INSUBCONTINENT EXCLUSIVE:
Dividends and share buybacks are going to become buzzwords on Dalal Street over the next two years, and that will potentially make more
collapse of debt-equity structures in Indian corporates, and a very high percentage of their profits will get converted into cash flow for
want of opportunities to increase capacity, says Kenneth Andrade, formerly a star fund manager with IDFC Asset Management, who now runs his
own venture Old Bridge Capital Management.
For a decade, Kenneth managed in excess of $8 billion at IDFC AMC and oversaw its fastest growth
in the industry through 2005-15
For 13 years, each of the funds he managed outperformed their benchmarks year after year
His flagship scheme, IDFC Premier Equity Fund, delivered a CAGR growth of 22.3 per cent for 10 years
investors have slowed this year
Overseas investors, in particular, have been withdrawing money fast amid unwinding of soft money policies by global central banks, improving
growth prospects in developed markets, currency turmoil in emerging markets that eats into investment gains and systemic issues hurting
earnings growth of India Inc.
As the nation enters a busy election season that culminates in the 2019 general election, Kenneth says returns
on Indian equity would be variable, and continually so.
In 2017, the domestic equity market closed in the positive virtually every month
outlook on returns despite our view on buoyancy in earnings cycle
Macro headwinds, including the 2019 election, will keep the asset market volatile
But opportunities will present themselves in these conditions
known for smart stock picking, especially in midcaps and smallcaps, says Indian market has overshot itself at both ends.
The last rally was
led by expanding valuations as earnings were sticky and not growing
The next couple of years could see an earnings revival and this should hold valuations steady
Growth in profitability should take over post this consolidation, he forecasts.
Brokerage ICICI Securities put out a report on Tuesday,
saying Indian market valuations are off their highs, but above-average on most parameters
However, the PEG, or price/earnings to growth, ratio for Nifty50 based on a one-year forward P/E of 17.6 times and an earnings growth of
12.9 per cent stood at a near-average 1.4.
PEG is a valuation metric for determining the relative trade-off between the price of a stock,
the earnings generated per share and the expected growth rate.
Disturbing global cues and mixed March quarter earnings have not helped lift
the mood of domestic stock investors, who continue to wait for earnings revival.
But Kenneth sees an interesting inflection point
ahead.
Chances are that, going forward a high percentage of corporate profits would start converting into cash flow and go into balance
As such, payouts to shareholders via dividends and share buybacks will soon become the norm, a trend which is already becoming visible, he
points out.
Investors would be net beneficiaries in such a scenario
A lower net worth would correspond to higher RoEs
corporate earnings hinted at improvement in capacity utilisation levels to around 74.1 per cent
There was also a sharp uptick in new order book growth
Some analysts say capex cycle usually starts around 85 per cent utilisation level.
There is excessive capacity, set up over the past decade,
which has kept corporate demand on the capex side slow
Utilisation levels will increase further with growth in GDP
growth and the operating leverage this would build in
The trend would, thus, be slow turnover growth and high-teens profit growth
his belt.
Kenneth, who founded Old Bridge Capital Management in 2015 after quitting IDFC Mutual Fund, has been busy raising money for a
Category III alternative investment fund, The Vantage Equity AIF, which has a regulatory limit of 1,000 investors
opportunity to put a portfolio together that would play out to the above scenario
The US central bank has allowed the markets enough time to absorb these shocks.
The direction of interest rates in the US is material, says
interest rates from what happens globally.
