ITI Asset Management Company (AMC) has been on a roll. Over the last one year, ITI Mutual Funds Small Cap Fund has given returns of around 46 percent and its multi-cap offering has given returns of around 31 percent. ITI AMC recently crossed the Rs 10,000-crore mark in assets under management (AUM).
In a year-ender conversation with Moneycontrol, Rajesh Bhatia, chief investment officer at ITI AMC, spoke about how being at the right place at the right time and betting on areas where there has been mispricing have played an important role in the performance of the firm's funds. He also talked about his outlook for 2025 and why Donald Trump becoming the next US president could be a matter of concern for Indian macros.
Edited excerpts:
What has worked for your multi-cap and small-cap funds this year?
A diversified portfolio and early bets on the right sectors have driven performances in both funds. Over the last 18 months, we identified opportunities in capital goods and public sector enterprises, including PSU banks, defence and railways, as areas offering significant value. Our early entry into these sectors allowed us to capitalise on their growth. Additionally, our strong exposure to mid-cap and small-cap stocks made a notable difference.
How important has stock picking been for you? What calls have worked particularly well?
Stock picking has also been central to our success, forming the core philosophy of our firm. Our flexibility in stock selection has been a key factor behind the strong performance across schemes. When it comes to the public sector, our approach as a fund house has been to focus on areas where there is mispricing, as this is where significant investment opportunities lie. From an investment perspective, it is critical to determine if stocks are available at good valuations.
For instance, while private banks are strong companies, the real value lay in PSU banks. These banks were coming out of a decade of underperformance and had cleaned up their balance sheets. They were available at significantly lower valuations—at half the price-to-book compared to private banks trading at three to four times price-to-book. Importantly, PSU banks were not growing slower than the market; they were growing at an adequate pace, but with cleaner balance sheets and improving ROE (return on equity), their valuations were bound to converge with those of private banks.
Similarly, we identified early opportunities in defence and railways. These sectors are still in the early stages of a long growth cycle and present substantial long-term potential.
What is the active share for both funds?
The active share across all our funds is over 60 percent, reflecting our active approach.
Could you expand on your view on banks? Is liquidity a concern?
Some of our fund managers are more positive on public sector (banks) and some on private sector (banks), which can be seen in both our small-cap and multi-cap funds. On the other hand, I personally believe the opportunities are more favourable for private banks, and value has shifted back to them. The earlier convergence happened because PSBs (public sector banks) were available at half the price-to-book value and were expected to generate similar ROEs.
During the credit cycle, as interest rates rose, NIMs (net interest margins) expanded and credit costs dropped to near zero, leading to bloated ROEs and profits. However, that phase appears to be over. We are currently at the peak of NIMs and credit costs, which are now starting to deteriorate, particularly in areas like MFIs (microfinance institutions) and unsecured loans.
Over the long term, PSBs generate ROEs that are about half of what private sector banks achieve. For instance, if private sector banks generate an ROE of 2, PSBs generate 1. However, PSBs use significantly more leverage, which pushes their ROE to around 15 percent, comparable to private banks. This high leverage, combined with peak ROEs and credit conditions, makes PSBs more vulnerable to cyclical changes.
If ROEs for PSBs decrease even slightly, it could have a significant impact.
The difference in business models is crucial here: private banks maintain stronger ROEs and better pricing because of their superior lending practices. For example, one of the larger private banks has recently managed to reduce its gross NPAs (non-performing assets), showing more measured credit costs despite a slowing market. This resilience means private banks are better positioned to weather future challenges.
At present, I see greater value in private sector banks, as their business performance is less likely to deteriorate compared to PSBs.
What about liquidity concerns?
Yes, this is a concern. If FIIs (foreign institutional investors) withdraw due to higher US interest rates and a current account deficit, liquidity will tighten, posing macro challenges. However, I personally believe that private banks are better poised to navigate such conditions.
Why does the small-cap fund hold a large number of mid-cap names?
Simply put, mid-cap names appear where we see strong opportunities. We also maintain liquidity to manage redemptions. This is part of our risk management while staying focused on bottom-up investing.
Any contra calls this year?
Digital commerce was one. We recognised its potential early, leading to strong returns. Similarly, an overweight position in IT paid off despite scepticism. Everybody is still wondering why people are buying IT stocks. We have done very well with the IT contra call. In my funds, I was going overweight on IT when it was not as popular.
Which sectors are you overweight and underweight on?
In the ITI Multi-Cap Fund, overweight sectors included capital goods, realty and consumer services, with underweight positions in FMCG and IT. In the ITI Small Cap Fund, overweight sectors were capital goods, metal mining, and forest materials, while chemicals and consumer services were underweight.
What strategy has worked for you overall this year?
To make significant money in the market, you need to stay ahead of it. Fortunately, I was able to anticipate some trends and act accordingly. For instance, I sold PSU banks and some defence companies early (about five to six months ago). Although they dipped and then rose again, I have no regrets. I sold when the themes became too popular and valuations seemed stretched. This is my style—exiting when valuations appear expensive and shifting to more predictable business models like some private bank names.
As markets became pricier, I gravitated toward sectors offering greater predictability and value. I avoided being vulnerable to a sharp valuation contraction, such as defence stocks dropping from a P/E of 48 to 36, which, while still expensive, implies a 25 percent decline. Instead, I focused on segments like financials, IT, capital goods and digital commerce, where I remain overweight.
On the other hand, I am underweight in areas like consumption, insurance, and oil and gas.
What is your outlook for 2025?
The Indian markets are expected to be buoyant for 2025. India's long-term economic outlook remains positive, driven by expectations of a capital expenditure-led growth cycle. In the short term, though, slowing economic growth, higher valuations and weak earnings-per-share revisions could keep markets rangebound. We believe that sectors like private banks, IT services, digital commerce, capital goods, pharmaceuticals and consumption could be ones that could have a clearer path to stronger earnings and, hence, are expected to perform well. We strongly believe that 2025 will be a stock pickers market and investors may invest in a staggered manner and potentially generate wealth to see through volatility. Our strategy will continue to focus on identifying companies using a bottom-up approach—selecting those with the potential to outperform even in challenging conditions.
What are the biggest risks for 2025?
The election of (Donald) Trump is indeed a significant development. One key concern is the possible increase in the cost of capital under his administration. Higher costs of capital can reduce the demand for equity investments, particularly from FIIs, who may reduce their buying from markets like India, thereby impacting liquidity in Indian equities. On the other hand, the supply side in India remains strong. However, this could lead to an imbalance in supply-demand dynamics creating some pressure on the markets.
We don't know how all of this will play out. But I know that it has brought uncertainty. And it has brought in risk. Which means that it's better to wait and watch and not be in a risk-on mode. Be in a guarding mode.
Is the capex slowdown a concern for your small-cap fund which has larger weightage to capex-heavy sectors?
No, as we believe that public capex is gaining momentum, with significant spending expected in the next five months. Private capex will follow, driven by factors like Made in India, PLI (production-linked incentive) schemes, EVs (electric vehicles) and green energy. Sectors like healthcare, hospitality, ports and airports are also witnessing strong investments.
What were the biggest surprises this year?
The downside has been over-regulation in insurance. The upside was the resilient markets and the rapid scale-up of digital commerce. The bounce-back in small- and mid-cap stocks was also a pleasant surprise.
Disclaimer: The views and investment tips expressed by investment 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.
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