The markets are touching new highs every day. What is your view going forward?
I think that investors who are coming into the equity markets or equity funds should always take a long-term view. The performance of the stock markets is finally a reflection of the future growth potential of the economy. The Indian economy is entering into a new growth trajectory where from a 5-per cent kind of sustainable growth rate, we are moving to a level of 7 per cent plus growth rate. With this kind of growth rate, the overall corporate sector earnings should grow at an average 15-20 per cent over the next few years. If we put this in perspective of where the markets are today, the P/E ratio on a one-year forward earnings is around 12.5-13 times, which is not expensive given the fact that in nominal terms the economy is likely to grow at 12-14 per cent.
As such there will always be near term volatility in the stock markets and if the markets go up by 30 per cent, they will also always correct 10 per cent. This is something investors should be ready for. But the long-term trend remains extremely positive.
Today there are several drivers of the Indian economy, which include high consumption growth, a strong capital expenditure cycle, large-scale infrastructure investment and strong outsourcing opportunities. On a five year perspective, the Indian stock markets should give a return of 12-15 per cent and for long term investors who are taking a 15-20 year view, returns can be as much as 15-20 per cent. There are two reasons why long-term returns should exceed short-term returns. The first being that over the next 3-7 years India's international rating will get upgraded to investment grade from the current level of below investment grade. This will lead to one level of re-rating in the markets. The second re-rating will happen over the long term, as India becomes a developed economy over the next 15-20 years. As such long term investors will make much better returns than short-term investors.
What sectors do you like now and why?
I am positive on the capital goods, engineering, cement, automobiles, technology, pharmaceuticals and media sectors among the larger sectors. I think capital goods is the sector, which has the clearest earnings visibility over the next three years in this country. Most of the industries are now operating at high utilisation levels plus there is a focus on infrastructure. This will drive order books and earnings growth of engineering companies. Besides these factors, today there are strong outsourcing opportunities in a large number of engineering segments.
A growing middle class, and cheaper and easier financing options will drive growth in the auto sector; the penetration of cars is still pretty low in the country and is likely to jump substantially over the next three to four years. Cement is another sector where I am extremely positive given the fact that there is no capacity addition over the next three years and this is likely to give huge pricing power to these companies. Here, the price movement over the medium term can be like that of the oil price movement, where no one even imagined the kind of prices that we are seeing today two years back when crude was trading at $10-12 per barrel. I am positive on technology but the only factor which concerns me is a lack of pricing power and increasing salary costs which will have an impact on the margins of the companies as volume growth slows down. In technology and pharmaceuticals, India has a long-term competitive advantage, which will continue to play out over the next few years. Media is a sector, which is coming out of a trough and should do well as the overall advertisement spend increases.
Besides this I am also positive on a number of emerging sectors like textiles, construction and auto ancillaries. These industries today are of a very small size relative to their potential and should generate huge returns for shareholders going forward.
My approach to investing has been largely bottom up. I try to evaluate a company based on its competitive positioning, the growth potential of the business or businesses in which it operates, the available market place for its goods or services, the pricing power and sustainable profits levels of the company in the medium term, earnings visibility and its return ratios.
I typically like to take a call on companies after visiting them and evaluating the management bandwidth of the company along with its business outlook. What I have also observed over the years is that one has to just evaluate the management of the company and its ability to deliver above normal returns to investors. Such companies are often investment worthy as the management will find avenues for growth which an investor is not able to visualise at a given point in time.
The bottom-up approach to investing typically brings one to the same results as the top-down approach but in a more efficient manner, because here one is focusing first on micro research and then trying to evaluate the same in a macro environment. For example, we were one of the first investors in the automobiles sector. After meeting a whole lot of auto companies in early 2002, I realised that all these companies had undergone substantial restructuring over the previous five years and were seeing significant volume growth. Volume growth combined with no capex and consistent cost cutting was a potent combination in an industry with high operating leverage. My key picks at that time were Mahindra and Mahindra at Rs 100 levels and Tata Motors at Rs 75 levels. An overweight position in these two stocks based on bottom up research finally led me to the same result, as a top down positive view on the auto sector would have resulted in.
Similarly there are a whole host of mid-cap stocks where I have been the first to invest in over the last three years, which include stocks like United Phosphorus, Thermax, Balrampur Chini, Apollo Tyres and Shasun Chemicals. I think that the key to making money in mid-cap stocks is to buy them when they are very cheap, illiquid and when no one is looking at them. Eventually as the companies start delivering results consistently quarter on quarter more and more people start looking at these stocks and the liquidity builds up. But since these are mid-caps with a limited floating market cap the returns can be substantial. At this point of time I would call myself a value-oriented growth fund manager. This is because I believe that value without growth finally does not get translated into positive stock price movement.
You have been a successful stock-picker. What is your process?
I like to carry out my own internal research before taking an investment decision mainly because I have realised that the views of external analysts are likely to be biased at best. Equity analysis is a nascent industry in this country and as such the experience levels and the talent pool is very limited. I am firm in my view that equity investing is an art rather than a science. The investor has to not only have an ability to carry out analytical analysis but also be able to independently evaluate softer issues like management competence, future business environment, etc and have a good feel of the way the stock is likely to behave. Before going in for an investment I would typically like to be confident of the long term growth prospects of the company so that one does not have to monitor the stock on a day-to-day basis. The stock should ideally have the ability to perform even in adverse market scenarios and provide a positive return. I know that it is a difficult task to expect this to happen all the time, however I always try to go in for such an investment.
You do not hesitate to be the first investor in a stock.
We take a view on companies based on fundamentals, away from what people are saying which can be justified by the stage at which the company is in. If we are investing in a new company, we take a smaller stake if we are not very confident. When other investors start coming in, one can increase holdings as the stock will gain presence in the market and also result in higher liquidity. For a large number of stocks, we have built such positions over time. The other stocks are a small percentage of the portfolio.
Conviction comes from experience, being successful and with time. In equity investments, along with fundamental analysis, gut feel also plays an important role. Let me give you an example. We invested in Adlabs at about Rs 120-130 after attending a group meeting along with many other fund managers and other investors. We took a view that the entertainment industry in India is in a nascent stage and it has great potential. People who look at current year's earnings will always find the stock expensive. We bought many construction companies thinking that after five or ten years, these companies would see their turnover rise 20 times. When that happens, even the stock price will increase manifold.
Can you tell us about each of your funds? How do you manage them to achieve the objective?
I manage a wide range of equity funds at present, which we have been able to operate in accordance with the investment objective through disciplined investing. Some of the prominent funds that I am managing are as follows:
Magnum Contra Fund: This is one of our best performing funds and has performed consistently well over the long run. It is a diversified equity fund, which invests in a contrarian manner. It invests in stocks/sectors which are out of fancy at a particular point of time. This fund is not a value fund as is commonly misunderstood. In this fund we take bets on sectors very aggressively. Just to give an example around four months back most people were very positive on steel and negative on the automobile sector. We felt that steel was likely to correct, so we aggressively invested in the auto sector and made money. Similarly we take bets in this fund on large caps and mid caps. Till six months back we were invested in mid-cap stocks to the extent of 65 per cent, which we changed to a large-cap weightage of 65 per cent two months back as we believed at that time that people were focusing too much on mid-caps and large-caps were out of favour.
Magnum Global Fund: This fund has also done consistently well over the last three years. This is an aggressive diversified equity fund with specific focus on mid-cap and small-cap stocks with capitalisation between Rs 100 crore to Rs 3,500 crore. The fund takes a judgement call on strong growth prospects of companies, which are identified bottom up and balancing it with the risks involved. The fund seeks to invest in mid- and small-cap stocks by identifying them before the market recognises their high growth potential and hence the reducing risk profile. We intend to compensate the higher risks with higher returns. In this fund, we have a concentrated portfolio of 20-25 stocks on which we take strong bets.
Magnum Taxgain Scheme: This is an equity linked saving scheme which makes long-term investments in stocks consistent with the average duration of investor funds (typically over four years). The fund invests in companies with sustainable and scalable business models which can lead to significant outperformance over the long run. Over a period, the portfolio will reflect a judicious mix of stock which will provide consistently good returns in the near, medium and long term. This is one of the best performing schemes in the country over the last three years and is also the largest ELSS scheme in the market today. A commonly misunderstood thing about ELSS schemes is that investors can put in only Rs 1 lakh in these schemes. This is actually not true as investors can invest any amount with a lock-in of three years.
Magnum Emerging Businesses Fund: This is a pure growth scheme, which was launched last September and has done well since inception. This fund invests in stocks of sectors which are considered emerging at any point of time. We invest at a time when the market capitalisation of stocks in such a sector is small relative to the size of the opportunity on account of global/domestic outlook.
Besides these I am handling the Magnum Multiplier Scheme which is a 70:30 large-cap to mid-cap fund, Magnum Equity Fund which is pure large-cap, Magnum Mid-cap which is pure mid-cap and Magnum Pharma which is a pharma specific fund. Each of these funds is managed in a focused manner which is reflected is the composition of their portfolios.
Handling funds with different objectives is a very challenging task and this is possible only through a focused approach to investing and managing funds through an investment philosophy, which gels with the investment objective of the fund. In SBI Mutual Fund, most of the funds are clearly differentiated in terms of the way they will be investing and as long as we stick to them I think the task is not so difficult. However, imbibing this sense of discipline has come through a lot of effort and hard work put in over the past three years.
What would you attribute your recent success to?
I would attribute my success to having an investment philosophy, which is not a me-too of either any of the existing or past investment gurus. I think that as an investor one has to go through the investment styles of all past masters of investments but finally have one's own style. I believe this is what I have been able to do over the last 10 years of my experience in this field. I strongly believe that to do well in this field one has to take strong calls on investments, stick to ones' beliefs, learn from past mistakes without letting them overwhelm you and have a focused approach to investing without bothering about what anyone else is doing. Subsequent to a strong due diligence, I buy or sell stocks depending on my conviction irrespective of the general market opinion which I believe has to be a feature of a fund manager who has to perform over the long run.
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