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3 themes Krishna Sanghavi is betting on to Covid-proof his portfolio

We are bullish on domestic manufacturing, digital and companies with strong management that are a must for the core economy, says the Chief Investment Officer, (Equities), Mahindra Manulife Asset Management.

Post pandemic, how have you changed your portfolio construct given this is once-in-a-lifetime event?

A big thing in this pandemic kind of situation is that one set of companies end up losing profitability while another set of companies start emerging as beneficiaries and the earnings potential changes for a set of companies.

Our overweights in financials have come down and focus has increased on companies which have business outside India.

Today we are in a situation where the expectation is that India will have a 10% decline in growth, while the global economy is looking reasonably better with a 5% decline. So, the outlook for companies with a focus on the global economy is better.

What themes are you overweight on?

Domestic manufacturing is one thing we are bullish about. The government lowered corporate tax for India manufacturing last September and now in the last six months, things have changed and due to the Covid pandemic, a lot of global corporates are looking at India as an alternative to China. Globally companies are looking at an additional move away from China. Chemical and pharma companies stand to benefit.

Second is the digital theme which will accelerate because of the Covid situation.

Third, when things settle down after the current pandemic, go for core companies, businesses without which economic activity cannot happen. While companies will go through challenges and pains right now, they will hold on due to strong parentage.

India had one of the strictest lockdowns and with unlock happening in stages, when will it start reflecting in numbers?

From a manufacturing angle, what we are able to spot is that auto and cement sales are far better than in June or July. A month more down the line, we will be far better on year-on-year (YoY) terms in areas like electricity consumption, where we have reached somewhere between 85% to 90% on average.

There are some extreme areas which have been severely impacted like tourism and hospitality and maybe commercial vehicles. If we ignore these, for the majority of the items, we have reached a stage of 80%-90% of pre Covid sales. Hopefully, this should move more towards 100% in the festive season as things pick up.

The first quarter GDP numbers were poor with real GDP growth at (-)23.9% in 1QFY21.

Our expectations on the economic side have clearly not played out, as the expected recovery of economic activity has kept on getting deferred. We started with around 4%-5% kind of GDP decline expectation and today a 10% to 14% decline in GDP is the expectation. So, to an extent the expected improvement or recovery from the lockdown hasn’t really happened and unfortunately the number spread has not really improved. Daily Covid numbers are now more than 90,000 plus which are not permitting economic activity to normalise fast and due to which many states are not getting fully operational.

How are the markets placed from a valuation perspective? We had a one-way move from March with the Nifty up 45% and the Nifty PE ratio is now 32.

Yes due to an upward spike, valuations have moved up sharply. However, we are talking about comparing this in a year when there is economic contraction. If we sit back and say FY21 is a year to be forgotten and look at how the next 12-18 months play out after FY21, then we may actually have a situation where valuations will not look that expensive.

Pharma stocks have seen a sharp run in the last one year. Is there more upside in these stocks or is it just safety amidst poor economic growth?

As a result of Covid, healthcare has turned out to be one of the focal areas where consumption has increased. Many healthcare companies have revenue from both domestic as well as international business. With healthcare as a percentage to GDP being lowest in India, it is nothing but a proxy to economic growth. As the economy improves, per capita income goes up, the ability to spend money on healthcare will keep on improving. To that extent, healthcare is a good structural story. We will always have to worry about valuation but this is one sector where we have a reasonable roadmap to products.

Technology is another theme which has attracted institutional investors. How do you play that?

I have preferred to play it more through telecom right now as an enabler because finally if you reach that platform between customer and the supplier, the biggest need is data.

Telecom is an enabler to technology. Amazon, Facebook are all so-called direct technology companies. In India, we don’t have direct business models as yet where one can directly invest. We started the digital journey in the last two-three years. In many of these companies the future opportunity can be large, but as a current business need, it’s a small portion now.

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