Four pockets where this fund manager sees growth at sensible prices

Given the fact that we have been bombarded with a slew of headlines from across the globe. You had the fall of the major banks and the rescue steps coming in. In light of that, the markets have borne the brunt of it back home. While there may not be any correlation with the Indian banking system as a whole. How are you looking at our markets shaping up in light of this kind of volatility and news headlines?
Global challenges have been continuing for nearly 18-19 months with the start of the Ukraine war and the high inflation and interest rates. These are all a function of how the underlying conditions shifted maybe 18 months back and that is what is getting reflected or the outcome of that is getting visible to you in the increased volatility. Today’s market is adjusting to a normal world versus how the market used to be earlier in terms of looking at extremely low interest rates as a base case forever. So, we are in that adjustment phase and this is certainly hitting global demand as well as the growth outlook for Indian companies.

In the last two to three quarters, earnings have been fairly muted in India. In fact, we have been trending late single digit earnings kind of growth against 13-15% which India has the potential to deliver. We are already facing the impact of it. Today, we are in midst of bad news which in a way is now starting to give attractive prices for Indian equities.

In fact, in the last three months, I have seen many outside index companies correcting and becoming more attractive. It is a journey where we are in an environment of low earnings at least for a couple of quarters even from India and where the valuation generally stands, we could just be around middle for a period of time till we come back to a stronger earnings growth path.

So what are you doing with the you know deployment plans at this point of time? Are you keeping your powder dry, increasing your cash levels to look at better entry opportunities or accumulating opportunities for some of your funds? Are you nibbling in select stocks?
While the indices have remained flattish for 18 months, they have seen some kind of time correction. Over the last three months, we are finding material price corrections happening in many pockets of the market. So relative attractiveness is certainly emerging in some places where the fundamental news remains to be weak in terms of near term earning growth.

Those are giving us opportunities to shift our portfolio to businesses which are more sensibly valued. Our focus has now been buying growth companies which are available at sensible prices and that has been our approach to managing risk as well. At the end of the day, not overpaying for growth and choosing selective businesses, which are better priced is where we are focused on deploying our capital.

As a funder, we generally do not take significant cash calls as per our own investment policy and framework and our idea is to continuously keep scouting for good available investable businesses at reasonable prices from a three-year horizon.Would you call fintech stocks high growth businesses available at really ridiculous price points or are they also looking reasonable now? Where does the word value fit in for a Zomato or a Paytm or for that matter Nykaa?
The question is more on the new age businesses where you definitely do not have any specific near term cash flows and businesses which are strong. The approach to this is very simple. If you are getting these businesses at a justifiable reasonable valuation, even if you look three-four years out, giving a couple of years more for them to demonstrate the right profitability, in some cases might start getting interesting.

Are they at throwaway valuations? No, I think very few businesses in the new age space are in throwaway valuations and in the listed space, the valuations are much better than what they used to be a few months back but I think they are not at throwaway valuations.

The key point in these businesses is whether each of these businesses has a right to win. So if they have a right to win we can pay a premium because we know there is longevity to do these businesses and when you have that kind of a framework in play, these can be valued a little more higher than other businesses because they have a longevity of growth and that is what is the premium we will be willing to pay. But excessive froth and all that which has evaporated or has gone away I think it is still not in the value-value zone as you might call it but I think opportunities will emerge and are emerging continuously.

So what is cheap in this market? What is cheap and where growth could be more than the earnings average because ultimately if you get a combination of cheap and reasonable amount of growth, you will make decent compounding returns?
Look at sectors where there is reasonable growth visibility, for example banking. Banking is reasonably priced with a strong or good medium term outlook because the perils of the past or the challenges of the past are behind and we are now getting into demand for credit and a reasonable environment for growth. It is not cheap, but it may be reasonably priced businesses with strong visibility.

Similarly, pharmaceuticals are very reasonably priced. The secular nature of the businesses will start kicking in because all the ups and downs of Covid are behind us and hence at valuations which are 40-50% cheaper than consumer businesses, these appear very good opportunities to play in.

Utilities, for the growth they are delivering or starting to deliver now, are meaningfully attractive so that is one more space which is there. One space where valuations may not be attractive but growth outlook is very strong, is the engineering and manufacturing and their corrections of these kinds and this kind of global bad news can allow for increasing exposure to those spaces. So these are the four spaces we find reasonably attractive from a three-five year investment horizon and that is where our focus today is in selecting businesses.

Outside these four spaces, a lot of businesses are seeing meaningful corrections in the last three months. It is just possibly people giving up on the high growth rate expectations of those businesses. There are certain ignored sectors like insurance and all which have suffered some challenges because of what has happened in the Budget and the high valuations of the last three-four years coming off a bit.

Directionally those businesses are getting attractive from a medium term kind of horizon. It is a mixture of moderate growth outlook for businesses coming at reasonable prices. It is still not very cheap for most businesses.