'Many non-index stocks have huge potential to be wealth creators'

Largecaps & bigger midcaps, market leaders & MNC companies, though expensive will continue to be part of most long-term portfolios on the merit of their business & franchise value, Devang Mehta, Head – Equity Advisory at Centrum Wealth Management said in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpt:

Q: RBI finally announced one-time loan restructuring after a lot of demand, but with riders. Will it really solve the NPA problem?

Unlike under the corporate debt restructuring mechanism, where debt of any large company with stressed loans was restructured, now only companies that were servicing loans until February will be eligible for restructuring their loan. With loan tenors being extended by two years, the extent of COVID victims will not be known till 2023.

The Street was hoping to understand the impact due to COVID in the September quarter, as the moratorium granted in May ends by the end of August. The scheme may be designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios. A number of Indian banks have announced capital-raising plans. The biggest impact will be that banks will be able to check the rise in non-performing assets (NPAs) to a great extent.

Q: After a rally from mid-May, do you think the market is due for a major correction which can drag the Nifty to 10,000-mark or it is just consolidating around current levels to make a march towards 12,000 in coming weeks?

The big rally was attributed to a global liquidity surplus thanks to a series of monetary and fiscal stimulus from central banks and governments globally. Some market watchers also blamed it partially on a huge influx of new investors, who triggered a sudden surge in flows of household savings into equities & the typical get rich quick crowd for creating a source of income, compelled by a pandemic induced lockdown.

After such a fast & furious rally & in the absence of earnings growth, a correction or atleast some consolidation is warranted & this will actually be good for the health of the markets. However, a left out feeling still prevails amongst a vast number of investors who want to bet for the longer term as investment avenues dry up & interest rates head lower. This will actually limit the downside to a certain extent. It makes a lot of sense to follow individual businesses & focus on their quality of earnings & market share gains rather than following index levels.

Q: The broader markets still looked strong given the outperformance to benchmark indices (from March lows as well as year-to-date). Do you think midcaps and smallcaps can beat benchmarks this year, especially after underperformance in previous two years?

Our Core Investment Philosophy revolves around owning businesses which are market leaders or potential to become market leaders; with all the superlative qualities & moat surrounding their business. Such companies do exist across the market cap spectrum, be it large, mid or small. Large & large-mid caps, particularly bluechips, market leaders & MNC companies, though expensive will continue to be part of most long term portfolios on the merit of their business & franchise value. However, a number of businesses outside of index still have huge potential to be wealth creators of future. Even amongst, the mid & small caps, polarisation can play its part, rewarding investors who hold quality businesses & punishing those who are hoping against hope to buy inferior businesses.

Q: The IT index did not see major impact of lockdown. Infact, work from home helped them a lot in terms of cost saving. Even the index posted strong rally YTD and from March lows. Have you increased your exposure to IT and what is your pecking order, and why?

India's IT industry is benefiting from rising demand for digital services as the pandemic hastens the global shift toward automation. Strong deal pipelines, upbeat management guidance and cost-cutting measures are few reasons to be bullish. Even in this difficult environment, a number of IT companies have seen upgrades this month. Reasonable valuations, free cash flow, return ratios and payout metrics also make the sector look attractive from a loner term perspective. We have been bullish on not only IT services but also niche companies operating in Engineering & R&D, automation etc.

Q: What is your advise to investors/traders on this Independence Day?

Unpredictability has been & will be the only constant for some time to come, given the various moving parts across the world. One has to stay focused, stick to a long term investment plan & be disciplined. You won't be able to consistently time the markets. Rather, focus on your responses to navigate volatility. Holding onto great companies which have durable competitive advantage & pricing power for longer timeframes reduces the number of buy and sell decisions you've to make. Fewer decisions lead to fewer mistakes. Action is overrated, while patience is underrated. Good businesses make the best use of slowdown and recession to gain market share from weak competitors. You realise the value of good companies only during bad times. Difficult times are bound to come in economies, markets & one's investing journey. Your edge can be as simple as having a different time horizon (read long term) from most of the investors. Although it appears simple, it is exceptionally powerful.

Q: Pharma (with participation by every stock) remained the leading sector in current rally. Are you still want to take the exposure to this sector and also are you bullish on the space?

In this unprecedented global lockdown, pharma and healthcare services, being the most critical even in the essential services category, remain exempted everywhere. Chinese supply lines for key starting materials and APIs are back to near normal, hence the supply side issues are mostly resolved. A multiple re-rating in some stocks is on the cards, especially for those with stable earnings visibility, no balance sheet stress and strong return ratios. Profitability is also likely to improve due to cooling off of raw material prices, lower travel and promotional spend due to lockdowns and incessant focus on cost rationalization. We have been on the right side of a number of MNC pharma companies in critical segments since last couple of years. One segment, which we entered quite early in the cycle, has been diagnostic labs. We also like companies operating in the niche segment of Contract research. Insurance will be an allied beneficiary due to the increased focus on healthcare.

Q: An embargo was imposed by the government on the imports of 101 defense items under the Atmanirbhar Bharat program. Are you a buyer in defence stocks given the sharp focus of government on 'Make in India' programme and what is your advise to investors?

In the past, many large private sector players committed huge investments, but clocked sub-optimal returns due to lack of clarity, slow pace of activity and lack of integrated decision making. The intent on the paper is good but the execution on the ground & budgetary allocation remain key monitorables. However, it's a step in the right direction & will benefit some PSUs & private sector companies. We would be watchful here & let the initial euphoric move on the stocks die down. The exact impact will be known, once orders start flowing in for these companies.

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