Micro and midcap companies will outperform largecap companies, Vinit Sambre, Vice President & Fund Manager of DPS BlackRock told CNBC-TV18.
Sambre is bullish on industries like consumer durable goods, textiles, specialty chemicals and small non-banking financial companies (NBFCs) in the long-term. Visibility of earnings of companies has improved and India is gaining in comparison to its competitors like China, he said.
Government’s capex investment plans will benefit small and mid cap companies through order wins in the near term, he said.
Sambre is expecting capital goods, automobile and industrial sectors to grow in first phase when the demand picks up in the economy.
Earnings will be subdued in next two quarters, but small and mid-cap companies will be beneficiaries of operating leverage that will drive earnings, he said.
Below is the transcript of Vinit Sambre's interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Sonia: Your microcap fund has outperformed the benchmark by nearly 30 percent in the last 1 year. But considering the micro and macro environment right now, do you think this outperformance can continue substantially going forward?
A: We definitely believe that in a bull market, small and midcap as a category tend to outperform the large cap and our view on the market for the next three to four years is quite positive. We hold the view that equity as a class is going to outperform and when we see this outperformance, the small midcap and the microcap as a category should outperform. As far as the microcap fund is concerned, we have been very clear about the strategy on the funds. We look at having a bottom-up stock selection approach where a large amount of emphasis is placed on having a very detailed due diligence on the company.
Also, it is of utmost importance to own great businesses having great managements and added with that there is a lot of focus on the back-end research process, which we follow. All of these have yielded good performance in the past and I don’t see a reason why these shouldn’t continue in the future.
The endeavor will be to continue the stance and only think from the macro perspective, the when we see the investment cycle picking up, there can be some marginal changes in the portfolio linked to this investment cycle, but broadly the strategy is going to be followed and should yield definitely good results.
Anuj: So what are your investment ideas or themes that you are currently betting on for outperformance?
A: Broadly, what we have observed is some of the themes which have played very well has been the themes where there has been shift which is taking place from the consumer side from unorganised to organized. We have seen there are many categories within this where this theme has played out well for us and that still continues because as a country we are quite under-penetrated in most of the categories in the consumer durables and many other segments as far as the consumers are concerned.
So, that is a big theme which should continue, we are still under penetrated. As the demand momentum picks up and as the economy picks up, that theme will play out well. Few other themes which we are bullish about is the specialty chemicals category where we have seen that the India as a country has started gaining as compared to China, so in terms of being competitive or the other factors, India has gained proportion as compared to China and we are seeing good amount of business continuing to come to the Indian companies.
The visibility of these businesses have gone up significantly, so in terms of the visibility of businesses and the broader thing- some of the specialty chemical companies are likely to do well over the next three to four years and we are betting on that.
Third theme, that again a similar theme is a textile story where we have seen that some of these companies again as compared to China, we are becoming more competitive and these companies are gaining. The good part about all of this is that the business which is coming from the developed markets, they provide a good amount of consistency and also visibility for the business which improves the predictability of some of these businesses and we have also seen the 'Return On Capital Employed (ROCE)s of these companies improve quite a lot, so we are betting on that category as well.
Lastly, some of the fast growing Non-bank financial companies (NBFCs) where the companies have been in a position to maintain their balance sheet quality; those have played well and will continue to do so. We like these small NBFCs which have potential to grow significantly as we see growth coming back in the economy and ability to maintain the balance sheet quality is very high there, so we are betting on some of these NBFCs as well.
Sonia: That is a lot of sectors you spoke about. Your top picks are textiles, chemicals and NBFCs. Now some of these companies have run up about 3-5 times in the last one to two years. Do you have the valuation comfort or is it time to search for new sectors?
A: The valuations have gone up significantly, but the size and scale of opportunity which we see going forward is again very high and we don’t see the size of opportunity coming off in the near term and again the good part is that most of the companies are also moving up the value chain where the focus is on improving value addition, unseen margins, on spending less on capex and improving the ROCE.
These factors are quite positive and along with that if you have predictability of one to two years with reasonable set of valuations then that is a pretty good factor to continue to hold a positive view.
Anuj: Around one year ago, people were pushing up for tyre, logistic, railway, defence companies to be the next big leaders but we have hardly seen any of these names from any of these sectors in your portfolio, any particular reason for that?
A: Definitely the thought process is that the government’s intention to spend money on some of these sectors is pretty high although we haven’t seen those spends coming out today and hence we see lack of names there but the point is that as I mentioned earlier, the government focus is going to be on these segments. They are on track as far as these capex are concerned. It might have got delayed because of whatever reasons we know about them but they are on track, things are coming back.
When we talk to the companies, they are quite hopeful, so we will see these spends to come back and those anyways are going to be the key driver of the economic activity because to us what we believe is that the whole momentum of GDP coming back has to start with the government capex coming up and where we don’t see they have any wrong intentions, they have the right intentions so that will come back and at some point in time we will have to take a call.
We continuously keep analyzing these segments and if any good meaningful opportunity is available at good valuations, we will definitely look at them.
Sonia: So what are you looking for in the small and midcap companies? Is it capex cycle revival or is it more to do with operating leverage?
A: Today the small and midcap companies- some of the stronger companies have already set up their capacities, they are all operating at lower utilization levels, so I don’t think in terms of capex they will be first ones to start spending, it will be the government capex which has to initiate the whole process and post that, the private companies will come up.
Depending upon how the demand shapes up, they will start to spend but initially they will be beneficiary of the operating leverage because these capacities as and when they start getting utilized, there will be enough operating leverage to play out and that itself should drive the earnings in a meaningful manner. So, you are right, the small and midcap companies will have great operating leverage in the initial phase.
Sonia: So which sectors you expect the operating leverage playing out the most in the next few years, will it be chemicals, textiles, auto ancillaries or may be even something like pharma?
A: Industrials or capital goods, auto ancs, these sectors to mind are ones are where the leverage will play out significantly in the first phase of the demand pickup.
Anuj: Why have some of the older and established companies like Rallis not been able to do anything in the agro space or not been able to capitalize while some of the new names have been able to do that?
A: India has great enterprising talent and there are so many companies with great management, they are lying not seen by investors and these people have great strategies, which is what we see.
The winners of yesterday may not be the winners of tomorrow, which will depend upon how each of these companies are strategizing their business and even within each of these categories, there are numerous aspects which keeps changing, so in case of agro-chemicals one has to be taking initiatives in terms of launching your products, one has to take initiatives in terms of having portfolio of products, one has to take initiatives, see it as a business, as a combination.
So, these initiatives which actually matter and determines the success factor for some companies for a given period of time and for some companies for a given period of time but most importantly for one to be successful, one has to be on top of these initiatives.
So, our job is to really identify these trends early on and try to see if some of the companies are changing much faster than the established ones and then our job is to look at those names. So, the best way to look at for each of these companies will be to stay ahead in the competition. We will have to look at some of these initiatives at the forefront.