How this fund manager avoids value traps

Summary: How do seasoned fund managers separate cheap stocks with potential from those that stay cheap forever? Meenakshi Dawar breaks down her dual-bucket approach, value trap filters and why cash flow is her first screening test. Learn how she navigates valuations in a changing market and rides value to growth. With over 13 years of experience in equity research and fund management, Meenakshi Dawar, Senior Fund Manager at Nippon India Mutual Fund, brings a sharp eye for market cycles and value opportunities. In this interview, she explains why today’s market is in a consolidation phase, where she’s spotting signs of recovery and how her team separates undervalued stocks from value traps. She also breaks down her dual-bucket investment approach, the evolution of market valuations and the qualitative lens she applies to ride a stock from value to growth, without getting caught in the value trap. 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 (profit and loss) statements w