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Pravin Palande
I look at markets as numbers because numbers don't lie

Why ICICI Dynamic Fund has a contra bet on Cairn India

S.Naren, the chief investment officer – equities at ICICI Prudential mutual funds is taking a big bet on Cairn India, a global E&P company which has seen its stock price fall by 12 percent over the last year. In comparison, the BSE Sensex has moved up by 21 percent.

The May 2013 fact sheet of the mutual fund shows that Cairn India accounts for 10.53% in his Dynamic Fund. Cairn India accounts for a fourth of India’s oil production and has an exploration acreage of 42210 sq/kms. When it comes to valuations, it is exactly the stock that a fund manager like Naren is on the look out for. Cairn India trades at a P/E multiple of 3.7 times which is lower than the industry P/E of 12.

The market in general is giving a very high valuation to sectors like FMCG, Pharma and quality banks which are being traded at a earnings multiple at around 30 times, fund managers are having a tough time looking for value.

Naren who is known for his fundamental analysis and long term investment philosophy finds the market very expensive at these levels. In general, he has looked for quality at a reasonable price but this is one market he feels that is difficult to understand.

This has to do with the fact that all the quality stocks now has huge FII flows. These are investors who are ready to give higher valuation to stocks as long as they deliver quality. Most of these investors are ready to wait in case the market falters or the companies spook them in terms of growth rates. They know it that India is a growth market and eventually they will get the returns if they are ready to wait for the long term. On the other hand Naren has decided to stay away from this rally. This has also affected the returns for the Dynamic Fund. Over the last one year the fund has underperformed the the BSE 100 which returned 22% while the returns of the fund were lower at 12%.

In such a situation Naren is looking towards Cairn India to deliver.

It is a bet backed by conviction. Only a few months ago he was in a similar situation.

In October 2012 he had taken a similar exposure to Bharti Airtel when the stock was completely out of flavour amongst investors. The stock was down by 40 percentage while the Sensex had moved up by 15 percentage over the last one year. The fund manager saw that there was a lot of value on the telecom growth story and invested into the stock through the Dynamic Equity fund. No one was buying the story when the fund started investing in Bharti at around Rs 260 in August 2012. In the next four month the stock moved up by 34% and thus gave a huge booster to the Dynamic Fund.

Though it may look like the Dynamic Equity Fund will miss out on the quality rally that is now experienced by the market, It will be a good idea to go by the guts of S.Naren. It may take him some time for the fund to deliver performance. But given time, the long term investor can still benefit by investing into this fund even at this levels.

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Pravin Palande
The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. Im forever looking for these trends.
 
 
 
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