Tandon says they are very constructive and if any events unfold because of the global situation, it should be used as a buying opportunity rather than getting worried that something is unfolding.
In the last three years, your equity AUMs have grown from Rs 36 crore all the way to Rs 19000 that is a 500 times jump. What would you say has contributed to the success?
All has been supported by the trust of lakhs of investors who have invested. We have more than 20 lakhs folios. So the trust of investors and distributors which they have showcased in our processes, in the risk management system which we have built, the investment framework which we have built and which has led to the AUM growth that we have seen. It is all about processes which we are able to demonstrate and we have earned this trust in the last three to five years.
Could you tell us your approach to stock picking and asset allocation? What are the things that you look at before selecting a stock or a sector?
We are in the business of risk management and returns are byproducts. The entire thesis in which we have built our risk mitigation framework, is called VLRT framework and there we try to capture our global macros in the form of liquidity indicators or risk appetite over and above the valuation analytics which every traditional house has set.
When we look at the combination aspect, it gives us a better outperformance because it is all about what framework you have built. The way we look at it, we all live in a very dynamic world and the data keeps on changing. We cannot have a static style of money management. So we brought India’s first dynamic style of money management.
As a mutual fund or as an AMC, we say we are a data analytics firm. So the entire thesis revolves around data analytics and that gives us some edge in terms of taking or generating superior risk-adjusted returns.
What do you make of the current market situation? We saw a correction in the last three days. We have seen some buying coming in. Do you think markets have made a bottom in the near term?
I always talk about how 2023 will be more volatile and one has to live with these volatility signs because the larger perspective or Indian macro looks very strong both from medium term and long term perspective. Yes, we have seen a good amount of capitulative moves in many of the stocks; In India particularly, in a midcap and in the smallcap scale also. But even in the largecap space, we have seen a good amount of capitulation. The fear index was at one of the highest post-Covid levels and that is the level of fear which has been built. Even today, market participants are very reluctant to participate. It has led to a small rebound which is expected. I will also like to give you some word of caution because though the Indian macro is good, the global risk appetite has declined and this is one of the reasons we believe the first half of 2023 might be challenging. When I say challenging, I mean it is more volatile. So stock rotation is the theme to play in that volatility. Otherwise, the first half can be slightly weak relative to the second half of 2023. But if a lot of people believe that they can sell now and rebuild a position again. That is theoretically not possible. If you really talk about the best ways that the buy on dip strategy should work, we remain very constructive and if any events unfold because of the global situation, it should be used as a buying opportunity rather than getting worried that something is unfolding. So we are constructive from the near and medium term perspective for India.
You had also spoken about a great alpha generating theme in the form of manufacturing. Does that thesis hold true for the long haul? How one can actually play or bet on that theme?
So in terms of manufacturing, it is a very large thesis because we are talking about the way some of the global macros or the global economies are getting affected. That generates a huge opportunity in India. Manufacturing itself is a very large theme and we like to capitalise on the individual components.
Obviously, by default, banking is the first component which becomes very important, both private sector and public sector – and that is one important theme. Then, the infra theme should also do very well. This has been the most neglected theme for the last many years. The stocks opportunities are very limited. Yes, capital goods have moved up significantly and most of the stocks are becoming relatively expensive and I think it is an opportunity.
So auto ancillary is another opportunity one should look at. In capital goods, the largecap names have outperformed and they are expensive. But there are many such opportunities available in small and midcap place. Auto ancillary, power – if I have to look at infra in general – these are the larger themes and this list can be very long. One has to spot the opportunity in individual names rather than saying one sector or thesis which has played out.
Can pharma be that contrarian bet in the market? DRL and Sun Pharma would have done very well in the year gone by, but can the gains be more broad-based now in the pharma sector which has been a bit of a lag in the year gone by.
It is an interesting point which you have brought up because we have also seen that the pharma sector is now trading in that neglected zone which we generally look forward to. We exited from pharma in September 2020. We have been adding some of the pharma names. So, it is not very decisive right now because in terms of earning potential, it might take a quarter or two more. But from a behaviour perspective, we generally look forward to stocks that are trading in the neglected zone for a while or have reached the most hated zone also. People do not want to even touch pharma stocks.
The majority of the fund houses are exiting pharma because they have been holding these names for a while and their patience is getting tested. So, I think it is a good opportunity, but one has to be very stock specific there because it is not that we are able to take that call, the sector has reached a bottom and bottom fishing should be done in some of the individual names, particularly the ones which have been neglected or beaten down and some triggers are expected.
So, pharma is something you would look at, but it is a neglected sector. So, opportunities could come in but one has to be selective, is that what you are trying to say?
Yes.
In terms of selective, would you categorise healthcare also in the same category, the likes of Fortis and other hospitals?
See, the hospital space itself is very good. Post Covid, this sector is recovering. We are constructive on the hospital space. The only thing is we have to look at is the valuation. Some of the valuations are still very stretched, even some of the diagnostic companies have corrected a lot from the higher levels, but they are still not that attractive.
So, selectively one can participate in the hospital space also, but I am more constructive on the pharmaceutical, the formulation companies or the API companies. More focus on the pharma companies rather than hospital space.
What is the outlook when it comes to the cement space because Ambuja is something you had looked at a long time ago? What is the compelling argument within the cement space?
If we are constructive on infra, then cement by default becomes the first choice. We have a very large exposure in some of the largecap companies and some of the midcap companies also. We are very constructive on the space. This quarter will be very good in terms of volume growth, but may not be great in terms of margin.
But if we talk about the next one or two quarters going from FY24, we should be more constructive because we expect even margin expansion there. The energy prices have corrected a lot, which will help them. Demand is anyway picking up. The only concern is the extraordinary capacity announcement which has been made by all the players that they are going to increase their capacity by 30%, 50%, 80%, is something which is slightly scary at this point in time, but one has to look at whether it really gets implemented or this is just an announcement because implement this side, it takes time.
From a near-term and medium-term perspective, we are very constructive but too mature to talk about a very long-term thesis, given the extraordinary capacity which is being talked about as the patience of retail investors will be tested. So far, we have not seen and it matches with our thesis. They made extraordinary money in 2020 and are more patient because this is not their core business. They have left this thing to the investment managers like us.
I am very constructive on the retail flow perspective. I have not seen any slowdown, neither at our end nor at the industry level. So, I think this phenomena has the potential to last longer and it fits with our larger thesis for India emerging as a $10-trillion economy in 10 years’ time.
I personally do not expect the retail flow will slow down and so far, there is no trend to endorse that.
