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Cyclical funds back in action

Aabhas Pandya

After lying in morass for months together, cyclical funds and funds with a significant exposure to old economy stocks have sprung back to life. Apart from the equity funds of UTI, a few funds dedicated to the old economy stocks have shown healthy gains in less than a month.

Thanks to renewed talks of disinvestment by the government, pickup in demand for cement, attempts of hostile takeovers and portfolio rebalancing by institutional investors, the hitherto languishing family of cyclicals are witnessing buying interest on the bourses.

"There is expectation of disinvestment and unlike on most other occasions, this time the government is more aggressive and hence, the uptrend in cyclical stocks is expected to continue," says Prema Madhu Prasad, general manager, department of funds management, Unit Trust of India. "If the government has decided on disinvestment, it should not face much problem, except with MTNL, where there is a strong union," adds Shyam Bhatt, fund manager, Tata Mutual Fund.

Apart from the sell off in Air India, the government intends to reduce its stake in MTNL and VSNL to 26 per cent in favour of a strategic partner. The government has also decided to amend the banking legislation to enable it to bring down its stake in public sector banks to 33 per cent, from the present level of 51 per cent. The talk of sell off has also triggered a rally in the oil counters, which command a huge asset base but continue to be undervalued due to government's control.

"Old economy stocks look good from a long term perspective with cement companies such as ACC, India Cements and Grasim having been able to cut costs significantly. We expect the government to start making positive moves on the disinvestment front. This has the potential to provide an extremely strong impetus to the economy.

Especially so if the government proceeds smoothly with its divestment exercise and corrects its fiscal situation," says S N Rajan, chief investment officer, Kotak Mahindra Mutual Fund. "The government should take up the issue of disinvestment seriously to send the right signal to domestic and international investors. If the fundamental problems of power and transport sector are not resolved, the markets could be revisiting the current levels many times over in the future,'' adds a Mumbai-based fund manager.

Among some of the top gainers, UTI's Petro Fund rallied by over 18 per cent since October 24 with its NAV vaulting from Rs 10.9 to Rs 12.93 on November 15. Other UTI funds, which have notched up fresh gains, include Mastergrowth, Primary Equity Fund, Masterplus '91 and Mastergain '92. With more than 40 per cent of their assets in cyclical stocks, these funds have generated a return of more than 10 per cent in 20 days.

Springing Back to Life?
	Return in %	Cyclical Exposure (%)
UTI Petro	18.62	87.81
Equity Tax Planning 2000	15.45	12.60
Grandmaster	13.66	19.22
Mastergrowth	12.99	38.64
UGS 5000	12.01	30.37

Apart from UTI, funds like Alliance Basic Industries and Magnum Contra from SBI MF have seen their NAVs gather momentum. Though their NAVs continue to hover below par, Alliance Basic has returned 11.57 per cent since October 13. The fund essentially invests in brick and mortar companies.

"The talk of disinvestment apart, portfolio rebalancing is taking place, with everybody who is overweight on technology cutting exposure and moving to cyclicals. We are also buying into select cyclical stocks like cement,'' says Bhatt at Tata Mutual. Adds Ranjan Dhawan, managing director, PNB Mutual Fund, "A number of old economy stocks have reached prices, where they offer very good value and are expected to be firm in the near future.''

Last but not the least, hostile takeover bids for asset rich corporates, whose market capitalisation is far lower than their intrinsic value, is driving old economy stocks. With their bulging assets and drooping share prices, cyclical companies have become a sitting duck for predators in the Indian corporate sector. "It is slowly becoming a reality that a corporate needs to manage its value better or someone else will show more keenness to do so. This is expected to enhance the performance of select stocks in the future,'' says TP Raman, managing director, Sundaram Newton AMC.

Source: Value Research

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