Arpit Shah, founder & director of CARE PMS, says that the Growth Plus Value strategy envisages investing in companies (businesses) in which he expects sustainable and scalable topline growth and companies which are grossly undervalued or have high potential for valuation rerating, based on future income/cash flow.
Shah is part of the core investment team which manages clients as well as prop investments. He is a Chartered Accountant with 15-plus years of experience in equity markets.
Shah says people are shifting from safety to growth, and, hence, he believes he just touched the tip of the iceberg, and there is still a lot of steam left in these segments.
The Growth Plus Value scheme has outsmarted other schemes in the PMS industry (data collated by PMSBazaar.com shows). What is the strategy?
Shah: As the name suggests, our Growth Plus Value strategy invests in companies (businesses) in which we expect sustainable and scalable growth in topline and companies that are grossly undervalued or have high potential for valuation rerating, based on future income/cash flow.
We give time to the managements for execution of their strategies and wait patiently for the market to recognise the true worth of the company.
We ask our investors to invest with a mindset of a minimum of five years. In the last two months, we have seen many of our portfolio companies getting recognition from the market, resulting in sharp price movements and returns.
We have seen that this type of sharp appreciation is inherent for smallcaps. In our strategy, we have a higher exposure to smallcaps.
In the mid and smallcap space, you have allocated funds in the FMCG and staple food, pharma, paper and packaging, construction and the chemical segments. What makes you so bullish on these sectors?
Shah: We built a portfolio on the assumption that COVID will remain in our life for a considerable period of time, and, hence, businesses that will be least affected were on our radar.
In all segments, we bought industry leaders which have gained more market share from their peers. As the market became more broad-based, unlocking of value started in these companies.
We are still optimistically invested in all these sectors and companies because we feel even after the current rise in market price, valuations are still cheap.
Our weighted average PE of the portfolio is 15x, which is much below the NIFTY PE.
HIL and LT Food top your holdings. What makes you bullish on these stocks?
Shah: HIL is a bet on the management. Mr Dhiruproy Chaudhry has really turned around the company. From cement-roofing business, HIL is now a building material solution provider, with businesses like pipes, putty, AAC Blocks and panels, and flooring solutions.
They repaid seven years’ loans in just two years; that also, during a crisis like this. Recently, the management shared its vision to make HIL a $1billion company, which is more than 2x from here.
Considering Dhirup’s past, it can certainly happen. With extremely low equity of Rs 7 crore, an increase in topline will have a significantly higher impact on earnings per share, which can result in price appreciation from these levels as well.
LT Foods is into staple foods. It has all the elements of an FMCG company, like branded sales, value-added products, etc. Further, the business of basmati rice has an entry barrier which puts the existing players in a sweet position to grow.
For the last few years, the management is focused on improving margins, with the launch of products like ready-to-eat food packets and organic rice. Its current valuation of 10x is giving us too much comfort to hold/add this stock for future appreciation.
You hold a cash equivalent of 14 percent of total AUM. Does this mean you expect some profit-booking in this space and cash can be deployed on dips?
Shah: Yes and No. We believe that the market will become more selective and the rally will sustain. Hence, we are 85 per cent invested. At the same time, we generated some cash as we exited from some of the companies, and also trimmed down weight in certain companies, based on our weight-allocation criteria.
There is a small element of euphoria in the market. If a correction happens, we will have cash in hand to invest aggressively.
Further, identification of companies and evaluation of investment opportunities are a continuous process. Hence, we will have new themes to invest in the coming days.
Small and midcaps continue to dominate price action on D-Street. Do you think the time of easy money-making is over and retail investors following a DIY approach should be selective in this space?
Shah: The smallcap segment has grossly underperformed since January 2018. The last one year’s rally can be considered as a makeover of that underperformance.
People are shifting from safety to growth, and, hence, I believe we just touched the tip of the iceberg and a lot of steam is still left in these segments.
I don’t believe people can make easy money from the market on a sustainable basis. Investors have to be cautious and calculative at the same point of time.
Smallcap is a wide space, and, hence, identifying companies and staying invested require a lot of due diligence on a regular basis.
If investors have this time and skill, they will be better off. Else, it is always better to rely on a portfolio manager who is doing this as a full-time job.
Any big themes where there is still a margin of safety in the small and midcap space?
Shah: There are many themes where our research team is working. Renewable energy is a theme. Rural India is another theme that is doing quite well.
The margin of safety is always company-specific, and for our set of companies, we believe the risk-reward ratio is favourable for investors.
Disclaimer- Arpit Shah, his family member, and Care PMS directly and through its clients has exposure to the companies/sectors mentioned. The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.