Indian Economy on Recovery Mode, but ...

IDFC Mutual Fund expects Indian companies to show a lot more financial discipline during the fourth quarter of the current fiscal year. Banks have already written off some of their bad loans and local companies will sell non-core assets to cut debt, Kenneth Andrade, chief investment officer, IDFC Mutual Fund, tells ET's Apurv Gupta.

However, the CIO, who manages Rs25,000 crore of investor funds and is known for his acumen in stock-picking, raises concerns on political uncertainty ahead of '14 elections as a fractured majority could adversely deteriorate economic environment for a while. Edited excerpts:

How do you see the year panning out against the backdrop of 2012, which was a turbulent year?

There has been a large economic expansion in the country in the past seven years. The first leg was led by the expansion from corporate and the second leg in the last three years was led by the growth in a consumer-led economy. We have been maintaining that Corporate India will see its last leg of balance-sheet growth or the increase in balance sheet into 2013 March end. Post this, you will see companies having a lot more financial discipline. Banks have already taken write-offs and corporates will deleverage and sell non-core assets. This is similar to 2000. We have come a full circle and are seeing a rewind. This could be the beginning of a new cycle.

Do you think that there is lot of nervousness on the political climate and policy deadlock which is scaring away investors?

Ahead of the elections in 2014 it is not surprising that the environment is uncertain. There is no political consensus and a fractured majority could adversely deteriorate the current environment for some time. But the latest round of events on FDI and attempts to lower subsidy are all in the right direction. As long as the longer term direction is to move to a market-driven economy with some level of subsidization, as a country we should pull it through as the economy tiers upwards in growth. Earnings growth, which is a rarity across the world, is something of a given in the Indian economy which has gotten investors' attention worldwide.

How are you positioning your portfolio in that case?

We are expecting this year to be a reasonably stable. There does not seem to be any one large macro event outside or internally which will disrupt the entire environment. So, the focus will be back on to earnings growth and the deleveraging of corporate and the economy. We will expand this part of our holding given the fact that cash flows will materialise on the system, balance sheets will stop growing and you would have some part of a capacity actually getting utilised.

So do you think that a large number of infrastructure projects stuck for want of funds and approvals taking-off this year?

We feel that infrastructure will be a stable sector from here onwards. There are several reasons for this. First, there was this execution issue. Many people said that Indian companies will not be able to execute large projects. However, that was resolved as many companies showed their competence on that front. The second issue is fuel supply. The supply is available but the issue is to negotiate and resolve. The third factor is that the price cannot be passed on to the end consumer. However, that, too, will see a resolution in the next two-three years. While this was not the case so far, states have now started passing on the cost to the consumer. So, most of the projects that were unviable as the cost could not be passed on to the consumer will become feasible.

What segment or space are you particularly bullish on?

We are positive on public sector companies, especially, from bank and power sectors. Most of our funds are drawing down their exposure to FMCG and pharma space due to stretched valuations. Most of these PSUs have survived many cycles and proved that they are as efficient as any other private sector company. They have several natural advantages in terms of their reach and distribution. Most of the PSUs have huge cash reserves and are not leveraged. Most of them are available at attractive valuations. For instance, companies in the utility sector like power and gas have been expanding their capacities in the past few years. The balance sheets are strong. All this while the stock is trading at historical low valuations despite many of these companies enjoying a sort of monopoly status in their segments. We believe it's a compelling place to be in. In case of PSU banks, the most talked about issues like NPAs, will be resolved in the next 2-3 years.

Apart from political uncertainty, there are macro-economic concerns like ballooning fiscal deficit. Do you think that will keep the investors on the edge?

The key risk continues to be the uncontrolled fiscal deficit to which there is still no answer. The recent events have changed that sentiment quite significantly. It is left to be seen if the same can be implemented in the spirit in which it was announced. A lot of this pessimissim is captured in the valuations of the market. Valuations are comfortable, corporates look like they will recalibrate their balance sheets towards a low debt: equity structure and this will make investing in corporate equity more attractive. So while at a macro level there are significant unanswered questions, at the micro level corporate business models are beginning to look attractive.