‘Some mid-cap IT companies looking overpriced’

Sensex has touched 60,000; Are we in a bubble?

In any economy where profits and GDP are rising, you would expect the market to hit an all-time high. Even if you invest money in fixed deposits, the value of money in them will reach an all-time high every day. I am not so much concerned about the level, but rather the speed of the increase. I see pockets where valuations are high and where the paper quality in Initial Public Offerings (IPOs) is not so good. At the same time, there are stocks and sectors that are still undervalued and where one is looking for opportunities. The market is not in a bubble but is in an overvalued zone.

The cash value in PPFAS Flexicap is 7%, not exceeding your history. You are not very cautious on this market.

When we start, we don’t say we need 15% or 20% cash because the market is at this or that level. Our starting point is to find stocks where we have a strong belief and can invest money. All that is left is in cash. Usually cash is 3-5% in a fully deployed scenario. We are getting ideas to infuse money and that’s why liquidity is not at a very high level.

Are there areas that look more valuable?

Mid-cap IT has had a very strong run-up. The IT pack has benefited from the pandemic and automation. The pace of digitization has accelerated. Hiring in IT companies is at a record level. Some mid-cap IT companies are looking highly valued. Wherever we see valuations going up, we are reducing our positions.

When we last spoke face-to-face in June 2019, PPFAS was on Flexicap ₹2,000 crores and now it is ₹14,600 crores. Is size a problem?

When we launched in 2013, we were in ₹300 crores and now we ₹15,000-16,000 crores. naturally a. flexibility of ₹300 crore fund a. is different from ₹16,000 crore fund. The good thing is that the companies we are investing in are huge. For example, in the overseas component, with companies like Amazon or Alphabet, our size doesn’t really matter.

Flexibility becomes a challenge in the small and mid cap segment. But the overall market size is also increasing there. What was small or midcap five years ago has also changed. Mid- and small-cap companies have grown. If you look at the portfolio, we have been able to put money in companies like CDSL and IEX. In addition, we have limited the number of stocks in our portfolio from 25 to 30. So, in the small and mid-cap space, we can have 2.5% allocation to stocks instead of 5% allocation.

Is there any level at which you would say that PPFAS Flexicap Fund is huge, especially given the Securities and Exchange Board of India’s (SEBI) $1 billion limit on mutual funds to make international investments?

We’re doing numbers, and as of today, by the current size, which is roughly ₹16,000 crore, we have deployed approximately $460 million as outward remittances abroad. We still have time to go over half of the $1 billion limit. so I think ₹If the fund size exceeds 30,000 crores, the existing format may not work if the limit is not revised.

How does India compare with the US market, especially US tech stocks?

The Indian tech space is extremely valuable in terms of valuation multiples. Therefore, comparable companies in India get a much higher premium valuation than some companies in the US. So, if we compare companies, for example, the US is cheaper. Some may argue that the Indian growth rate is higher or the potential may be higher, but that is debatable, and purely on a valuation period, the US is cheaper.

Lastly, what was the idea behind PPFAS Conservative Hybrid Fund?

The objective of the Conservative Hybrid Fund is to meet the fixed income needs of the investors. So, we would generally have around 12-13% in equities, 9-9.5% in REITs and InVITs and the rest in debt securities. Now Reits and InVITs are also cash-flow generating assets, where you get paid quarterly from the underlying asset’s cash flow and are currently yielding 6-8% depending on the issuer. We are largely managing equity to meet cash flow needs and raising some amount of capital, rather than just viewing it as a growth asset. Now, it so happens that currently the best cash flow giving properties are largely in the PSU sector, and some in the private sector. Sometimes it comes in the form of a dividend yield, and sometimes companies use the buyback route to return cash to shareholders, and even that should be fine for us. But essentially, cash must be returned to shareholders, given the investment objective present for the fund.