Consumer stocks will be a good bet over next 3-5 years: S Naren of ICICI Prudential AMC

The performance of the Value Discovery Fund has been among the best, if not the best, in its category. With interest rates likely to edge higher, are value stocks the safest bet in this market even though they may be more volatile than say information technology stocks?

The fund was launched in 2004 and over the last 18 years, what we've seen is that as long as investors have a long-term orientation value, tend to do reasonably well on a risk-adjusted basis. It is not a strategy which does well on a quarter-on-quarter basis. It is only the steadiness of the fund in the short run which has been a challenge but look at it from an investment logic: you're always looking for value and you're trying to see where there is a good gap between the market price and intrinsic value and you're willing to be patient about it. We believe value presents an interesting opportunity over the next 2-3 years.

On the banking side, three out of the four major banks you own in the Value Discovery Fund have seen a sharp correction and one of them is now at 52-week lows. What is the market missing when it comes to banks and are you accumulating these stocks at this juncture?

We have our own caps on how much of a sector we will buy in a fund. But if you look at it, at one point it would have been the fund that would have had the lowest weightage to banking compared to others.

We believe that credit growth will come back in the economy, but it looks like the ownership element in banking is hurting the sector more than anything else. And that is the challenge now more than anything else.

We knew that the top banks had huge surplus liquidity and that liquidity will feed into credit as credit demand picks up. Credit growth, usually, picks up because of very high oil prices given that if you have to sustain at higher oil prices, you need credit. This was our learning from the 2006-08 cycle and the 2012-13 cycle and that is the reason why we have actually picked up all the banks which have very good savings and current account franchises.

Do you find it ironic that in a developing market like India, where banks traditionally have been a growth story, they are probably currently the most value-oriented stories available on the Street?

Across the world, banks haven't done too well in the last 10 to 12 years for various reasons and I don't think there is anything ironic here. Actually what was more ironic is that the most basic consumer product today on earth is telecom. And telecom did so badly globally that we actually bought a few global telecom stocks about six months back. Those telecom stocks, actually, turned out to be the most defensive stocks in this correction for us, and that gave me a lot of happiness because I realized that without telecom in a COVID-19 world, I would have been totally at sea. I was very surprised as to why the sector did so badly across the world, that I got an opportunity to buy something so cheap.

Once credit growth picks up in the economy and stays elevated for a period of time, if banks with good current account-savings account franchises still don’t perform, I would be worried and not otherwise. If you look at the last three to four years, credit growth has been (so) very low that there was a time when we had clearly gone to a low weightage in financial services and banks. Next few years, I think banks will have a better time.

How are you looking at the consumption side of the economy given that your fund has considerable exposure to the automobile space?

Consumption is a structural trend for the next 20-30 years in India because you have good demographics and low per capita income. As the per capita income goes up, consumption will naturally inch upwards. The challenge for us over a period of time has only been valuations. Whenever you have a sector which has done badly for years, in a structurally good space, we always look at it positively. If you look at, for example, the Value Discovery Fund, we've been underweight on consumer staples for a while, not because consumer staples is a bad sector, but because it had become overvalued.

Consequently, I do think consumption will present itself as a good opportunity for us over the next three-five years as it underperforms and becomes reasonably valued. I think with oil prices going up, the amount of money that is going to be available for consumption is going to be lower and that is going to lead to a situation where it will benefit us, in my opinion, over a period of time.

You are single-handedly and as a fund house one of the biggest institutional investors in the country with exposure to more than 250 companies. What's your take on the latest softening of  rule by the Securities and Exchange Board of India on separation of the chairman and MD/CEO roles? As a stakeholder, would like to see companies take voluntary action like Hindustan Unilever Ltd, one of your portfolio companies, has done?

I think, on a continuing basis, various efforts are required to improve stewardship in companies that we invest in, in a steady manner by the regulator, investor, press, and various other stakeholders.

There has been a lot of improvement in laws in the country, but this is not something where the effort is over. We've seen companies where the chairman and CEO have been the same and things have been well managed and companies where the chairman and CEO are different and the companies have not been managed well.

In this regard, ESG (environment, social and governance) has become a very important area. I think that's something that we are focused on but it is not something that will happen overnight. I think between ESG, stewardship, and various other things, this is going to be a marathon where things will improve steadily.

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