Playing the 'brands' theme

Tax-saving funds naturally attract retail investors, who are looking at every possible option to reduce tax outgo. Indiabulls Mutual Fund has launched 'Indiabulls Tax Savings Fund', an open-ended Equity Linked Savings Scheme (ELSS). Kumar Shankar Roy interacted with Sumit Bhatnagar, Head-Equity Funds, to understand what's the USP of this product. Bhatnagar, who worked with SEBI prior to Indiabulls AMC, is aiming to deliver superior risk-adjusted returns by investing in a concentrated portfolio that will play the 'brands' theme. Read on.

Edited excerpts
Tell us about the equity investment strategy for Indiabulls Tax Savings Fund.
We are looking at identifying companies that are themselves very good brands, or have brands under their product portfolio. The idea is that established brands weave a virtuous cycle around the company. This helps it mould the entire ecosystem to its advantage, which in return benefits shareholders not only in the form of strong fundamentals and strong financials but also get premium valuations in the stock market.

This does not mean that brands alone will be the criterion for stock selection. Entire in-depth fundamental analysis would be done to back the investments. Companies that have robust fundamentals would be there, but companies/sectors like PSU Banks, who otherwise have very good brands but are facing challenges like bad loans, may not be there. Ideally, an investor through our fund will be getting exposure to very good brand companies that also have sound fundamentals and bright prospects.

From an investment point of view, is there any research that suggests brand companies give higher returns than others?
We have done an in-house study on this subject. Our findings indicated that companies with established and prominent brands not only delivered superior PAT (profit after tax) growth but also have very good stock market performance as well. Some examples that we came across include a premium undergarment maker, a luxury Indian motor bike maker and a leading car maker. These companies not only reported robust profit growth but also were very well rewarded by good stock market performance. These are just some case-studies. We came across more than 40-50 such companies that historically have generated superior risk adjusted returns and have been fairly consistent market-beaters. The companies typically have high-quality management, strong balance sheets, very little leverage and also enjoy high return on capital/equity.

At the top layer, you have a universe of companies that are brands themselves or have a bevy of well-known brands. Tell us about the rest of the investment process that your fund will employ.
Once we have an universe of brand companies, we will conduct in-depth fundamental analysis where we will understand the growth prospects, valuation, balance sheet, return ratios, etc. Complete management meeting would be done. Both supplier and buyer channel checks would be done. Then, qualitative analysis would also be performed in terms of understanding management reputation, business strategy, competitive positioning, quality of earnings and corporate governance. After that, the stocks will be presented to the investment committee for approval.

What would be the style of the fund? How many stocks would you typically own in the portfolio?
It would predominantly be a multi-cap fund, where 50% would be large-cap and the balance in mid & small cap stocks. Portfolio construction shall be predominantly growth oriented; stock selection to be based on bottom-up analysis. It will be a concentrated portfolio with 30-35 stocks. The fund will be benchmarked against BSE 500.

Which are the kind of stocks will you avoid?
Companies that do not have a face will typically get avoided. For example, in the auto ancillary space, the big companies which are well recognized brands will be looked into but the smaller ones, not so well known names, may be avoided. Broadly speaking, the B2B (business to business) kind of companies will not get that much attention.

But B2C companies command high valuations. Do you think there is a good upside for these stocks in a 3-year kind of time frame?
We will be very conscious of valuation. You have rightly said that valuations in these stocks are high. But typically this kind of stocks have always traded at a premium and with the kind of opportunity that is available right now, we are fairly confident that the stocks will continue to deliver the strong performance that they have done in the past. Decent returns can come.

Tax planning funds have a different redemption pattern given the three-year lock-in compared to the diversified equity schemes. How much does this factor play a role in fund management and investment?
A 3-year lock-in is a blessing in disguise for any fund manager. This allows us to take a long-term view of the stocks. This also helps the investors enjoy stable returns, and lower volatility.

Why are you launching an ELSS fund at the current juncture?
The main reason is that we want to expand our offerings. Its not that there is liquidity in the market and so we are coming out with a fund. We are a long-term player in the market. Liquidity is a short-term phenomenon.

What are the cash and exit strategy of your fund?
Typically, we would like to be fully invested. This is because for 3 years we will not face any redemption. The exit strategy for the fund would be that when the target prices are hit, we will review the respective investment thesis. If we believe there is more upside, we will continue holding. If we think differently, we will book out. It may also happen that there may be some event which would require us to take a special look. If a stock has run ahead of the market, we might prune our exposure and then look to re-enter at lower levels.

This article was originally published on November 01, 2017.