Midcaps and smallcaps still little expensive, says Vikaas M Sachdeva of Sundaram Alternates

On a longer term basis, you have to identify themes and structural growth stories. You have to look at the fact that India has recently crossed $2,000 per capita GDP, and there are several tailwinds.

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One should look at stocks primarily in these four areas — we call them four-by-four multiplier themes — financial inclusiveness, exports, consumer demand and and phygital.

First, if you look at the way China grew from 2006 to 2019-2020, a phenomenal portion of the GDP is coming in from financial services. In 1996, China had one bank in the top 10. Today, there are four. The top four global banks are Chinese. That is something which can manifest in India.

Then you're talking about consumer demand. Because per capita GDP at this point is $2,000 (per capita GDP), people are spending less on basic amenities and more on consumption. That is something which is set to explode.

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Next, in exports, we've always been known for our IT prowess in outsourcing. People outsource IT to us. Pharma and now chemicals. I think these policies, which the government is now talking about, is making a more structural sort of an opportunity across sectors.

Last but not the least, I think one of the things which is of great interest to us is the fact that a lot of these large companies, which have very strong definitive moats, are evolving all over again. And they're using digital technology, what we call phygital, in terms of expanding their moat and actually retaining dominance.

Investors would do well to identify companies, good and high-quality companies, and should not get carried away by short-term gyrations. Look at the high cash-flow and high ROC-generating companies, and just stay the course. That is a way to write the India story.

We are at the Dubai Alternative Investment Summit. We are pitching India to global investors. Recently, we had the Hindenburg report and then we had George Soros coming out with a statement. Do you think these events can impact India's appeal in any way?

I think that pitching India as an investment destination has been happening for the last 20 years. Now, we are showcasing India to the world.

The second part is the events you mentioned. We are a democracy. We have to place a very high amount of importance on corporate governance, which is increasingly something which Indian corporates are realising. You will have incidents like these, once in a while, and I'm not saying this is because of corporate governance or not. I'm not getting into that.

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It is not an isolated instance. There have been companies across the globe. The largest democracy, rather the largest country in the world, the US, has had far more severe issues. So you have to take it in your stride. I don't think that's an issue.

Talking about your fund, you're focused on midcaps and smallcaps. Any specific pockets which look interesting?

It's not just midcaps and smallcaps. I think we've got a very vibrant portfolio of large and midcaps, and mid and smallcaps. Our focus is basically to get the best company at the best valuation. Right now, midcaps and smallcaps are still a little frothy. We will have to just wait and watch, but we are taking our time.

We are picking and choosing what we want. There are some amazing new companies which are coming in. We are adding them as well. At this point of time, one would need a little bit circumspection.

Any specific view on banks?

I think banks are basically a play on the Indian economy. If the Indian economy is going to grow, companies and individuals will require a lot of credit. Banks today are very well placed to get a person and cater to them. In fact, one of the more amazing things which I'm seeing in banks is that they are increasingly open about using analytics in terms of acquiring and maintaining customers.

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If you're talking about the structural growth story coming in, banking, as a sector, has to grow, and this is going to be increasingly global. It is not just going to be local.

When it comes to the PMS industry, what is the time period that an investor should look at for outperformance?

There are three parts to it. Number one is the risk profile of the investor. The risk profile of the investor is a savvy guy who knows fully well that he's getting into a portfolio of concentrated stocks. So what he should be looking at is more of absolute returns rather than benchmark returns. Okay. You have to show it from a benchmark basis because that is the norm.

But at the end of the day, he will make money only if he looks at absolute returns, which he makes over a period of time. I think the risk profile of the investor is very different.

Number two, if you look at portfolio management, as an entity, there's a lot of emotional engagement clients have to this particular investment avenue. Unlike mutual funds and AIFs, here, there's a demat account, which is opened in his name, and there is trading, which is happening in his name. So his ability to respect and understand and know more is far higher, because his emotional engagement is very high.

The third thing. I think one of the things we should learn from the mutual fund industry is investor education. I think a similar thing now needs to be done in the alternative industry. I'm not saying educating, because this is too smart a segment to be educated, but highlighting the virtues of PMS and managing expectations … I think it will be very good.

Just to conclude your question in terms of performance, I think in the last 3-4 years, last 2-3 years, in particular, have been very choppy. Typically, if you see when the world comes out of a global crisis, you talk about 2000, you talk about 2008.

I am just giving you some decent markers. Now in 2020, there is a rush of money which comes and lifts all stocks. So, typically, you will find a lot of stocks which have not done too well but will do very well.

Again, if you look at the same data, you will find that in 7, 8, 10 years after that, there is a flight towards quality. People are now starting to look at PEs of certain stocks, vis-à-vis earnings, which are now starting to come in and they are now starting to rationalise. So my sense is that in the next 3-5 years, we will see a complete about-turn and quality will start attracting a lot more money.