ET BureauSome mid-sized companies, which got dragged into the market downturn, didn’t merit such a fall. They are now attractive, widening the opportunity basket, Badshah tells ET Wealth.
How long do you expect global risks to weigh on markets?
Most of the problems stem from the dramatic fall in commodity prices. This can be attributed to the stoppage of quantitative easing two years ago, and partly to the China slowdown. Commodities generally have a way of sorting themselves out through adjustments in demand and supply. In a typical commodity downturn, you will find that when commodity prices come to a stage where incremental supply is not viable, those who are at the higher end of the cost curve find it difficult to survive. Those high-cost capacities start winding down, which, at some level, starts restoring the demand-supply balance. That adjustment process will have to happen, which would then lend some stability to the global markets. This can take a couple of years, but the market will start reading the bottom long before it happens.
If and when foreign investors return, will India be looked at differently compared to other emerging markets?
If some of the existing macro factors which are positive for India, such as lower commodity prices and a relatively strong currency situation, remain in place, India will stand out. We are growing at a healthy pace, even as some other emerging markets are contracting. If some other factors, like monsoon, work in our favour, India will be seen in a much more positive light.
Are there good buying opportunities in the current market?
We have seen a fairly good correction; a part of it warranted. There are some mid-sized companies, which got dragged into the market downturn, that have nothing to do with, say, the China slowdown or commodity downturn. These companies, which didn’t merit such a fall, have certainly become attractive. So, the opportunity basket has widened. Even some of the companies that were richly valued so far seem reasonable now. Our need to scout for new ideas has waned, as some of our existing stocks are looking more attractive now. I would rather buy more of what I already have than look elsewhere. Besides, we run with a limited number of stocks across most funds, and don’t see much churn.
How are you positioning your funds now?
We have a fairly large exposure to automobiles, where we have seen decent correction in some leading stocks. We have augmented our position in this segment. We have also been reasonably well-exposed to NBFCs. We like this segment as there are many specialised firms, which are not as affected by issues relating to NPAs. Their growth rates are similar to the operating growth of many banks. We have looked at select consumer goods names, which have pricing power and are thus likely to maintain margins even if commodity prices rise. Mid-sized, niche technology companies are also a preference. These too did not merit a correction, but have fallen with the market. These are the companies that have actually delivered good earnings growth in the recent quarter. We also continue to look at IPO opportunities, but only in areas which fit our investing philosophy of quality, growth, longevity and price.
Most of your funds have been table toppers. What has worked well for you?
We have always had a very clear philosophy about how we want to run the funds. It does not vary for different fund managers, even though they have the liberty to pick stocks within the broader philosophy. This allows us to focus on certain types of businesses. We prefer companies that boast of quality, growth and longevity. We have our own parameters of judging whether it is a quality business. We like companies with certain competitive advantages, healthy corporate governance standards and a decent dividend payout policy. We prefer to stay away from companies that are highly leveraged, have multiple earnings streams or outsized global exposure. This philosophy has allowed us to find success over the past few years.
What is the rationale behind your penchant for having concentrated portfolios?
Running a concentrated portfolio of 18-20 stocks does not come easily to most fund managers. But if one ensures enough quality among their picks, the risk actually is much lower. If your quality checks are in place, the possibility of a blowout is very low. Our flagship funds in the PMS business, running successfully for more than a decade, run on the same principle of buying and holding concentrated, high-conviction portfolios of good quality stocks. These have not only outperformed their respective benchmarks, but have also exhibited less volatility. In mutual funds, our beta and volatility is lower than the benchmark, despite concentrated exposure, because the underlying stock selection is hygienic. If you compromise on quality, you will get into trouble. We don’t look for new stock ideas every day. We are happy to run with four to five good ideas in a year.
Do large-caps seem more attractive than mid-caps now?
Large-cap index constituents have high business exposure outside India. Over the past decade, many of these companies have made several acquisitions abroad. In most cases, a large portion of their revenues come from international operations, which have witnessed challenges in the past few years, causing earnings to decline. Mid-sized companies are mostly domestic-driven. These have been much more consistent in terms of growth. Markets always gravitate towards certainty, which explains the attraction towards mid-caps. But there are pockets within the mid-caps that have over-extended in valuations. While large-caps as a basket currently look more attractive than mid-caps, it all depends on individual companies.
How long do you expect global risks to weigh on markets?
Most of the problems stem from the dramatic fall in commodity prices. This can be attributed to the stoppage of quantitative easing two years ago, and partly to the China slowdown. Commodities generally have a way of sorting themselves out through adjustments in demand and supply. In a typical commodity downturn, you will find that when commodity prices come to a stage where incremental supply is not viable, those who are at the higher end of the cost curve find it difficult to survive. Those high-cost capacities start winding down, which, at some level, starts restoring the demand-supply balance. That adjustment process will have to happen, which would then lend some stability to the global markets. This can take a couple of years, but the market will start reading the bottom long before it happens.
If and when foreign investors return, will India be looked at differently compared to other emerging markets?
If some of the existing macro factors which are positive for India, such as lower commodity prices and a relatively strong currency situation, remain in place, India will stand out. We are growing at a healthy pace, even as some other emerging markets are contracting. If some other factors, like monsoon, work in our favour, India will be seen in a much more positive light.
Are there good buying opportunities in the current market?
We have seen a fairly good correction; a part of it warranted. There are some mid-sized companies, which got dragged into the market downturn, that have nothing to do with, say, the China slowdown or commodity downturn. These companies, which didn’t merit such a fall, have certainly become attractive. So, the opportunity basket has widened. Even some of the companies that were richly valued so far seem reasonable now. Our need to scout for new ideas has waned, as some of our existing stocks are looking more attractive now. I would rather buy more of what I already have than look elsewhere. Besides, we run with a limited number of stocks across most funds, and don’t see much churn.
How are you positioning your funds now?
We have a fairly large exposure to automobiles, where we have seen decent correction in some leading stocks. We have augmented our position in this segment. We have also been reasonably well-exposed to NBFCs. We like this segment as there are many specialised firms, which are not as affected by issues relating to NPAs. Their growth rates are similar to the operating growth of many banks. We have looked at select consumer goods names, which have pricing power and are thus likely to maintain margins even if commodity prices rise. Mid-sized, niche technology companies are also a preference. These too did not merit a correction, but have fallen with the market. These are the companies that have actually delivered good earnings growth in the recent quarter. We also continue to look at IPO opportunities, but only in areas which fit our investing philosophy of quality, growth, longevity and price.
Most of your funds have been table toppers. What has worked well for you?
We have always had a very clear philosophy about how we want to run the funds. It does not vary for different fund managers, even though they have the liberty to pick stocks within the broader philosophy. This allows us to focus on certain types of businesses. We prefer companies that boast of quality, growth and longevity. We have our own parameters of judging whether it is a quality business. We like companies with certain competitive advantages, healthy corporate governance standards and a decent dividend payout policy. We prefer to stay away from companies that are highly leveraged, have multiple earnings streams or outsized global exposure. This philosophy has allowed us to find success over the past few years.
What is the rationale behind your penchant for having concentrated portfolios?
Running a concentrated portfolio of 18-20 stocks does not come easily to most fund managers. But if one ensures enough quality among their picks, the risk actually is much lower. If your quality checks are in place, the possibility of a blowout is very low. Our flagship funds in the PMS business, running successfully for more than a decade, run on the same principle of buying and holding concentrated, high-conviction portfolios of good quality stocks. These have not only outperformed their respective benchmarks, but have also exhibited less volatility. In mutual funds, our beta and volatility is lower than the benchmark, despite concentrated exposure, because the underlying stock selection is hygienic. If you compromise on quality, you will get into trouble. We don’t look for new stock ideas every day. We are happy to run with four to five good ideas in a year.
Do large-caps seem more attractive than mid-caps now?
Large-cap index constituents have high business exposure outside India. Over the past decade, many of these companies have made several acquisitions abroad. In most cases, a large portion of their revenues come from international operations, which have witnessed challenges in the past few years, causing earnings to decline. Mid-sized companies are mostly domestic-driven. These have been much more consistent in terms of growth. Markets always gravitate towards certainty, which explains the attraction towards mid-caps. But there are pockets within the mid-caps that have over-extended in valuations. While large-caps as a basket currently look more attractive than mid-caps, it all depends on individual companies.
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