Finding value in the Indian market is not easy: Invesco MF's Taher Badshah

Taher Badshah brings nearly three decades of expertise to his role as Chief Investment Officer (CIO) at Invesco Mutual Fund. Having been associated with the AMC for over seven years, Badshah currently oversees five equity schemes with a combined AUM (assets under management) of nearly Rs 30,000 crore. His portfolio includes the four-star rated Invesco India Focused Fund and Invesco India Smallcap Fund.

In this interview, Badshah shares insights on new-age companies, urging against dismissing them as mere bull market instances. He also explains his investment philosophy and the improving performance of Invesco India Contra Fund, the largest scheme of the fund house. Below is the edited transcript of the interview.

What is your investment philosophy? Are there any stocks or situations that excite you when evaluating potential buys?

There are challenges with both good and bad markets. Bad markets are challenging as investors don't see much excitement, and the industry turns sluggish, but from the fund manager's point of view, it's fun as we get to buy stocks cheaply. However, good markets, as we are currently experiencing and witnessing, also present challenges as opportunities can shrink. It's important to extend one's investment horizon and manage return expectations. Therefore, each market scenario presents its own unique set of challenges. Obviously, as professional managers, we must find our way through both market conditions and perform and position ourselves accordingly.

Regarding my personal style and approach, I started as a growth investor and generally thought about markets from a growth standpoint before I joined Invesco Mutual Fund. At Invesco, my perspective has broadened significantly. We run a value strategy called the Invesco India Contra Fund, which is our largest fund in terms of assets. I believe this value strategy has enhanced my skill set, as it is driven by a different mandate and necessitates a different approach to investing.

India is typically known as a growth market and probably will continue to be one for the foreseeable future. Therefore, coming up with value ideas in the Indian context is not an easy task. In developed markets, many sectors and industries have turned mature and thus present themselves as value opportunities at some level or another. However, in India, the focus is on a blend of relative cheapness, de-rated growth entities, and turnaround stories, which is somewhat different from the more global definition of value. I have found this to be highly beneficial, and the investment process at Invesco has provided me with excellent support. It's an investment process that allows for growth and value investing.

At Invesco, we run every strategy according to their respective mandates and ensure we manage them actively at all times. I oversee several growth strategies, including small-cap and flexi-cap funds, all of which necessitate a growth orientation. Even our Focus 20 strategy follows a predominantly growth orientation, whereas running the Invesco India Contra Fund necessitates switching hats and starting to think of contrarian or value. While this is easier said than done, our investment process has undoubtedly made this more manageable.

Over the past three years, the Invesco Contra Fund faced challenges compared to its value-oriented peers despite consistently outperforming the BSE 500 benchmark. Now, the gap is narrowing. What factors are driving this improved performance?

That is a good question. We must acknowledge that this fund is mandated to follow a value investing style. On one level, growth-oriented strategies are defined in a somewhat more standard way. However, when it comes to value, managers may hold varying opinions about what value means at different stages of the market. Given that value carries diverse connotations, it contributes to the performance differentials between managers at different stages of a market cycle.

We have been managing the contra fund in a way that consistently communicates our value strategy to investors, which involves purchasing businesses facing challenges. We don't currently see positive trends, but we believe they have the potential to regain growth momentum over time. Suppose we have reasons to believe that the company still enjoys the necessary competitive advantages for it to emerge out of those headwinds. In that case, that becomes a good starting point for us to initiate ownership in the fund. In this process, not only do earnings expand, but valuations also revert, resulting in meaningful gains for investors. We typically advise investors in our contra fund to consider a somewhat longer horizon of three to five years. This is because, unlike growth companies, where growth is already evident, we are investing in businesses that are currently struggling but are expected to improve in the future. This transition from headwinds to tailwinds is not a simple process and often takes time.

Regarding the enhanced performance, we haven't made significant changes. We have followed the standard template: buy headwind or value businesses and then, over a period of time, wait for tailwinds to reappear. We supplement this by maintaining a strict valuation discipline, ensuring we reduce exposure or exit the position when valuation multiples more than adequately reflect that the turnaround or value discovery of that business is close to complete.

In the contra fund, when something becomes mainstream, it becomes the right time to start branching out and re-emerging into other opportunities. Over the past year, we have made incremental investments in sectors such as IT, utilities, and capital market-oriented companies, besides some consumer names that have underperformed. Some of these are starting to experience a cyclical rebound and have delivered good returns. On the other hand, industrials—which we invested in during Covid when they were relatively cheap—have now become expensive and a lot more mainstream compared to many other parts of the market. As part of our general sell discipline, we have reduced our weights in this segment in the recent past, after which we've seen a fair bit of correction out there as well. Moreover, we also moderated our exposure to PSUs, which worked out well for the fund.

You hold some high P/E stocks. How do you balance the risks and rewards there?

Some of these high-priced stocks are expensive because they offer the necessary longevity of growth and provide a pathway for businesses to grow over a longer period. Additionally, some of these companies are of high quality, possess a clean and well-managed balance sheet, and do not have significant leverage. In fact, many of these companies generate significant cash flow, which is why their valuations become well-supported. While some valuation compression is possible, I don't think it will cause fatal accidents. High-quality businesses deserve higher multiples than their competitors. But we have to be cognisant that at some point in time, there will be a period of underperformance, especially after they have witnessed a sharp rise and valuations have over extended in the short run.

If a stock has performed well, valuations have increased, and we observe either a decline in growth or other developments that may warrant caution, we will not hesitate to remove the stock entirely from the portfolio. Keeping the portfolio reasonably diversified is the best way to manage risk continuously. Even today, with just 20 stocks in our focused portfolio, we have exposure to almost every possible market segment or theme, including banking, healthcare, manufacturing, energy, IT services, consumption and defence.

Given the current state of the market, it could be beneficial to include a value component in the portfolio. While the strategy remains primarily focused on growth, we counterbalance it with a selection of value stocks that are not as expensive and, at the same time, represent quality businesses that may not have experienced significant market movement. Such a blend ensures that even though there might be some high P/E multiple stocks in the portfolio, the portfolio is still quite comfortable on an aggregate basis relative to the growth it provides.

You've also added new-age tech companies to a few of your portfolios, and they've done well recently. What's your take on the future of e-commerce, especially given the mixed performance we've seen in the past?

The operating metrics remain similar for identifying stocks, regardless of whether they are new-age businesses, initial public offerings (IPOs), or any other type of company. I use additional important parameters as guiding principles when analysing new-age tech companies.

First, the stocks should possess a significant competitive advantage, given that certain new-age businesses are easily replicable and have low entry barriers. Second, the initial profitability of some new-age businesses is either low or non-existent. We recognise that these businesses require capital, but we also ensure that this capital does not create significant leverage on the balance sheet. It is also important to ensure that profitability is not too distant into the future. We don't want to be in businesses where profitability will come in only five to 10 years. This is because we may not necessarily have the tools to measure visibility over such long periods. Therefore, I believe it is crucial that some of these companies may have a shorter path to achieving profitability. Third are the softer aspects of the management and the team running the business. In my opinion, some of these new-generation businesses have the potential to grow, gain significance, secure leadership positions, and achieve profitability. And we've seen that happen in a few of these names, even though there was original scepticism in the market.

It's not a good idea to dismiss all of these as froth or as just instances of bull markets. I think it is still important to carefully evaluate some of these stocks because they define new paradigms and new ways of satisfying the consumer and delivering experiences or products.

Also read: Interview with Devender Singhal of Kotak Mahindra AMC