These were the very reasons that were attributed to the correction post September 1999, after a 50% rise in the Sensex over the previous 6 months. Do you think this is an indication of another correction in the offing or do you feel that market players go with the theory that the rise in long positions are partly due to the rise in the value of the underlying stocks themselves?

    Mr. Mehrotra: Without equating the two, lets look at the badla rates and the outstandings. The fact is, that somebody is buying on margins and is willing to pay the badla rates between 22-29%, indicates that he is bullish. But if it becomes top-heavy it could trigger a correction. What happened last time was that FIIs and the stronger players sold heavily and pushed things overboard as a result of which weaker players panicked and sold out. So it is not just long positions and high badla rates, its about a trigger that is reached which effects a correction.

    EQM: Do you think that the trigger has been breached?

    Mr. Mehrotra: I think you should look at the (outstanding positions) in the individual stocks in the market. If you look at the Rs 37 bn outstanding positions, you will find that they are focused on a handful of 8-9 stocks. Then you should look at other stocks and see if there is buying interest in those stocks. I think there is a lot of liquidity in the stock market. There are a lot of funds, open-ended funds, the equity funds, technology funds, plain vanilla funds. A lot of this money hasn't really flowed into the capital markets over the past 2-3 years, and we are seeing that happen now especially over the past 6 months. Net cash positions with funds is very high. According to me, by the month end (January 2000) cash should be about Rs 20 bn.

    But to give a counter-balancing effect if there is a reaction. I think it will be short and sweet. From my wish list, I hope there is not a big run-up in prices before the budget. Because if you build up too much expectation pre-budget, experience shows that there could be a correction later. The positions must spread so that more players are involved. Right now it is a very narrow market.

    If we look at percentage of savings in stock market compared to the percentage that came in earlier, it is still a small number. There is potential for this number to increase considerably. Rs 200 bn on an average was what individuals used to invest in initial public offerings (IPOs) year on year. They haven't done that for about 24-30 months now. It is beginning to start now.

    EQM: Coming to your portfolio, you have an IT-specific fund. But lot of IT-specific funds have entered the market. Is it that fund mangers find IT valuations too hot to handle and they put the onus on the investor? Its like telling the investor - You decide whether you should invest in an IT-specific fund or whether you should invest in a general fund with IT exposure?

    Mr. Mehrotra: Actually it's the opposite. There are 3-4 criteria. I speak for most fund managers when I say this. We are in the business of managing funds. When we launch a scheme it shows that we feel that there is demand for that product. We also realise that in a sector fund there is higher return as there is higher risk, which is due to the constraints of operating in a single sector.

    When you launch a scheme you don't ask the investor whether you would like to invest in the scheme. You have your reputation and credibility on the line. On the contrary, we tell the investor we feel that it's a good time to put your money in this scheme.

    EQM: Your IT fund was launched more than 16 months ago. Valuations were lower then, and have shot up considerably since. Are good stocks available at reasonable valuations?

    Mr. Sukumar: I would say it was challenging 16 months ago and it is challenging even now. Earlier whichever stock you picked up, did well, but now it is that much more difficult to select a good stock at current valuations. Of course you have a lot of liquidity coming in, but liquidity is not predictable like fundamentals. So you have to go by the fundamentals. Fundamentals over the next 2-3 years will improve. In the next 12 months, stocks will definitely go up and the better quality stocks will perform better, but the game has not changed much.

    EQM: You plan to launch an Internet fund at this point in time. What is the strategy that you have planned? What are the kind of companies you are looking at?

    Mr. Sukumar: We are looking at four kinds of companies, 1) those who supply services to Internet companies, 2) dot com companies, 3) e-commerce companies 4) brick and mortar companies that have an Internet strategy in place.

    EQM: Most of the portals and dot com companies across the world do not generate even cash profits. How will you go about valuing these companies?

    Mr. Sukumar: With most the of the dot com companies you got to have the basic ingredients right, like in other businesses. You must have the right technology, scalability of the business plan, where the revenues will come from. At some point of time, revenues have to show, else there is no point. There has to be the right content, attracting visitors and keeping them, attracting advertising revenues, e-commerce and transactions.

    EQM: But how do you arrive at a number for valuing the company?

    Mr. Sukumar: You must have a parameter. Basically the company must build up a stickiness in visitors, to ensure that they keep coming back. It must build up a base of quality visitors. It is important how much money the company is investing to attract and retain visitors. Once this is accomplished e-commerce can be built into that. And this will depend on other criteria like credibility of the people.

    EQM: So you would look at a figure at each visitor?

    Mr. Sukumar: Yes we would look at how much they have spent on visitors at ramp up phase and the maturing phase and if it has not dropped by then, there is a problem. So there is no one basic formula. So out of the 150 portals that will come out of India in the next 6 months, I don't think there will be more than 20 around down the road.

    EQM: What about infrastructure problems concerning accessibility to the Internet? Do you think that it will hinder Internet usage?

    Mr. Sukumar: I think that these problems are short term in nature. We are seeing a steady growth in the Internet Service Providers (ISPs) which will boost subscriptions. Moreover, a lot of corporates have the Internet, so a large number of employees are able to access the Net in their offices even if they don't have the Net at home.

    EQM: Coming to the Kothari Pioneer Prima Plus Fund, you have the leading companies in all sectors like auto, auto ancillaries, oil. Do you expect all these sectors to do well?

    Mr. Sukumar: To put a perspective about the Prima Plus Fund we employ the bottoms up approach. It is not a cyclicals play per se. The focus is on companies that generate a high return on capital over a period of time. You will see a MICO or a Madras Cements generate high return on capital in a boom phase. Over the long term, these companies generate a lot of wealth and this reflects in the share price.

    EQM: You have L&T in your portfolio. Earlier the company used to invest funds in its cement businesses from its construction business and even now speaks of a 36 m tpa capacity. This has affected the return on capital.

    Mr. Sukumar: The return on capital is not retarding. We have bought it because of what we feel it can achieve in future. We did not have it earlier, when it was using funds from the construction business to boost the cement business.

    That's right. I think L&T has only come in the portfolio over the past 3 months. We feel the company is doing things right. They are going in for a restructuring and this will be reflected in a year or two. And we have been proved right as the stock has appreciated over the past few weeks. Its just begun treading the wealth creation path and we think its doing well.

    EQM: What do you have to say about the company's announcement that it plans to expand cement capacity to 36 m tpa?

    Mr. Sukumar: The expansion process will not be capital intensive as it will mainly involve acquisitions with little greenfield expansion. So it will probably boil down to US$ 37-38 (approx. Rs 1,600-1,650) per tonne.

    EQM: You have Nirma in your FMCG fund. There was a time when analysts were concerned about its soda ash venture, but the company proved them wrong. Another concern is the brand, which is owned by promoters' company. Do you think there are any more concerns about the company?

    Mr. Sukumar: I think they are very clear in their strategy. They want to dominate the mass-market segment by offering value for money products. I think if you compare the TFM of Nirma's brands with HLL's brands, I think they are probably ahead. In a country like India, with such a large middle class this strategy has worked well. With in-house production of soda ash, they also have an edge in pricing over HLL.

    EQM: Has a consensus emerged in the markets that FMCG stocks have tanked enough?

    Mr. Sukumar: I would not say that FMCG stocks have been tanked. But money has now gone to software stocks, which are performing better than FMCG.

    EQM: Do you think that fund managers are willing to take on more risk now, which is why they are investing in IT stocks rather than the staid 10%-20% stocks?

    Mr. Sukumar: Its basically a question of momentum. If you want to post those kind of returns, you have to take that risk. There are some people who make money for the wrong reasons. Even if we come across a lousy stock and know that it will go up from Rs 100 to Rs 400, we would never buy it. The other thing is diversification. Sometimes you have diversified funds with 80% IT exposure. I don't think that is the mandate. If you want to do it, you must set up a dedicated fund. That's why we have a Pharma Fund, IT Fund, FMCG Fund and they are still doing well. Because investors invest in these funds if they want exposure to these sectors. If they are looking to diversify risks, then they will invest in a diversified fund like Prima, Bluechip.

    EQM: You have a lot of companies like E Merck, Fulford, Abbot. Do you think these companies will give you large gains?

    Mr. Sukumar: These companies were bought in the value proposition. These are in the formulations business and they have brands that just can't be wiped off. With the shakeout in the industry, pharma companies are on the lookout for acquisitions, so a Fulford with another name will give higher valuations, as you saw with Rhone Poulenc.

     

     

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