Sachin Shah of Emkay Investment Managers feels for the last two-three months, the largecap indices have been rangebound, but the broader markets have been very buoyant.
"The bottoms-up investing in mid & small-cap stocks seems to have gathered steam. Our belief is that we are in an economic recovery phase and therefore we strongly believe one should have a decent allocation to equities," he told in an interview to Moneycontrol's Sunil Shankar Matkar.
He believes the Indian economy is in an up-cycle revival mode, therefore most of the businesses like Autos, BFSI, Capital Goods, Pharma, IT will do well over the next 18-30 months.
Q: India reported the highest daily cases in the world and experts to feel it could take several weeks to turn the graph southwards. As a fund manager, are you worried about your portfolio and do you think your portfolio is a COVID-proof portfolio?
For the last many days, the number of states reporting the daily cases were higher than the previous day. But, lately, it seems to be consistently going down. E.g., Mumbai's daily COVID positive numbers have dwindled quite significantly in the last 10 days or so. The data also suggests the second wave of COVID is going to start receding much sooner-than-expected. The other very relevant point is that the economic activity in this second wave as not been affected as much when compared to the national lockdown of the last year 2020. It is also reflected in the unemployment data. During the last year of April and May, the unemployment figures had crossed 15-18 percent across all work age groups, however, this time around, the data is far better and is reflecting just under 2 percent in most of the categories.
Q: What are those COVID-proof sectors that one should consider for investment now, and why?
Last year, when most of the businesses came to a stand-still, the essential sectors like Pharma & FMCG based companies did well. Also, since everyone was shifting to the virtual work setup, IT companies' stocks did quite well. But as I have mentioned earlier, the economic activity does not seem to have been significantly impacted this time. And also with our last years' experience, we now know that the demand for most of the affected industries bounces back soon and strongly. We believe the Indian economy is in an up-cycle revival mode, therefore most of the businesses like Autos, BFSI, Capital Goods, Pharma, IT will do well over the next 18-30 months.
Q: What is your take on the so far March quarter earnings? What are the hits and misses in the earnings season?
The results have been quite encouraging from the topline growth and demand seems to be fairly buoyant for most of the industries. The management commentary & the undertone also suggests that the underlying demand drivers seem to have fallen in place. Therefore, most of the companies are optimistic about sustainable aggregate demand. Even on the margins and profitability side, most of the companies have done a decent job. Despite witnessing higher raw material prices and lower gross margins, companies have by & large been able to hold on to operating margins by cost efficiencies and lower financing cost.
Q: All rating agencies and experts lowered the economic growth target for FY22, citing the fast-rising COVID-19 infections. What are your expectations about growth and have you lowered the FY22 target?
After last years' experience of strong come-back by the overall economy in the second half of the financial year, we are not in a hurry to write off the current financial year with 45-60 days of the second wave of COVID. We are quite hopeful that if the second wave subsides by early June then the impact on the full-year growth will be very limited, perhaps next to negligible.
Q: What is your take on the banking and financials segment after the RBI announced several liquidity measures to support the economy and business that hit by the second COVID wave?
After last years' shock of national lockdown, most of the banks & NBFCs have created adequate provisions for any challenges in their respective borrower segments. But more importantly, our view is that in such catastrophic kind of events the stronger financial institutions emerge even stronger and therefore the top 3-5 banks/ NBFCs will further consolidate their collective market share.
Q: The market has been ragebound for more than two-and-half-month. As a fund manager, what should be your strategy? Also is it still a buy on the dip market and why?
For the last two-three months, the largecap indices have been rangebound, but the broader markets have been very buoyant. The bottoms-up investing in mid & small-cap stocks seems to have gathered steam. Our belief is that we are in an economic recovery phase and therefore we strongly believe one should have a decent allocation to equities.
Q: Lastly, can you share views on your investment framework, how did it help you in the past decade that saw many dips in the market?
It's very important to have an investment framework. For more than a decade we have been implementing our proprietary framework E-Qual to evaluate the management's corporate governance aspect of management quality. E-Qual is a time-tested model applied to the wealth-creation strategies of EIML. While valuing a company, the risk-adjusted returns are best captured with the E-Qual model, which helps calculate qualitative risk objectively that is not captured in the P&L statements or balance-sheets, for example, management integrity & capability, distribution of shareholder wealth like their dividend policy, investor communication & liquidity. The focus on management quality has ensured a track record of zero blowouts over the past 10 years with all our investments.
Management integrity and capability are two non-financial but qualitative metrics that can provide a sense of future returns. High standards of corporate governance are critical for long-term and sustainable growth. It not only benefits the company but also all the stakeholders involved. At EIML, the belief is that wealth creation is not possible without quality management and high standards of governance. Transparency and sound business ethics are hallmarks of strong corporate governance and ensure business risk mitigation.
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