'We see value in Power and Consumer durables'

Summary: With growth cooling and valuations stretched, manager of two four-star-rated funds shares how she’s spotting opportunities today, staying clear of value traps and steering her funds through today’s market challenges.

Amid a consolidating market and tempered growth expectations, Meenakshi Dawar is focused on staying ahead of the curve. The Senior Fund Manager – Equity Investments at Nippon India Mutual Fund notes that “growth rates are now lower than the historical averages”. Dawar oversees assets worth over Rs 22,000 crore across three schemes, including the four-star-rated Nippon India Aggressive Hybrid Fund and Nippon India Value Fund.

In this conversation, Dawar shares how she distinguishes value from value traps, the importance of business longevity, and why power and consumption are emerging as interesting opportunities today.

Indian equities have been moving sideways lately. Do you see this as a pause in the rally or a sign that the post-Covid bull run is behind us?

This is definitely a consolidation phase for the market. Post-Covid, we saw very strong growth in the Indian markets, driven by both domestic and global factors. We were in a phase of significant monetary and fiscal stimulus, both locally and globally, which led to well above normal growth rates in many pockets of the market.

But if you look at the last one to one and a half years, there has definitely been some consolidation. Growth rates are now lower than the historical averages, and since valuations were already quite high at the starting point, we're seeing a bit of a time correction in the market, along with some degree of growth normalisation.

If I were to give you a view going forward, in the last one to one and a half years, a lot has happened, both domestically and globally. There were several global uncertainties. We saw tariff wars, which the market was not prepared for. Domestically, we went through a phase that began with some regulatory tightening, followed by elections, which led to some delay in CapEx, a theme that had gained traction post-Covid. All these factors resulted in some disappointment versus the growth expectations that the market had, and that has contributed to the correction in valuations.

Valuations are stretched, and there's also a slowdown in earnings. What's your overall assessment of market risks and opportunities at this point?

The opportunity in the market right now lies in the hope that the second half of the year will see a recovery in many segments that are currently subdued. We're seeing some signs of government capex returning, and the government has also accelerated efforts to push growth. We've seen some stimulus measures being introduced, a rate-cut cycle has started and steps have been taken to boost consumption. For instance, the government has announced tax cuts. All these factors point to a buoyant second half.

Now, the risk is that—despite these growth measures—recovery doesn't materialise in the second half. So, if growth remains subdued and business sentiment doesn't improve, then that's a significant risk for the market.

Could you walk us through your investment framework—the principles that guide your stock selection and sector calls?

Sector calls are a very top-down process for us. When we decide on a sector, we evaluate its long-term potential. If a sector has been through a difficult period, say, over the last three to four years, but now shows signs of a growth turnaround, we become very positive about it.

We also look for sectors where we believe strong compounding can take place over a long period. For instance, every stock in a sector has a cyclical element. Even consumption, which is a structural theme in India, can show cyclical growth, as we saw in the past few years. And individual stocks are even more cyclical because they price in a certain level of growth; if that growth doesn’t play out, the P/E de-rating can be quite sharp. So, that’s how we approach sectors: we assess the long-term growth potential and identify inflexion points.

Stock selection, on the other hand, is a very bottom-up process. I personally divide it into two buckets. One is where we want to play compounding stories within sectors. These are typically market leaders—companies with strong management, sound capital allocation and the ability to keep gaining market share. Over time, they keep getting bigger and stronger within their sectors.

The other bucket is undervalued stories. These are companies that have not performed well because the sector has been in a bad phase. Such companies go through financial stress; their balance sheets and P&L statements weaken and profitability falls. But when the sector begins to revive, these companies tend to benefit from both operating and financial leverage. We also selectively choose names from this bucket, employing a strict bottom-up approach.

Are there any value pockets in the market today that you're particularly excited about?

Since the market has been consolidating over the last three to four quarters, there are some segments where investor expectations have been disappointing in the short term, leading to value emerging in those areas.

For example, the consumer durables space has seen very poor growth over the last three to four years. Growth has lagged the long-term trend, and current valuation multiples are below their normalised levels. So, if growth picks up and consumer demand returns after the festive season, and these companies resume their normal growth trajectories, you could see a valuation re-rating in these stocks.

Another segment where we believe the market has overreacted to short-term developments and, hence, where value has emerged is the power value chain. A year and a half ago, the market was extremely bullish on this space because we were running a peak deficit. However, due to the recent benign weather, power demand has been impacted, leading to a significant sell-off across the value chain.

We believe that, structurally, India will continue to see 5–7 per cent annual power demand growth. The broader theme of rising demand, continued capacity additions and the shift to renewables is very much intact. As demand revives, we expect this space to bounce back.

Are consumption and the power sector the two broad areas where you're seeing value right now?

Yes, those are two themes where we see immediate value. But on a stock-specific basis, we're also seeing opportunities across sectors.

Due to liquidity issues, there have been many tactical sell-offs in the market. So, in almost every sector, there are individual stocks where valuations are lower than the potential growth rates of those companies.

The performance of Nippon India Flexi Cap Fund has been mixed in recent quarters. What’s weighed on it, and what are you doing to improve it?

When you invest in equities, you always do so with a long-term view, both for sectors and for stocks. In this fund, we made a few sector and stock calls with a 3–5-year perspective in mind.

Last year was a period of readjustments. We were riding a strong government capex cycle, but that momentum paused due to elections and fiscal consolidation. Many companies and sectors linked to that theme underperformed. However, this was a short-term phenomenon. In recent months, we’ve seen government capex picking up again. Activity on the ground has improved.

We’ve remained overweight in value sectors, particularly in the power value chain, which we believe is a structural story. The short-term blips from last year are behind us, and we’re confident the next 2–3 quarters will see normalisation and performance recovery.

Are there any stocks in your Value Fund that you wouldn’t include in the Flexi Cap Fund, even though you technically can?

The difference lies more in weightage and investment horizon rather than stock selection. In the Value Fund, we might allocate heavily to an entire value chain and stay invested for a longer duration.

In the Flexi Cap Fund, we prefer to play more compounding stories. The valuation gap may not be large between what the market and we believe, but we’re focused more on the longevity of earnings growth.

Take EMS (electronics manufacturing services) companies, for example. Since their listing, they’ve traded at higher multiples. But given their high growth trajectory, we’re comfortable investing in them in the Flexi Cap Fund.

The Flexi Cap Fund is more diversified across growth and value, balancing valuation discipline with growth longevity.

The Value Fund currently has a significant mid- and small-cap allocation of around 30–40 per cent. Do you have internal guardrails to manage risks in these segments?

Risk management here is largely about diversification. In value investing, where you’re ahead of the market in identifying underappreciated themes, the key is not to take concentrated bets.

We ensure no single stock or theme dominates the portfolio. Typically, we identify at least four to five strong themes that we believe will play out. If one doesn’t perform, the others compensate.

You also need holding power, especially when investing ahead of the curve. That’s why diversification and disciplined position sizing are absolutely critical in managing mid- and small-cap exposure.

Aggressive Hybrid Fund shows around 50 per cent portfolio overlap with the Flexi Cap Fund during the Covid period. How do you manage the Aggressive Hybrid Fund differently?

The Aggressive Hybrid Fund is positioned for slightly more conservative investors. It combines both equity and debt exposure, roughly 75 per cent equity and 25 per cent debt.

Now, for the equity portion, which forms the bulk of the portfolio, our approach tilts more towards large-cap companies, especially sector leaders. These are companies that have a longer operating history, stronger balance sheets and more seasoned management teams. That way, both business risk and valuation risk are comparatively lower than what we might take in more growth-oriented funds.

So yes, there’s portfolio overlap with the Flexi Cap Fund, because the themes and preferred stocks are similar. But in the Aggressive Hybrid Fund, our allocation is skewed more towards stability and resilience, whereas in other funds, we may take a bit more risk for higher returns.

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