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Interview: All Over for Easy Money

The way ahead is tough: Sabharwal told Wealth Insight the day Sensex crashed over 800 points

After Completing his chemical engineering from IIT, Delhi, in 1993, Sandip Sabharwal joined IIM Bangalore to do his post graduate diploma in management. He joined SBI Mutual Fund in June 1995. He started managing pure equity schemes and became the Head of Equity in February 2005. He left the AMC late in the year to become Lotus India AMC CIO. Excerpts from an interview:

What's your view on the current market levels?
The Indian markets have gone up by over 300 per cent over the last three years since the rally in the markets started. At this point of time valuations in the market look stretched with forward valuations of the market at around 18X expected earnings for 2006-07. However, the momentum continues to be strong. In this scenario, we believe that the next few months will be periods of high volatility with strong swings. The markets from their top can correct by nearly 15-20 per cent over a 3-4 month period. That is likely to form a base for the next upward move. The direction of the market with a long term perspective is clearly up and I believe that is what investors should look at.

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.

How tough is the way ahead?
The way ahead in terms of outperforming the markets and making strong returns is going to be extremely tough as the period of making easy money seems to be over. As such a strong research focussed approach to investments which involves both theme identification before it becomes a trend and avoiding speculative stocks will be extremely important.

Which sectors do you like now and why?
At this point of time we are positive on the capital goods, cement, infrastructure related, software, textiles and gems and jewellery stocks. We believe that strong pockets of opportunity also exist in a large number of other sectors, however these are stock specific opportunities where a bottom up approach is required, for example in sectors like automobiles and consumer goods where the opportunities are more company specific rather than sector specific.

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. However valuations in this sector have expanded rapidly over the last two years and as such one has to be very selective.

Cement and infrastructure related stocks are a direct play on the growth of the housing and infrastructure sectors in India, including the strong capital expenditure cycle that is on in India today.

A strong growth in per capita income over the last three years combined with a revival in the rural economy is creating strong growth opportunities for consumer good companies. These companies today are seeing both volume growth and pricing power and as such present a good investment opportunity. We believe that technology stocks today are one of the most reasonably valued segments in the market and are a good hedge against huge market volatility and will provide strong positive returns over the medium to long term. Growth prospects for a 20-30 per cent CAGR in this sector remain extremely strong.

In the mid-cap segment, sectors like textiles and gems & jewellery are likely to see an exponential growth in their sale and profitability over the next few years which will potentially create a large number of multi-baggers in these sectors.

Many of your mid-cap picks worked wonders for your funds at SBI Mutual Fund. But after the run of the past over 3 years, do you think the potential for significant out-performance has gone down, or are there still multi-baggers left to pick?
I believe the opportunity to pick out strong winners will continue till the point of time the economy continues to grow strongly at a rate of 7 to 9 per cent. There are also sectors where one can pick potential multi-baggers in outsourcing related sectors.

My view is that the market will always give us opportunities to pick 7-10 good stocks in a year which will not only outperform the markets but also provide absolute positive returns. It is because of this that we have a strong fundamental focussed investment approach at Lotus India AMC also where I and my team of analysts are continuously looking out for new ideas. Just to put this into perspective four of us in our team have met over 200 companies on a one to one basis over the last four months to get a micro perspective of how companies see their future to be. We combine this with our macro call on various industries and the economy to pick stocks to invest into. As such I believe that as long as we do our job properly and pick out stocks with proper due diligence there should not be too much difficulty in continuing with what has been done in the past.

What kind of an investor are you?
I consider myself an aggressive and patient investor. I typically try to take long term calls on companies into which I am investing. I make up my mind on which stocks I would like to take a bet on. If I believe in it, I pick it up whether or not it is fancied by other investors. Then, I hold onto it with conviction.

I have my own investment philosophy which is not a replica of any of the past investment gurus. A fund manager must have his own style. He can learn from others but must ultimately cultivate his own philosophy. One also needs to be focused in this field. If I believe in a stock, I am willing to stick to my belief without getting concerned about what other investors are saying about it.

The conviction to do this comes from experience, being successful and with time. One also needs to learn from past mistakes after all the market is above everyone. This is something that I am always ready to accept.

For example right now, there is a deluge of money in the market from foreign investors. For them, to buy into mid-cap stocks makes no sense since they are largely illiquid. So money is going into large-caps. As a result, a large majority of mid-caps have underperformed. So they could be a good investment right now. A large number of investors would not be willing to take a bet on such stocks as they do not have any short term momentum.

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.

You do not hesitate to be the first investor in a stock. How important role does instincts or gut feel play while you pick unheard names? What are the major concerns that you would like to watch out for?
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 to start with. 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, in my previous assignment we built such positions over time. You also need strong conviction. In equity investments, along with fundamental analysis, gut feel also plays an important role.