The NFO of the ICICI Prudential Innovation Fund is open till April 24 and follows innovation as a theme across sectors. Edited excerpts from a chat with the fund manager:
What is the idea behind the Innovation Fund and which are the sectors that would be on your radar?
Innovation is an integral part for most of the leading companies across sectors in order to thrive and maintain its leadership position. Successful innovation creates immense value for a company. Example: In the auto industry companies that innovated in the scooters space gained substantial market share as urban customers chose scooters over motorcycles. Similarly, in the passenger vehicles space companies that innovated in the SUV space gained market share as customer preferences shifted from traditional cars. Another example of innovation is the airline industry. Around the world and in India, companies with the low-cost no-frills business model have gained. This model starts with ordering aircraft in bulk, optimizing crew training to deliver no-frills but standardized service – all of which together aided in improving the customer proposition.
The only space where companies can do well with limited innovation is in the commodities business. Example: In the mining or upstream oil sector a company could do well with limited innovation if it owned a good mine or had low cost oil reserves.
Can you help us understand how you are going to screen stocks as innovation can be in any sector?
To begin with, we will look for companies which are innovating across sectors, either in terms of products, processes, delivery mechanisms and the likes. Post this stage, the short listed companies will be assessed on qualitative parameters like management execution, track record, strategic partnership, etc. Then quantitative aspects like impact on margins, operating cash flow, free cash flow, etc will be accessed. At this stage, macro factors like government push, global environment etc will also be taken into account. We will also evaluate whether the company is likely to see earnings upgrade due to the strategy/innovation underway. The companies which clear each of these stages will be considered for portfolio construction.
How open are you in considering loss-making new-age stocks a part of your portfolio?
We are open to considering new age companies provided we are convinced of the path to profitability being followed at this point. There are companies, we believe, which instead of scaling-up, should ideally scale down to become profitable. In some of the cases, the losses are a result of an unsustainable strategy being followed.
In terms of where we are now in the interest rate cycle, how do you think banks stocks will do once interest rates start falling again?
We believe the Indian economy is resilient and hence interest rate cut is a far off eventuality. We are positive on banks, especially corporate banks. Incrementally, we believe asset quality and credit costs for the corporate banks will be more benign than the last few years.
Where do you see Nifty headed in the next few months? Are we going to see fresh highs anytime in 2023?
Post the recent correction, the Indian equity market is in a better position supported by macros and healthy corporate earnings outlook. Valuation wise, the multiples are in a neutral zone. Also, India’s premium to emerging markets and Asian peers have cooled off. Apart from this, the Government capex which tends to have a major multiplier effect on the economy is growing steadily. All of these put together bodes well for the domestic markets. Going forward, we believe the Nifty will move in-line with the earnings growth.
Are you convinced by the recent bounce in realty stocks? Is the momentum strong enough?
Housing is a critical driver of the overall economy. We believe real estate companies that build and deliver homes will do better than companies which are aggressively accumulating land banks. We like business models, where companies are monetizing their historic land banks. Currently, there is healthy momentum as can be seen from cement demand, growth in home loans, commentary from real estate developers etc.
