Piyush Sharma, Portfolio Manager at RH Minerva Funds, says we camp ourselves in the sub-$1 billion space, and mostly within the less than $500 million space. We don’t really see froth in our book, where 10 of the 14 holdings are under a billion, he says.
In an interview to Moneycontrol’s Kshitij Anand, Sharma, who has been part of Citigroup and Bombay Stock Exchange, and with about two decades of experience in research and investment, says as long as we don’t compromise on value, we end up capturing more than our share of earnings upside over just about any meaningful time period. Edited excerpts:
What a performance it has been for your fund (Minerva India Under-served – smallcap)! Nearly 23% rally in July, and over 100% gain in the last year. What was your strategy?
We have had a zero-style drift in our strategy over the past decade. So, nothing much changed over the past year. We continued to focus on institutionally under-owned clean stories that had situation-specific material catalysts at attractive/reasonable valuations.
It’s just that the ticker tape has eventually responded to solid underlying cash flows, after what I believe was a fairly unusual extended period of disconnect, when the size, and not earnings, was the determinant of stock outperformance.
What is necessarily more satisfying, however, isn’t how the stocks have responded, but that they are backed by solid, sustainable, and incremental underlying earnings vs. optically better growth numbers on easy comparisons.
The fund is now more than a decade old. According to data from PMSBazaar.com, you have delivered a CAGR return of over 17%. This is impressive, since small & midcaps were underperforming toll 2018. How did you manage to pick the winners?
While we have delivered an annualised net alpha of around 7 percent vs. smallcaps over a decade, we take more pride in the fact that this wasn’t skewed by two or three stellar years for the asset class, in general.
If anything, a single year, 2017, materially dragged our relative performance. So, low skewness and volatility excite us as much as these headline CAGR numbers do, if not more.
I believe we have debunked the convenient narrative that investing in micro and smaller smallcap space needs to come with heightened volatility.
The space we invest in is typically not the established beneficiary of liquidity tailwinds and associated multiple re-ratings.
We are, therefore, willing to suffer in the interim as our hypotheses manifest in earnings. As long as we don’t compromise on value, we end up capturing more than our share of earnings upside over just about any meaningful time period.
The small & midcaps recorded a shakeout due to a BSE circular, but the storm has passed. Do you think the space looks overvalued and investors should tread with caution?
While addressing the valuation issue, one needs to appreciate that India throws everything beyond the top 250 securities into one basket.
Effectively, a benchmark, such as the BSE Smallcap, becomes a mish-mash of an index, with several $1 billion-plus names stashed alongside $300-500 million constituents to create a supposed smallcap benchmark.
We note that there are two distinctly different ‘small’ Indias within these benchmarks, with the larger, more liquid constituents far more richly valued than the sub-billion universe.
We camp ourselves in the sub-$1 billion space, and mostly within the less than $500 million space. We don’t really see froth in our book, where 10 of the 14 holdings are under a billion.
As of July-end, our median holding (excluding financials) was trading at 10x FY22E EBITDA, at a 30-40% discount vs. the median Nifty50, Nifty Midcap50, and Nifty Smallcap50 constituents (excluding financials), despite better earnings traction.
So, one needs to be very careful when bunching everything ‘small’ into one large heterogenous basket and deriving conclusions.
If one looks objectively, one should see rich valuations for most headline constituents, regardless of size... to see a large paints name trade at a multiple that is thoroughly disconnected from conceivable permutations, or a large non-state-owned bank trade between 4-5x book at a time when some solid ASEAN and G7 bank franchises can be had at a fraction of that makes us as nervous as when we see liquid small/midcap specialty chemical darlings trade at elevated multiples.
What is your investment mantra or your checklist before buying a stock?
Nothing is more critical to us than accounting clarity. Be it credibility of earnings or the ability of minority shareholders to capture these, it’s an absolute must for us.
If these names fit with our sensitivities on absolute value, our overwhelming focus shifts to identifying significant and mostly unpriced/mispriced situation-specific catalysts.
You will often see our own exposure may not be reflective of our industry-wide views. For instance, two of our top three positions today are in auto parts, but that isn’t suggestive of us having a particularly favourable view on the Indian auto parts space in general.
You have seen many market cycles. Any advice which you would like to give to new-age investors/millennials, especially the ones who joined markets in the pandemic period?
First and foremost, ignore the noise. There is nothing noisier than the stock screen in retail-heavy markets. So, get off that stock screen, stop judging an investment by its price, and focus exclusively on the underlying business.
There is a considerable grind that goes behind it and this is why we never advocate DIY investing, particularly within the institutionally under-covered space.
Nonetheless, should one still choose to take it on themselves, I would suggest these things:
1 Diligently steer clear of momentum-driven fads and don’t get starry-eyed from near-term earnings or stock price movements
2. Don’t have blanket opinions on anything based on geography, sector, or size.
3. Be very skeptical of social media cheerleaders and supposedly free investment advice.
4. Try dissecting views that diverges from yours.
5. Don’t take Indian headline book values too seriously.
6. Don’t be scared of volatility in poor price discovery markets (sub-$1 billion names in India).
Instead, appreciate that price volatility is often a function of elevated individual investor ownership vs. volatility of underlying cash flows.
Price discovery can often be poor over short periods. However, over almost every 5+ year period, sustainable cash flow growth, coupled with reasonable/attractive value, is still the chief determinant of value creation. Don’t let GameStops and AMCs fool you that the earth has flattened overnight.
Tell us a little bit about yourself – a bit about education, interests as well as how did your love for trading/markets started and in what year? What was your first investment?
My interest in investing was born out of watching my parents and family discuss stocks in early evenings in the 80s. Several years later, it got refined significantly at the UNC-Chapel Hill during my MBA days, where we had some of the best minds in forensic accounting and complex deal-making.
Subsequent engagements on the institutional sell-side convinced me that one can create meaningful and sustainable value within the institutionally under-owned pockets within the emerging and frontier markets. India, as a launch choice, was largely driven by the sheer investable breadth outside of headline names.
My first listed equity purchase was Consolidated Graphics, a Houston-based commercial printer, which was fairly active in roll-up acquisitions within an otherwise distressed space. My first listed equity purchase in India was PVR.
I am particularly passionate about improving financial literacy in India, especially at the bottom of the pyramid. I also frequently put my ageing knees to test on soccer fields and tennis courts.
Your biggest mistake, if any, which you regret doing in investment or trading?
As long as our mistakes are infrequent and not within our high conviction positions, we should be okay.
Fortunately, our non-partisan lens, while identifying situations, have mostly worked well for us, but we have certainly had our fair share of setbacks.
I wouldn’t want to generalise, but I would be extremely cautious in having exposures in situations where one either needs to buy/lease capital assets from, or has a material operating dependency on the state, regardless of who runs the ministries.
I believe that the risk distribution is rather asymmetric in these situations and it’s hard to price some of these tail risks.
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