George Heber Joseph, CEO-CIO, ITI Mutual Fund, is economically when asked to share his investment mantra. “SQL” is how he sums up his philosophy. Margin of safety, quality of business and low leverage are the three guiding principles when it comes to picking stock for Joseph who has over two decades of experience in the mutual fund industry.
Joseph is not surprised that the Zomato IPO was devoured by retail investors. Investment opportunities in new-age businesses are still limited in India, he says. After the listing, however, the stock’s performance will depend on good old business growth, return ratios and cash generation.
In an interview to Moneycontrol’s Kshitij Anand, Joseph says to create wealth, focus on bottom-up research and find undervalued stocks rather than trying to work out market direction. Edited excerpts:
The market hit a fresh record high in H12021 and the momentum has continued. What is driving markets–FOMO, TINA, or plain liquidity?
Economy and business recovery, post the Covid first wave, has been quite strong and much better than the expectations, both in India and globally.
Good recovery in many parts of the economy along with certain cost savings due to higher adoption of digital has resulted in strong profit growth for the corporate sector.
Thus, we have seen strong earnings upgrades for the Nifty, for both FY22 and FY23. Strong profit growth, EPS upgrades coupled with ample liquidity, and low-interest rates have resulted in higher multiples and buoyant equity markets.
Retail investors gulped down Zomato IPO in the first hours of opening, a record of some sorts. What is driving the optimism there?
Globally, we have seen strong investor interest in digitally enabled, new-age businesses, both from private equity players as well as public markets such as Nasdaq.
In India, so far investment opportunities in this segment were restricted to private equity markets only. Hence, when any large company from such a new-age business comes for a public listing, interest is bound to be high.
However, the post-listing price performance will depend on business growth, return ratios and cash generation, like any other company listed on the exchanges.
Apart from Zomato, there are many tech-based platforms such as Paytm and PolicyBazaar may hit D-Street in the second half of 2021. Will they turn out to be the next wealth creators?
Wealth creation by a company comes from profitable business growth over the long term. Thus, investors will have to judge each individual business based on its competitive advantage, industry prospects, company growth, profits, and cash generation.
Some businesses may have a longer gestation period and higher investment requirements in the initial years. So an investor will have to take decisions based on these factors.
Manmohan Singh’s July 24, 1991, budget speech is considered as the harbinger of economic reforms in India. What is your take on that? Do you think the best of the reform years are already behind us and what does this mean for investors?
The year 1991 was definitely a watershed year for economic reforms. However, over the years, successive governments, irrespective of their political affiliations, have continued and taken forward the reform process.
Last year, we had Parliament passing laws marking significant changes in the agriculture sector. Many, significant administrative reforms are continuously being undertaken. So, investors should not be worried about the reform process is on the back burner.
Small & midcaps seem to be surging ahead of the benchmark indices and are trading a premium to largecaps which has not been the case for long. Does that make you cautious? What should investors do?
Typically, small and midcap stocks are more geared to economic recovery and tend to do well during periods of economic recovery. Thus, we believe, small and midcaps will do well over the next three to five years.
However, over the last year, and more particularly in the recent past, they have smartly outperformed largecaps. Thus, the easy part of the rally has already happened. Lately, we have also seen some low-quality stocks flying high.
The large valuation gap between largecaps and small and midcaps has been filled. We are, therefore, cautious on the markets and on this segment from the near term.
We need to be more selective in small and midcap stocks in terms of business quality, balance sheet strength, and valuations. We, therefore, advise investors to invest in small and midcaps gradually using the SIP/STP route at this stage of the market.
What is your investment mantra for wealth creation? When did you start investing?
We believe over the long term, wealth is created by investing in fundamentally sound companies, identified through a rigorous research process, at appropriate prices.
The focus is on bottom-up research and finding undervalued stocks rather than trying to focus on market directions.
Our investment mantra for wealth creation is best captured in our investment philosophy ‘SQL’ where;
S stands for margin of Safety: This means the fair value of business minus the current share price. We look to buy stocks with a good safety margin, so that there is more room to generate long-term wealth for our investors.
Q stands for Quality of business: This is crucial as quality businesses are long-term wealth creators. These are strong and sustainable businesses with a track record of good RoEs.
L stands for Low leverage: Low leverage companies are generally cash-rich. Therefore, they can invest and grow their business. In addition, high leverage companies are at a greater risk in case of business downturns.
We focus both on the ‘quality’ of the underlying business and ‘margin of safety’ ie the price or valuation that we are paying for the business. We give equal importance to both, which we feel will provide investors with a smoother investment experience.
Which sectors are likely to take the lead in the second half of 2021? Where is the smart money moving?
We believe the themes that will play out strongly over the next three years are the pickup in the capex cycle, improving domestic discretionary consumption, and loan growth.
We believe that the the capex cycle will pick up in India. The government is clearly focused on capex and infrastructure-spend. Private sector capex is likely to pick as most companies have strengthened their balance sheet over the last five years and are in a position to invest for growth.
Household investment in the physical assets (primarily real estate) has been in a downtrend since 2012-13 and is already showing early signs of a pick-up.
Also, loan growth has been weak in the last three years and is due for cyclical pick-up. Thus, sectors exposed to domestic economic recovery will do better over the next three years.
Have you spotted any under-owned or unloved stocks that could probably make a comeback in the next few years?
We will not comment on individual stocks. As stated earlier, recovery of domestic discretionary consumption, capex cycle and loan growth will play out over the next three years.
So cement, capital goods, construction, auto & auto ancillaries, corporate banks and engineering and industrial products and consumer discretionary should do well over the next three years.
What is your call on IT space? Your preferred pecking for Infosys, TCS, Wipro and MindTree?
IT sector’s growth prospects have improved as the digital and transformational projects have picked up and the drag from legacy business has reduced. The increasing share of offshore revenues has also improved their margins.
So the prospects are reasonably strong. However, sector valuations factor in most of the positives at this time. I would not be able to comment on individual stocks.
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