'There is a little bit of concern about the valuations and that should not be underestimated' | Value Research Gaurav Misra, Co-Head - Equity, Mirae Asset Investment Managers (India) Pvt. Ltd. shares his thoughts on market conditions, his investment principles and lessons

'There is a little bit of concern about the valuations and that should not be underestimated'

Gaurav Misra, Co-Head - Equity, Mirae Asset Investment Managers (India) Pvt. Ltd. shares his thoughts on market conditions, his investment principles and lessons

Just when the pandemic seemed to be receding, the Omicron threat has posed a new challenge for the markets and the economy. Coupled with it are other macroeconomic concerns. We speak with Gaurav Misra of Mirae Asset Investment Managers (India) Pvt. Ltd., about the market and economic scenario, Mirae's investment philosophy, his large-cap and focused funds, and his career lesson.

You have spent over 25 years in investment management. Tell us about the initial days of your investment-research journey, especially any memorable experiences or incidents that have greatly influenced your thinking.
I started my career in the investment-research field in 1995 and was in the 'sell' side of institutional research till 2004. Thereafter, I have been on the 'buy' side as an analyst or a fund manager. But even before that, from 1999 to 2001, I had also been associated with a private-equity fund on the 'buy' side and since 2004, I have been working on the 'buy' side and managing funds.

Some of the things that I recollect - one is that the Indian macros and growth used to be much weaker than today. The second thing was that back then, when one would use the classic discounted cash flow (DCF) for stock selection, one would get more investment options. Thus, a larger proportion of stocks used to have a price-value gap than in recent times. Foreign institutional investors (FIIs) had just started looking at India and the valuation levels were reasonably lower in comparison to what they have come up to now.

In terms of my own learnings, while one could find more cheap stocks at that point in time, cheapness would not necessarily mean that those stocks would be medium- or long-term compounders. One could make money as a transaction by getting in rightly and then also getting out but not necessarily as a growth compounder.

Thus, if the starting premise when selecting a business was to buy and hold, one had to look at other factors. First was the strength of the business model. The stronger the business model, the greater is the chance to come out better, even when there is economic vulnerability and weakness on account of maybe domestic issues or some international cues which have hit the system. Second was the issue of capital allocation and what the promoters or the management would do with the money if it could make inroads successfully. This is especially true for mid-sized companies. If there is a very well-run company but if it misallocates capital or makes wrong acquisitions, its ability to give compounding returns gets derailed.

The markets have been in a state of frenzy but there are concerns, particularly on the global front with rising inflation, excesses of loose monetary policies, the face-off with OPEC, etc. How do you view these in the context of the Indian markets? What concerns you the most at the moment?
Firstly, I would say that for investors and as a manager, if the investment horizon is aligned and if it is for a medium to long term, say one-and-a half years plus and beyond, which I think is necessary and the right horizon to have for equities as an asset class, then we have to be prepared to deal with some of these issues mentioned by you. They will cause volatility in the stock market and in underlying stock prices. But as I said earlier, if businesses have their own value proposition, then they will overcome volatility and add value.

The issues related to the loose monetary policy will eventually unwind, thereby causing some reversal in risky assets. We have already seen signs of that as far as emerging markets are concerned. But there will be short-term volatility on that count.

I am not as concerned as I would have been in 2013-14. There are certain differences as a starting point from India's point of view. Firstly, India is on a much better macro footing. Whether it is the growth outlook, the internal fiscal deficit, or trade and current-account deficits, we are nowhere near a weak macro position as we might have been in 2013-14. Our trade and fiscal account deficits have actually been in surplus till the last quarter. Maybe they will get into deficit but not to the extent of a major worry. We also have solid capital inflows against that. The current trend of tax collection is also ahead. So, the fiscal deficit might be lower this year than what was budgeted. The growth is also fine and even the latest readings, along with its high-frequency indicators, suggest the same.

Although we are sensing inflation worries, it's within that upper bound of the RBI. And the RBI itself is following a fairly accommodative and appropriate stance, given other additional concerns of Omicron. The energy markets have been slightly tighter and maybe there is some underinvestment in crude. But I think up to 75 [$/barrel] levels of crude on a sustainable basis, it should be alright for the country. There could be a spurt for a quarter or two with all the OPEC parleys but I think it should not be such a big overhang for the Indian macros.

So, I am not overly concerned about these. But Omicron, if the virus is truly to be not just highly more contagious but also more virulent, then that's definitely going to be a concern. But besides that, Indian macros are stable.
Indian corporate earnings have been very weak for the preceding three to four years. Corporate earnings as a percentage of GDP have been at the lowest level in the past two decades. It can't get lower than that.

As tax rates have been reduced, big sectors like banking are moving from loss to profit. Sectors like telecom are now consolidated and price hikes are happening, so they should also get to better profit levels. Cyclical sectors, like automobiles, which were in a downturn should also eventually pick up. I think the corporate-earnings outlook for the next three to four years is going to be in double digits, between the 14 and 16 per cent band. All these provide support to the market. Thus, at an aggregate level, the macro and corporate outlook are decent. But yes, there is a little bit of concern about the valuations and that should not be underestimated. I think superior stock selection would work here.

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