On the one hand, despite calls for valuation – global, FII money is very patchy – but still we are slowly marching ahead. But from today onwards, do you expect some profit-taking? Is that the message you are giving out to your investor fraternity as well?
Sunil Subramaniam: What has happened is that we have had consistent flows into mutual funds, especially from retail investors as the SIP book has been growing month on month. However the composition of the flows was such that more than 50% of the incremental flows in SIPs are in mid and smallcap funds. And so, from the quarter to date, FIIs in April and May sold Rs 50,000 crore worth of assets. But mutual fund managers were not in a position to buy so much of those because the flows they were getting were in mid and smallcap, and that is why we saw that the gap between mid and smallcaps and largecaps kept widening.
Now, post the election result, after the first few days of uncertainty around how will the coalition fan out, a lot of comfort has come to the foreigners and the fear which they had in the run-up to the election results, either they had their opinion polls which gave them some feedback or there was news around the rhetoric that the prime minister was employing, something happened and they started booking profits.So, this outflow of Rs 50,000 crore was a profit booking by FIIs. Now, alternatives to take that money and put it anywhere else in the world are not looking attractive. So, they had to come back to India. And once they got clarity that this government is by and large going to be a repeat of the last government, the ministerial setup is the same, that there are no undue pressures because of the coalition on the government, and the budget is likely to be along a reform-oriented policy continuity line, you are seeing the return of the FIIs. Now, when the return of the FIIs is coming is where you mentioned profit booking. Who is doing the profit booking in mid and smallcap are these fund managers. Now with the FIIs coming back, they are not fearful of buying those largecaps because they know the FIIs selling was there. They said, can we buy this a bit later, can we buy this a bit later?
But today with the FIIs returning, they know that good quality largecaps, quality earnings there. If the FIIs are going to be continuing to buy, then it is good to buy in early. And the widening gap in valuations between the mid and smallcap pack and the largecap pack means that for you this is a wonderful opportunity to rotate it and bring down the average one-year forward PE of your portfolio by buying good quality, solid, robust largecaps.
So, buying the largecaps is going to be both from the FIIs as well as reallocating from this because mutual funds are booking profits only to reallocate because today they do not pay out massive dividends from mutual fund schemes because they are not tax efficient to do that. So, when you say profit booking, it is booking from one segment and going into something else. Mutual fund managers are not holding big amounts of cash.
Among these export-oriented manufacturers, there are capital goods, some of the mid-tier engineering exporters, and, auto, of course. What about apparel exporters? How are the numbers stacking up beyond the domestic demand? Have we managed to achieve meaningful ground as far as our export scene is concerned?
Sunil Subramaniam: I think that it is still a long journey because I think what is success initially is partly driven by the PLI stuff and within the PLI stuff because of the incentives that we are getting, but we are still quite a way behind China in terms of productivity, in terms of… Though labour costs look reasonable compared to China at $1.6 per hour, China is at $4.2, which looks superficially cheaper, but bear in mind that China’s per capita GDP is six times ours. So, I think that what we are getting in the export success is at the low-end, low-skilled labour kind of exports and that is where we are seeing significant gains in electronics and some of the other sectors you mentioned.
So, it is a long journey and the productivity levels and the skill sets need to improve. I think the government will need to do something on land and labour reforms, maybe make a start in the coming budget for export on the manufactured space to shoot up. But at the same time, there is a healthy growth in the services exports because our data costs are the cheapest in the world means that a lot of data-related work, management, and consulting work is coming to India. So, non-IT exports around the digital space are also growing very fast.
The two successes are low-end labor-oriented PLI-driven exports, as well as the data cost-driven services exports, are the ones that are holding up and taking the export battle forward. But a long journey ahead of us and the scope is phenomenal because I saw some data that said that only 14% of the 135 MNCs in China have looked at India yet. So, there is a huge pool of people who are still making in China, which is seeing a decreasing labour population, which is seeing a higher cost of production happening there and hence I think the story is very bright for the future, but it is early days in terms of the growth.