'Consumer' stocks to drive market in the long term

MUMBAI: Sundaram Mutual Fund will focus on defensive sectors in the near term as high inflation, rising interest rates, and growth concerns continue to weigh on the Indian stock market.

The fund house, which manages assets worth more than Rs 14,500 crore, has trimmed its exposure to energy, financial services, and utility companies as the Reserve Bank of India's (RBI) aggressive rate stance to fight soaring inflation will dent profit margins of these sectors, said Srividhya Rajesh, vice-president equity, Sundaram Asset Management.

"We're sticking to defensive stocks...Inflation, growth worries, and high commodity prices will weigh on the market. However, we don't expect a deep correction," said Srividhya, who manages about.`1,200-crore assets for Sundaram Capex Opportunities and Sundaram Select Focus funds. Defensive stocks remain stable in various phases of business cycle. During recession they tend to perform better than the market.

However, during an expansion phase they perform below the market. Defensives include sectors such as pharmaceutical, consumer staple, and agro-products. Consumer-oriented sectors will lead the market rally in years to come driven by rising salaries and increased spending, Srividhya said.

"We're bullish on auto, FMCG, and telecom companies. Though sensitive to rates, some of the topline banks look good as they have corrected recently," she said. Sundaram Select Focus Fund, a large-cap fund with assets of more than Rs 899 crore, posted a one-year return of 3.12% against 9% gained by the Sensex during the same period. Large-cap funds, on an average, returned 7.3%, as per fund tracker Value Research.

The fund increased holdings in Infosys Technologies , Larsen & Toubro , ICICI Bank , State Bank of India , ITC , Bharti Airtel , and Tata Motors . It has reduced exposure to Reliance Industries, Tata Consultancy Services , Cipla and Sun Pharmaceuticals.

Sundaram Capex Opportunities, an infrastructure fund with assets worth Rs 350 crore, yielded a negative return of 12% over oneyear period. ET Construction Index, a compilation of infrastructure companies, has fallen over 16% over the past one year. The index - comprising stocks such as Jaiprakash Associates , Lanco Infratech, Reliance Infratel and BHEL - have fallen 15-45% in one year.

"Rising interest rates is not good news for companies operating in the core sector," said Srividhya. "Disappointing order flows are another problem faced by infrastructure companies. Growth has been slashed for most infrastructure companies. Higher capacities, lower utilisation will put pressure on profit margins of these companies. We're expecting a turnaround only when order flows turn normal," she said. Lack of government spending in infrastructure is also a problem for infrastructure companies, she said.

"The government has become more of an activist; the focus now is more on environment and less on development. There is a need for balance between development and sustainable ecology," she said. She emphasised that India needs to tap natural resources and rely less on imports.

"It is not in the interest of countries with huge deficits to import natural resources," she said. Rising global coal prices will impact earnings of Indian companies, she said. Shortage of dedicated wagons and rail corridors for evacuating coal will also cause problems. Coal prices have gone up to $330 per tonne from $225 per tonne in the last six months.

Coal accounts for more than half of India's power generation. Environmental clearances and low investment are posing hurdles for domestic coal production that supplies most of the coal consumed. Indian coal producers are increasingly depending on imports to meet the shortfall. Srividhya sees earnings of Indian companies declining 2-3% in fiscal 2011-12 due to rising input cost. "We've seen a decline in growth of large companies... smaller companies are still better off. But there is no reason for big worries as Indian companies have good surpluses," she said.

India's gross domestic product growth is likely around 8% this fiscal, she said. "The RBI is trying to contain inflation by raising rates. This should have an impact on overall growth. In fact, the RBI is trying to apply brakes on growth temporarily to avoid overheating. As a result of consecutive tightening, GDP growth this year will not exceed 8%," she said.