'The economy is looking up and that should benefit many sectors' | 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
Interview

'The economy is looking up and that should benefit many sectors'

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

In the previous part of this story, we learnt about his investment journey and views on economy. Here, we will get to know about Mirae's investment philosophy.

Mirae follows the 'growth at reasonable price' philosophy and attaches great importance to the 'margin of safety'. What are your anchors for determining it? How do you derive comfort on valuations while selecting a stock?
The margin of safety has two things. One is the current price and the other is the fair value. First, let's come to the value of the business itself. The value of the business is the function of various things which go into that business, such as growth, quality of growth and the strength of the business. And therefore, it is very important that we are extremely comfortable with them. For growth, it has to be the growth that is of high quality as in where the business model is not only growing but also the returns on capital employed are above average and all the growth should translate into commensurate good cash-flow generation.

The robustness of the business model is the first line of defence and from that, growth assumptions and the margin of the business flow. And then, profits and cash flow come. These are the first anchors of the valuation and that's why they should be the best. The second part is the numerical values of cash-flow valuations and traditional multiples that we use.

We check the valuations of the business using sensitivities across different key operating metrics to get to the range of values we are getting to. Also, for a given price, with the explicit period assumptions we have, what is the implicit growth? And are we comfortable with that?

But if I may just underline, the biggest thing is to understand the business and those key earning drivers. The value can have a range but if there is conviction in those business drivers, then the prices can be volatile but they can provide us with an opportunity to add at the time when otherwise people might be fearful and vice versa.

The second thing is the price itself. The market throws up a price on any given day. There, we have to exhibit the patience of not chasing the stock at any price. There is a price range up to which we are generally comfortable. One has to stick to it. So, it is a combination of both that works.

Both your funds - Mirae Asset Large Cap and Mirae Asset Focused - are generally closely aligned with their sectoral calls, though the approach to portfolio construction and position sizing may differ a bit. Does your investment process start with a top-down approach? Tell us about your approach to identifying your preferred sectors or market segments.
The approach to stock selection is essentially a bottom-up approach. We are seeking high-quality, well-managed growth companies at the best margin of safety. And as we are building up those stocks, we are cognizant of the benchmark weights at the sector level. We do not take significant deviation versus the benchmark at the sector level, especially for large sectors.

But individual positions could be as per our bottom-up conviction. We will be underweight on the names that we find expensive or the ones with which we are not comfortable. And we will be reasonably overweight on the names with which we are comfortable in terms of their growth and improving quality. And this plays out across sectors.

For instance, we are overweight on insurance and private corporate banks relative to respective stock benchmark within overall BFSI. Within consumer, we are much more overweight on durables and more underweight on staples.

The position sizing depends on the fund. The large-cap fund has to have 80 per cent in the top 100 names. The Focused Fund is multi-cap fund but has to have only 30 names, so the positions are more concentrated.

Your recent portfolio moves suggest that you are moving away from defensives such as FMCG while building positions in sectors such as services and insurance. Tell us about your thoughts here. What other sectors are you bullish on?
FMCG is a sector where typically growth rates are not so exciting, whereas valuations ride at the top end. Hence, at an aggregate level, we are underweight in it. If we get some good ideas at the bottom-up, we can refresh or re-look.

As we were discussing, the economy is looking up and that should benefit many sectors, including financial services, etc.

We are essentially looking at four buckets. The first is sectors which are addressing large-sized structural opportunities. Given the low per-capita consumption and other socioeconomic demographics, sectors ranging from consumption categories to discretionary to financial services - insurance, mortgage, personal credit, etc. - all have good growth ahead of them. The second is sectors where India has a competitive cost and quality advantage on the global stage, for example, IT and engineering R&D services, pharmaceuticals. The third is businesses with deep value or a special situation. Here, we believe the stock can deliver healthy returns on capital employed on a normal basis but right now for some reason, that sector is in problem or in a downturn, maybe due to certain global cyclical issues or idiosyncrasies particular to that firm or industry. The last and smallest space is for new-age firms typically based on platform business models. We have built some small weights here and are waiting to see how these managements execute and we will accordingly calibrate our holdings in some of these.

Mirae Asset Large Cap Fund is among the few actively managed large-cap funds to have beaten the index with great consistency. What has worked so well for you?
I believe the kind of approach towards both stock selection and portfolio construction is something that has worked and will work over the medium to long term. The past record does point towards that.

When the markets are in a very strong upward move as we have witnessed, then the portfolios could underperform. But I think the approach I have of not chasing any momentum should work out well over the medium to long term. So, it's all about reinforcing conviction calls within the framework of SEBI mandates and sticking to the course.

As they say, in the short term, the markets behave like a voting machine but in the long term, it is like a weighing machine where the merits of individual businesses matter more.

Your large-cap fund is now over Rs 30,000 crore in size and currently, the fourth largest actively managed one. Is size becoming a concern? What kind of SIP book is built up?
The SIP book is about 180-185 crore a month. As 80 per cent has to be in the top 100 names in a large cap, liquidity is not a concern. The way I am looking at them is in a more dynamic way. It is not that the fund is becoming big and the rest of the market is not growing. Ultimately, these corporates and their growth are going to be a function of the underlying economy. And I have a very constructive outlook there.

All inputs like workforce and other measures like infrastructure, technology, etc., are in place. I believe from a little less than three trillion dollar economy, India will become a five trillion dollar economy in about five to seven years' time, And a 10 trillion dollar economy subsequently. And it cannot just be because of an unorganised or the small sector. A lot of large-sized companies are going to participate profitably here. If you go back two decades, India was less than a trillion dollar economy and a lot of leading companies of that time have continued to remain relevant.

But surely, with the remaining 20 per cent of the portfolio, I cannot look at small caps.


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