Though he recently took charge of the equity schemes at Canara Robeco Mutual Fund, Lahiri has refrained from making dramatic changes to his predecessor’s portfolios
Do you believe there will be a slowing down in earnings due to various factors such as high interest rates, high inflation and high prices of crude?
Yes. We have seen the trend from the fourth quarter of FY11. Revenue growth was pretty robust at around 18-20 per cent YoY, but rising competition and increasing input costs - be it raw material, labour, finance cost, took a toll on profit margins across sectors.
The weak performance could be attributed to a large number of index heavy weights missing earnings expectations. Margin compression was seen across the board with manufacturing companies being the worst affected. As a result, profit growth was a modest 12-14 per cent YoY.
Keeping in mind the high interest rate scenario and high crude prices, which are the sectors which you will not touch?
Over the past six months, the Indian stock market has underperformed most global markets and most stocks have corrected. It is a well known fact that the Indian economy is sensitive to crude prices and the rising price of crude will have an adverse impact on corporate India. Also, pricing of petroleum products in India is regulated. So while a few segments have been protected against rising crude prices other users will be impacted. Given the high petrol prices and high interest rate scenario, interest rate sensitives like Autos, Real Estate, Power, and other leveraged companies would be hurt in the current environment.
What about Banking?
In the current interest rate scenario, the Banking and Financial Services sector faces headwinds in business. Credit growth has been robust, while deposit growth has not kept pace. Interest margins could be under pressure and there could be issues about asset quality. Banking has been one of the better performing sectors last year. Given this and the fact that the sector is facing headwinds, we remain cautious. Valuations for this sector have come off and when macro headwinds recede, it will provide a good investment opportunity.
Are there any sectors where you feel profit taking is wise?
At this point in time we believe that Consumer Staples are priced to perfection. Although companies are facing cost pressures, better earnings performance for the sector was driven by lower advertisement and promotional expenditure. If demand slows down, we could have some negative earnings surprises in the sector.
Are you investing at this level or sitting on the sidelines?
As a fund house, we do not take active cash calls. Cash levels are limited to 10 per cent, unless there are huge inflows or outflows. So incremental investments today are driven by cash flows.
If you are suddenly faced with a huge amount of inflows, where will you put the money?
One way of allocating a large flow is to just increase the existing positions proportionately so that the balance of the portfolio is maintained. Similarly when there is an outflow, we proportionately sellacross the portfolio.
In other cases, allocations are made to the best available stock idea. In the current market conditions such ideas exist in a few sectors like Pharmaceuticals and Technology.
Would you consider mid caps at this time?
There has been serious underperformance in the small- and mid-cap space over the past one year. Valuation-wise, there are bargains in this space. But one has to be very stock specific and very careful because mid-cap names tend to be associated with a higher level of risk and volatility.
What is your stock picking strategy currently?
We follow a set of well established but flexible principles that draw on the concept of earning power and return on investment as understood by the owners of the business.
We follow two basic principles.
We focus on the long term. When we buy a stock we like to think of ourselves as proportionate owners of the business and thus have a slightly a longer term view. We believe it is companies and not stocks that create wealth. We try and buy businesses that have predictable and sustainable operating cash flows over long periods of time.
We also buy stocks with a certain margin of safety. This means we try to buy stocks which are trading at a discount to our assumption of fair value. We also try and maintain a balanced outlook on the market.
To help us access investment value based on detailed and rational analysis of facts in stock picking, we essentially adopt a three step investment process which we call the BMV model for analysing companies. This is an acronym for Business-Management-Valuation. This model aids in an analysing companies and filtering the investment universe by doing fundamental research following our investment philosophy of investing in robust growth-oriented businesses with competent management at reasonable valuations.
How important is meeting the company management?
For a mid- or small-cap company, it is very essential. Here sometimes there is not enough publicly available information. So management meetings in such cases help us understand the dynamics of the business better.
What triggers a sell decision?
We sell stocks for three reasons.
The first being that we made a wrong call. We admit our mistake and cut our losses. When we buy a stock, we evaluate the same and have a certain target price in mind. As and when it reaches that level, we re-evaluate our call and see if we feel that the stock is fully valued.
Thirdly, when corporate governance issues crop up, if decisions made by the management or promoters are not in the interest of our investors, then we would decide to move out.