Saurabh Nanavati is the CEO, Religare Mutual Fund where he oversees all functions including investments, operations and sales. Saurabh`s last assignment was with HDFC Standard Life Insurance, as chief investment officer overseeing USD 2 bn in equity and debt investments besides other asset classes. Prior to HDFC Standard Life Insurance, he was with Deutsche Asset Management for little under 4 years. His earlier assignments also include stints with multinational institutions like Reuters and HSBC India. Saurabh holds an Electronics Engineering degree and is an MBA in Finance from Jamnalal Bajaj Institute of Management Studies.Here are some excerpts from an exclusive interview with Saurabh Nanavati.
As regards the investment team, we have a clear segregation between fund managers, analysts and dealers. We have 3 fund managers, 4 analysts and 1 dealer at present in the AMC team and an additional 2 Fund Managers on the PMS side.The analysts track roughly 280 stocks at present and we are looking at increasing the coverage by another 40 stocks in the next 3 months.
Give us your outlook for the markets in 2009? Will we see the effects of global financial crisis receding?
The first three months of 2008 were good but the situation deteriorated in the next nine months. This year, 2009 may see 12 bad months and the situation might continue even to the first half of 2010.
The global financial crisis is going to take a long time to resolve and the growth paradigm of mercantilism wherein the developing world produces goods and services to meet the insatiable appetite of the US consumer may never take centre stage again.
Capital flows are also likely to remain subdued due to risk aversion. Further, the governments of the western world who are injecting capital into their banks would like them to keep that capital at home. This crisis has heightened the risk of protectionism in the US and other developed markets as they are under public pressure to do whatever it takes to halt the decline.
However for India, the agenda must be the opposite - we must tear down the red tape and barriers that act as a hindrance to foreign capital. But we must also be vigilant to ensure that our economy and businesses are protected against unfair trade.
What are your predictions on the interest rate movement over medium term? Could you share your perspective on the Indian bond markets for 2009 given the continuous monetary easing and increasing government borrowings?
In the second half of 2006, RBI had then indicated its concerns regarding credit growth and started raising interest rates. But the economy did not feel the pinch of rising interest rates because foreign money was flooding into the system. In FY2007 total foreign capital inflows surged to over USD 50 billion and then doubled to USD 108 billion in FY2008. To put this in perspective the capital inflows in FY2008 were an 8 fold jump compared to the inflow in 2002.
The RBI continued to hike rates in the first half of 2008 and the economy was slowing in response to that. But the slowdown has morphed into an abrupt halt with the collapse of the banking system and credit markets in the western world which started in late 2007 and is still ongoing.
RBI has since changed its stance to a pro-growth strategy in Oct 2008 and started cutting interest rates. We feel that the rate cut stance will continue up to Sept 2009 and we can expect another 100 bps reduction in Repo, 150 bps in Reverse Repo and 50 bps in CRR in the coming months.
Bond yields have however factored in some of these cuts, and we feel that the 10 year yield may not rally beyond 5.50% from 6% currently, in an absolutely bullish case beyond 5.25%. This is because of increased government borrowings. We expect government borrowings to exceed their projections for next year as there will be a fall in direct and indirect revenue collections due to the downturn.
What is your approach for investing in government and corporate papers? How much do you rely on external credit rating while investing in the corporate paper?
Our fixed income philosophy is based on 3 parameters - Safety, Liquidity and Consistency.Again we have a defined investment philosophy and process, with clear segregation between credit analysts, fund managers and dealers. We currently have 2 credit analysts, 3 fund managers and 2 dealers.Credit analysts rely on external credit as a starting point post which they do their own internal analysis.Both in equity and debt, if the respective equity analysts and credit analysts do not approve of a security, the portfolio manager cannot buy it in his portfolio.Due to an increased risk aversion globally, government paper and corporate paper spreads have increased to around 300 bps from 150-200 bps earlier. We feel that the spreads may not compress to earlier levels for the next 18-24 months. However, a higher spread means a higher yield and therefore if the credit analyst has done his job well, it will enable the fund manager to buy the Corporate paper and earn a higher yield for the investor.
According to you what lessons should we take from the India`s biggest fraud at Satyam?Recent report by CRISIL substantiates weak governance practices in 50% of the 29 IPO graded by them since May 2007. How do you rate India Inc on corporate governance parameters?
At a philosophical level, India was always taking the higher moral ground as compared to the developed markets, that 50% of the Sensex companies were promoter owned, faster decision making and great corporate governance. This has been shattered after the Satyam episode. So when analysts say Satyam was an accident, I disagree. Investors have lost faith in our corporate governance standard currently and the whole market will suffer because of this episode.We clearly have issues on corporate governance parameters and I personally feel, that there will be some startling disclosures in the next 12 months by India Inc. Auditors too will tighten their requirements and not sign off easily on grey areas, forcing more disclosures.
Recent quarters showed significant drop in corporate earnings on back of higher input and fund cost. Going forward, what is your take on FY10 earnings? Will it continue to fall?
For the last 6 months, we have been communicating a 5-10% EPS de-growth from FY08 to FY10, to the market. This is for the Nifty stocks. The broader markets may have a higher earnings fall. Six months back, analysts consensus were talking of 15% growth and currently they have brought down these estimates to flat growth. We are yet sticking to our stance of a 5-10% earnings fall in this period.Difficult to predict when this will turn but our sense is we are at least 18 months away from a trend reversal.
With the impact of global economic meltdown started reflecting into domestic economy, how do you see the economic outlook moving ahead?
India is yet much better placed as compared to the global economy. But it may be difficult to meet the growth projections of 5.5-6% growth for FY10. Even assuming a normal and good monsoon, our expectations would be around 4-4.5%. There will be a definite slowdown in the services sectors and manufacturing sectors due to reduced demand. Job losses will peak between April to Sept 2009 and this will curb demand growth at the ground level.Looking at the positive side, there are three factors which should aid India decouple itself from this global recession after 12-18 months.a) Sub-prime - Due to RBI`s conservative policies, India is actually not having a major sub-prime kind of an issue - of home loan defaults and banking collapses at the ground level. This is a big positive. India yet has a financial system intact as compared to the rest of the world.b) Rural Consumption - This theme is definitely intact and will be largely responsible for India`s 4-4.5% GDP growth rate. The pay commission increase of last year will reflect in increased or stable rural spending.c) Political Reforms - The third factor will definitely be the elections and the new government stance. Difficult to talk of the outcome but the industry will need to be fleet-footed in terms of anticipating and understanding the new government`s stance on issues, as well as their powers to push reforms in a coalition situation.
What are challenges faced by the MF industry in the current scenario? How do you plan to overcome these challenges? What is your outlook for the MF industry in 2009?
MF investors are facing a confidence crisis at this point of time, post the Sept-Oct 2008 liquidity crisis. We will also see consolidation in the mutual fund industry in the coming two years. This business is for the long-term serious players only and carries fiduciary responsibility. I am sure promoters have now realized this and are re-visiting their business plans.From our perspective, it is time to get back to basics. Simple products, customer education, increasing visibility, strong platform to deliver consistency and shareholder commitment. Small innovations sometimes deliver fantastic results. All these are our focus areas.I am sure the industry will emerge stronger at the end of 2009. Let me assure you that the transparency levels are yet the highest by far in this industry and customers will appreciate it, once the risk appetite comes back.
Religare AMC is relatively new in the MF industry, what are your plans for scaling up the business?
Of the three existing business models in India AMC Industry - Retail, Institutional and Quasi-Institutional, Religare AMC has adopted the Retail Business Model. With the acquisition of Lotus Mutual Fund, Religare AMC now has a presence in 38 cities through 41 own branches. We intend to set-up a further 62 branches in 62 cities in the next 18 months to increase our network to a 100 cities. With a presence in 100 cities through own branches, Religare will be in the top 7-8 AMCs from a distribution reach perspective. It is important to understand the difference of having your own branch and having a presence through the registrar offices which are in over 150 locations.
Apart from managing fund house, what other things you like to do?
Spending time with my children (aged 5 and 2), reading economic articles and cricket. Proving skeptics wrong, in every walk of life, is also what I enjoy the most. I am going back to the movie ``Matrix``, where Keanu Reeves was told that ``this has been never done before`` to which he replied ``that`s why it will succeed``.
Source: http://www.myiris.com/newsCentre/storyShownew_opt.php?fileR=20090413142504196&secID=fromnewsroom&secTitle=From%20the%20News%20Room&dir=2009/04/13
