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"At Axis, quality is the bedrock of everything," emphasises Shreyash Devalkar, Head - Equity at Axis Mutual Fund. Having joined Axis AMC in 2016 as a fund manager, he has been steering the equity division since 2023. He currently oversees flagship funds, including Axis Bluechip, Midcap, Tax Saver, and Growth Opportunities, with total assets worth over Rs 1.3 lakh crore.
In a recent interview with Value Research, Devalkar explains how he is navigating the record-high valuations in the market. He also shares insights on recent portfolio adjustments, sector rotations and the potential impact of global rate cuts.
Below is the edited transcript.
Equity markets are hitting new highs. What's driving this rally, and can it continue in the long term?
The rally we have seen for the past three to four years is largely due to the micro factor: earnings growth across the board. The last decade (2010-2020), especially the second half, saw a concentration of growth in a few sectors and companies, which led to a polarisation of valuation - compression in most B2B sectors and expansion in a few segments doing well. The current rally has encompassed all sectors of the economy, from investment to consumption and exports, and resulted in a reversal of valuation compression. Despite the high valuations, the markets have been rallying due to strong earnings growth.
From a top-down perspective, we expect some fundamental aspects of the Indian economy, including the fiscal deficit, current account deficit, inflation, and interest rate, to move southwards, which is why India appears superior to the rest of the world. Despite the high valuations, markets are taking comfort in macro stability.
With valuations at record highs, how are you finding value in this market?
I don't see much value in the market. Some segments are overvalued, and some other segments are less overvalued. The Indian market has never been cheap, and it's unlikely that one can find absolute value anywhere in this market.
But on a relative basis, if you notice the broader sectors, which are mostly represented in the large caps, one may observe relative value in private sector financials, especially the banks where no rating is happening, and even the fast-moving consumer goods (FMCG) sector. We have observed that the FMCG sector in India has consistently commanded high valuations. Even today, the FMCG sector remains expensive. If we look at the pharma and IT sectors, they have not been re-rated to the extent of other B2B sectors in the market, compared to their pre-Covid valuations. So broadly, these are segments where one can find value on a relative basis.
How do you identify growth stocks that offer a good balance between risk and reward, especially during times of high valuations like now?
In today's market, everything is expensive. Around one and a half years ago, there were pockets where one could have found value in the market. However, given the current flow of money and the upward movement of markets, everything appears relatively expensive from a traditional perspective.
As far as stock picking is concerned, everything has remained the same for us. Since valuations across the board are expensive, we are probably sticking to the best companies and sectors at this point. The rotation among sectors is quite fast, and if you look at the one-year time frame, companies with the best growth will give favourable returns. There might be some consolidation because, in the last three to four years, there have been earnings upgrades in many sectors and segments by way of topline and margin surprises. Now that this phase is ending, it is unrealistic to expect margin surprises to continue occurring quarterly for every company. So, that's where we see some consolidation happening in the market and money flowing in those names that are delivering growth on a long-term basis.
At the AMC level, we've observed a shift from a strong growth orientation to a more relative growth approach while still maintaining a steadfast focus on quality. Can investors expect this focus on quality to continue going forward?
For all of us at Axis, quality is the bedrock of everything. Again, I'd like to elaborate on what quality means. We define quality as a better return on equity, high cash flows, and good corporate governance. There might be some deviations from sector to sector, like some emerging sectors that are currently loss-making. However, our focus is on determining whether the companies are in close proximity to duopoly structures and if there is a potential path towards profitability.
Therefore, we prioritise these metrics over businesses that are intrinsically low-quality and do not contribute to profitability. These are the fundamental quality components, and I believe we have consistently prioritised them and will continue to do so in the future. Concentrating on these aspects is important as they may not be readily available in today's market.
You mentioned making portfolio adjustments and increasing stock holdings nine months ago to improve performance. Yet, some key funds, like Axis Bluechip and ELSS, are still struggling. When do you think investors will see a turnaround?
The adjustments we made to our portfolios have started yielding results for most of our funds on a one-year basis and even more. The Axis ELSS Tax Saver Fund has outperformed the underlying benchmark on a year-to-date basis (YTD) in 2024, while Axis Bluechip has performed broadly in line with the benchmark. It's challenging to make predictions about the future, but our focus on quality and growth will continue even going forward.
You've been a relatively recent player in the value category, with just two funds launched after Axis Value. With global rate cuts on the horizon, how do you see this impacting growth and value stocks moving forward?
Every cycle is unique, and this cycle of interest rate hikes has resulted in significantly stronger growth. This same situation occurred during the 2006-09 period, and it has happened now when growth remains strong even as inflation and interest rates go up.
When it comes to the market, particularly Indian markets, we also saw valuations moving up quite rapidly. Therefore, one should not anticipate a further increase in valuations when interest rate cycles reverse. I believe stock prices are more sensitive to earnings growth than valuation. Therefore, the future performance of the sector will be influenced by the growth in earnings.
The mid-cap fund's performance has improved since the start of the year. We've noticed that the number of stocks has risen over the past eight months, with the new additions contributing positively. At the same time, you've sold some underperforming long-term holdings. What are your criteria for deciding when to sell a stock, particularly with these recent portfolio adjustments?
The portfolio has experienced significant changes over the past three years. Following the Covid economic recovery, we began implementing changes in 2022-23, which have continued into 2024. As you may have noticed, over the past few months, we have reduced our exposure to some of the most expensive parts of the market, like the industrial segment, while increasing our exposure to the pharma sector. Indeed, both valuations and upcoming market opportunities drive these fund moves or changes. This is particularly relevant to the mid- and small-cap categories, as I believe certain businesses may experience significant growth.
We focus on companies which have the potential to change orbit. If a company exhibits this pattern, the valuations should not be a major concern. If you look at Axis Midcap Fund, three to four companies among the top 10 in the portfolio have delivered returns despite their high valuations. These companies could break out of their orbit by replicating their formats or expanding their platform into other segments. These factors hold significant importance, and we closely monitor these parameters to determine whether to retain or sell the stocks, considering their valuations. Apart from this, the earnings downgrade cycle remains the key parameter to watch out for when selling the stock.
Your exposure to mid and small caps is relatively low in the ELSS, Focused, and Growth Opportunities funds. What's driving that decision, especially since mid and small caps have been doing well?
If we look at the Axis Growth Opportunities Fund, it has sufficient exposure to mid caps as per the category definition. However, due to the inclusion of some foreign equities in the fund, our exposure to mid- and small-cap stocks may appear smaller than that of our industry peers. That said, in the past, we have reduced our foreign exposure in the fund and added large- and mid-cap names.
Regarding the Axis Flexi Cap Fund, we've added many stocks across large, mid, and small caps. Rather than solely relying on the consumption side of the economy, I would argue that all equity funds exhibit diversification across themes such as consumption, investment, and exports. All the funds—beyond those mentioned—are diversified to that extent.
The Axis Multicap Fund has performed strongly in 2023 and 2024, partly due to mid- and small-cap exposure. Would you agree? What's worked for this fund?
Certainly, the mid- and small-cap categories have done quite well in the last three to four years. So, a higher allocation to mid and small caps has been the recipe for our performance. However, the fund has done well largely due to stock selection and diversification.
Are there any sectors that might outperform the broader market right now? What makes you optimistic about them?
The market has witnessed strong sector rotation in the last six to nine months, and there has been merit in taking strong sector calls. However, on an annual basis, investing in a few well-performing stocks will yield better results than investing in specific sectors or themes. The market in this cycle has been driven by certain themes, such as power, defence, EMS, and pharma. A bottom-up stock-picking approach will be better than a theme-based approach.
Also read: Interview with Niket Shah of Motilal Oswal Mutual Fund
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