How did you rejig your portfolio in the recent market crash of March 2020?
When the market corrected in March 2020, we were invested in very high-quality franchises. The correction did not impact us so much. We were confident that most of these businesses will bounce back. We had done a detailed analysis on identifying businesses which could bounce back in 12 months. We created a list of companies which fall in this bucket.
What challenges are you facing in generating alpha in the large cap space?
In the last five years, we haven’t seen any broad-based economic and earnings growth. The earnings growth has been in single digit. Within that, only a few pockets of sectors and stocks have seen growth. The entire market is chasing those stocks which has resulted in polarisation. COVID has only accentuated that trend. Although we have seen commodities bouncing back, you need all sectors to participate in the rally. Markets will price in those factors much ahead. The money will be redistributed into sectors where fundamental change is happening. We foresee that happening over the next three to five years.
What is your view on value stocks?
Even globally, value stocks haven’t done so well for a long time… Most of our portfolio is in growth-oriented stocks. That said, we don’t ignore value. We have got a lot of opportunities in the value space which has generated reasonable alpha over the last three years. So 80% of our portfolio is in growth stocks while the remaining is invested in either value unlocking opportunities and pure bottom up stocks where we are seeing a shift in businesses. India offers many such pockets of opportunities although is not broad-based. It is still selective.
What kind of growth companies do you like?
We are looking at companies which have large scale opportunities. The focus in on quality – professionally managed businesses, process-driven, high operating cash flows and so on. The predictability and visibility of earnings should be strong. These companies also go through a cycle but they emerge stronger through innovation. We identify business moats where the balance sheet is strong with healthy return ratios. These are companies with good brand equity and pricing power. We identify price to value gap where the market is not valuing the business properly. There is mismatch between what the market is expecting and what we are expecting. We try to identify such opportunities early where the market is ignoring certain positivity. It could be potential value unlocking or a subsidiary where there is intrinsic value, cash on balance sheet, etc.
Where do you see opportunities post-COVID?
Manufacturing has been ignored for the past decade. There was already a slowdown, which resulted in unemployment. Government realised that manufacturing is the way to revive the economy. Government launched initiatives like Atmanirbhar Bharat Abhiyan, Make in India, and so on. The taxation has been relaxed to make India an investment hub. In a normal scenario, we would have recovered smoothly in five years. COVID has accelerated that process. Today, global entities are de-risking away from China. China is supplying 70% of the manufacturing need. Of course, it is not going to happen overnight. Today, China is 5X or 10X in terms of capacity as compared to any country for manufacturing products. Due to the sheer size of the trade, even a 5% shift in any segment, Indian companies will increase their turnover by 50%.
Which sectors could benefit from this shift?
Investment will come in area where India has got core competence. These sectors are auto and auto components. India has already got an ecosystem of auto components. So far, most of the manufacturing was done to meet the domestic demand. India can become a global supplier of components for low-end models. This is because a lot of countries today want to spend less on manufacturing and more on research and development. India has got a good chance in the auto sector. We are one of the cheapest producers of cars.
What about pharmaceutical sector?
Yes. It will also benefit including agriculture and speciality chemicals. We compete head-on with China for producing speciality chemicals. I don’t think any other country is competing in this space. A lot of countries will be looking forward to India to set up global manufacturing units over a period of time. Another opportunity is in electronics. We generate the maximum number of engineers. India has shown some progress by initiating production linked incentive, or PLI, scheme with an outlay of Rs 42,000 crore for those manufacturing in India. I gather that the PLI scheme could be extended to a few more sectors. PLI subsidies Indian manufacturing. India and China compete head-on when it comes to cost, electricity, interest rates, productivity and labour. India has managed to reach that level in terms of cost.
Where do we lag?
The only area where we are not competitive is the scale of manufacturing vis-à-vis China. In order to help Indian manufacturers, PLI incentive is being provided so that large investments can come in. We have a lot of small-scale industries surrounding all these large industries like auto, chemical, electronics. They will all start mushrooming. When you create global scale capacity, you need to work on your infrastructure, port connectivity, road and electricity. It is like a domino effect across the entire economy which will generate jobs 3-5 years down the line, which in turn will boost per capita income and benefit consumer discretionary sectors.