Naveen Chandramohan, Founder & Fund Manager at ITUS Capital
Naveen Chandramohan, Founder & Fund Manager at ITUS Capital, believes a portfolio performance is dependent on two factors – ability to own growing businesses and own them at a sensible valuation.
“The outperformance will be dependent on owning growing businesses and staying disciplined in allocation – not so much mid or small caps,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
He feels banking, IT and Consumer businesses should continue to grow at a slightly higher growth rate than our GDP, which means the relevance of these businesses will not reduce.
Edited Excerpts:-
Q: India hits a market cap of $ 3 trillion on the BSE when the country faces a pandemic crisis. What is your view, and will India hit $ 4 trillion or $ 5 trillion by 2025?
A: We as a country are on our way to get back to a nominal growth rate of 10 percent (the number, our GDP + Inflation should come out on a normalized basis). This should put us on a path to be a $ 4.5 trillion economy by March 2025.
Q: Reliance Industries, HDFC Bank, HDFC, TCS, SBI, ICICI Bank, Kotak Mahindra Bank, Bajaj Finance and HUL contributed the most to $ 3 trillion market cap. That means the contribution was largely from banking & financials, TCS, Reliance Industries and HUL stocks. Do you think same set of sectors or some other sectors will participate in the journey towards $ 4 trillion and $ 5 trillion?
A: Correct, banking, IT and Consumer have been a significant driver of our economy reaching the $ 3 trillion market cap. These are businesses which should continue to grow at a slightly higher growth rate than our GDP, which means the relevance of these businesses will not reduce. However, I also see a significant contribution from pharma, financial infrastructure and insurance in our economy. This is how a typical economy moves towards a higher per capita GDP.
The old-economy businesses like infrastructure may gain importance, but I believe that will have its fortunes tied to government balance sheet spending flowing through into private capex.
Q: Mid and Small cap hit record high. Will the outperformance to benchmark indices continue in coming years like seen in 2016-2017?
I think mid and small caps are names we have given for companies to have an easier nomenclature. It’s important to speak of them as businesses and distinguish them based on the business models. For eg : if we take Pharma, there are mid cap companies like Laurus Labs which have potential to create significant value and continue growing in excess of 20 percent.
However, in the same sector, there are names which I would be uncomfortable with regarding their prospects of growth over the next few years. These have very little IP and investments in R&D, and their products have no pricing power.
A portfolio performance is dependent on two factors – ability to own growing businesses and own them at a sensible valuation. As I have often said, a good business at a premium valuation may not always result in shareholder returns. The outperformance will be dependent on owning such businesses and staying disciplined in allocation – not so much mid or small caps.
Q: With Vaccination drive, do you think third wave will not have major impact on market?
We have been poor in our execution as a country around our vaccination rates (while specific cities and states have done a great job of ramping up execution, I cannot say the same of India as a country). It’s important that we get this part of our act right.
It’s a bit premature to discuss the third wave today, as we are not certain of the strain in which it arrives, if it does. However, I do believe that we would handle it better. Will it have an impact on the markets – my base case will be non-significant. I believe the markets will move on to the next risk to worry about, as it always does.
Q: Which sectors are underleveraged now and may lead the next round of rally?
Today my definition of underleveraged are those where investors do not want to think of from a structural perspective. While pharma falls under this bucket, it may see near term selling due to investors wanting to take money off the table. From a 3-year perspective, we continue to focus on financial infrastructure, exchanges and technology led platforms which have very little representation today. Another sector that no one is talking about but deserves a look is ancillary real estate – this would include ceramics, tiles, home accessories etc.
Q: Realty sector rallied more than 11 percent in the second half of May after 3 percent correction in the first half of May. What are major reasons for the rally, and what should investors do with the space?
In the short term, the realty sector is bound to be volatile. The number of primary transactions have come down by 30 percent in the month of May, and that’s not surprising – with the lockdown across various states. The exposure of realty in investors’ portfolio is in the lower quartile if you compare the holdings data over the last five years.
Having said that, the sector does not fit our framework of investing today and we would look at better opportunities, than invest capital in realty.
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