Riding on high-growth companies | Value Research Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund, explains how an unapologetic growth-style strategy has paid dividends for the fund house
Interview

Riding on high-growth companies

Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund, explains how an unapologetic growth-style strategy has paid dividends for the fund house

BNP Paribas has proved to be one of the emerging stars in the equity-fund space, despite its relatively small size, with top-rated funds such as BNP Paribas Equity Fund and Midcap Fund in its kitty. Anand Shah, Chief Investment Officer, explains how an unapologetic growth-style strategy has paid dividends for the fund house.

Riding on high-growth companies Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund

BNP Paribas Mutual Fund manages some top-rated equity funds and attributes its returns to the BMV framework (business, management, valuation). Can you explain how exactly you select stocks?
This framework has been working very well for me for the last seven years. The core of this philosophy is that if you get companies right, you will get stock choices right. We consistently try to identify the businesses that can deliver high growth. This boils down to three things. We look for sectors growing faster than the GDP and within those industries we hunt for companies growing faster than the industry. We evaluate that in terms of earnings growth. We also want sustainability of this growth. Every company that is growing very fast needs to have a sustainable competitive edge, which allows it to replicate what it has been doing for past many years for many more years to come. The second big leg to identifying winning businesses is the moat. The third leg in the business analysis is to do with competitive intensity in the industry. We would generally want to buy businesses when the competitive intensity is decreasing or exit businesses when the competitive intensity is increasing. So, these are the three broad things we are looking at. Seventy per cent of my team's time is spent in identifying these winning businesses.

Then comes the management, where we are looking at two aspects - the first is competence. Are they doing well already and can they continue to do well? Do they have management depth, quality? The other factor is governance. So, again, if there is a problem around this aspect, we don't go to valuations at all.

So once we like the 'B' and 'M', we take stock of valuations. When you have a good business and good management, the stock's not going to come cheap. So, we appreciate that we will have to pay premiums for good businesses. That's where our analysis of moat comes into picture and what sort of premium we can pay. If the moat is very high, very strong, we are ready to pay a higher premium. But if the moat is weak or weakening, we don't want to pay premium. So that's how the framework works.

From your explanation, you seem to be a very growth-oriented fund. Aren't there certain phases of the market where looking for bargains or value stocks will work better?
Yes and there is no doubt about it that the fund can underperform the peers in such phases. In the run-up in the market between September and March, for instance, we did underperform the peers. So, there is no running away from the fact that if you're chasing reality, then at times when hope is the dominant driver in the market, focusing on reality will not work. But we are not averse to buying cheaper companies. Today, for instance, we are getting telecom companies which are quite cheap on valuations despite superior growth. Today, we have this situation because there is so much of confusion around this sector on competition, regulations and so on. Otherwise, you don't get such good companies cheap.

In the last few years, with growth hard to come by, everyone in the market seems to be chasing sectors and stocks with earnings visibility? So aren't these companies too expensive?
Yes, it has happened. We have had to let go certain sectors and companies where the reality doesn't match up to expectations. So, while we are ready to pay premium, we don't want to overpay for a good business. I agree with you that there is a segment of the market which is overpriced. Some investors look at current earnings growth and overpay for stocks because they hope that the same growth will continue for the next ten years. We are not in that camp.

You say you consistently look for industries which are growing at a higher rate than the economy. Today, with corporate India's sales growth being so weak, which are the sectors or industries where you see growth potential?
We find quite a few opportunities. For one, we see the banking industry continue to grow faster than the GDP by virtue of initiatives such as the Jan Dhan Yojana, higher penetration of financial services and so on. Within this, retail loans will continue to grow faster. So, you have an industry which is going to grow faster than the GDP. On top of it, you have a sub-segment of the banking industry - private banks - which has been growing faster than the industry for the last many years. It is difficult to argue that this will change, as private sector banks are gaining market share too. So that's one area. The other one which we are looking at is telecom.

This sector has come out of a 12-13-year period of pain. Consolidation is now accelerating; the top three are becoming bigger; the other guys are reducing their footprint. The top players also want to be profitable now, so competitive intensity has significantly reduced. That is showing up in the numbers and they've been growing earnings far, far faster than any other sector. A third sector is pharmaceuticals. Pharma is not like FMCG; it has much more volatility in earnings today than it used to have 10-15 years ago. But still over a cycle, these companies are achieving a very decent growth rate.

What are the opportunities that you see from the reforms that have happened such as reforms in the coal-auction, mining, etc.
If you ask me, these auctions, both the spectrum and coal auctions, have actually taken away from the corporate sector. Earlier coal and spectrum were supposed to come to you free of cost. Now you've paid lots of money for it. To that extent, it is a burden on India Inc. But that is okay. I see it as a one-time readjustment of the way the business is done in this country. It's a transparent way of doing business. If tomorrow someone wants to start up a new steel plant or a cement company or an aluminium company, they know how and where to start. They have to buy bauxite in auctions, they need to buy coal in auctions and then put up a plant.

So the uncertainty has gone away and now the demand for capex has to restart. The demand for capex comes either from the domestic consumer or global consumer demand. Unfortunately, both are slowing today. Therefore, there is no urgency on the part of companies to invest in capex.

Why is the sales growth for India Inc so low?
Inflation is a reason for sure because the nominal GDP growth rate, which was 13-14 per cent, is now down to 7-8 per cent. More importantly, you had massive rural growth rates of consumption through the last ten years. At some point, that had to slow down. So, that is what is happening.

Traditionally, whenever Indian investors have put such record money in equity funds, it has not been a good sign for the market. This year we have record inflows in equity funds, so is this is a warning sign on valuations?
My personal belief is we haven't seen anything yet as far as demand for equities is concerned. There's so much more to invest. It is just that the amount of investor money that is stuck in real estate and gold is so high. There is not much left to invest into equity. So, we will see newer and much bigger inflows into equity markets from retail households, but only after we see some liquidity in the real-estate market so that one can sell one's holdings. If you ask me, Indian households today are over-invested in real estate and extremely poorly invested in equity.

So, what we have seen is just a fraction of what can potentially come in. If we can keep the real rate of interest positive for 1-1.5 years and which is what Dr Rajan has committed to, I'm sure we will see manifold growth in the amount of money that will come into the market from households.

Gold is liquid but the lady of the house will never allow you to sell it (laughing). Gold is liquid but that's the last thing you touch.

Global risks have made a comeback lately. What do you think of them?
People are worried on two fronts - global and local. On the global front, there is the Greece debt crisis, US rate hikes and, lately, the Chinese slowdown. I don't think global worries matter to India anymore because we are quite strong today on macros as compared to where we were in September 2013. We are well-prepared for the US rate hike. So, as to global worries, I want them to play out as soon as possible. Let us be done with those events so that markets can move on. Coming to local concerns, yes, the GDP recovery is not V-shaped. But, personally, I never expected a V-shaped recovery. Nor is the government or the central bank in any mood to facilitate that. So, we are fine with whatever is happening. We are very comfortable with a slow but sustainable recovery.

This interview appeared in the September 2015 Issue of Mutual Fund Insight.


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