DAILY VOICE | Chockalingam Narayanan of BNP Paribas MF reveals the BMV methodology for stock picking

Market Outlook

Chockalingam Narayanan, Head-Equities, BNP Paribas Mutual Fund, follows the BMV (Business, Management, Valuation) philosophy for investment that focuses on businesses that grow at a rate higher than the economy and industry it operates in.

Narayanan, who has over 14 years of experience, says that one has to be very careful at this stage of the market about what businesses and stocks one owns. He advises investors to follow the investment philosophy that resonates with one’s risk appetite and horizon and follow it with discipline.

Here are the edited excerpts from his interview with Moneycontrol’s Kshitij Anand:

Q) Market hit fresh record high. What is the way ahead?

A) We have had one of the broader rallies in the market over the last 15 months, and the excess liquidity in the system seems to be supporting the continuation of the same.

With marginal money mainly coming in from retail investors, this seems to be moving more towards IPOs, small caps and midcaps that this set of investors have generally been more active in.

While earnings trajectory has been supporting it thus far, the small and midcaps are now actually not offering as much higher growth for the valuation premium that they seem to be commanding vs in the past.

To that extent, one has to be very careful in this stage of the market about what businesses and stocks one owns, follow the investment philosophy that one’s risk appetite and horizon provides comfort for and follow this with discipline.

Q) What is your mantra of long-term investment? Any principles or guidelines which you stick with when investing?

A) Follow an Investment philosophy with discipline. At our end, we follow the BMV (Business, Management, Valuation) philosophy that focusses on businesses that grow at a rate better than the economy and industry a company operates in, that have a sustainable MOAT; the businesses being run by competent management with good execution track record, capital allocation, and corporate governance.

If a company filters through all these, then we focus on Valuations, and that too not just headline numbers but cashflow-driven valuations.

Q) The latest US Fed statement highlighted that a number of FOMC members argued that the tapering should start with knocking off the USD 40 bn monthly purchase of MBS. How will it impact Indian markets?

A) The Central Banks will at some point look to taper and that could take some liquidity out of the system. They could also possibly look at raising rates sometime late next year.

While these measures could put some pressure on the markets, the earnings trajectory does seem quite sound.

From a valuation perspective though, tightening measures from the central banks is likely to have some impact on the multiples. Hence, as we head towards that change in regime, we could continue to see some volatility.

Q) The big China crackdown on ed-tech companies triggered jitters in equity markets across the globe last week. Do you think there is a silver lining for India or Indian firms in listed or unlisted space?

A) Ed-tech space is really a non-existent sector in the country from the listed sector perspective and hence very difficult to call whether this is good or bad for Indian firms.

Q) Plethora of IPOs are listing in July and the second half of 2021 – what do you make of the IPO frenzy on D-Street? How should investors evaluate IPOs ahead of investing?

A) The market is reasonably awash with liquidity and retail participation has been at the highest levels. That historically has led to good IPO markets.

The good part is – this will make the market more representative of the economy. A lot of the sectors that were playing a large part in the economy were not represented – be it e-commerce, fintechs.

So from that perspective, this will be good. However, investors need to tread with caution. Alongside some of these marquee business listings, we are also seeing a whole host of other companies that have proximate peers already listed.

Now given this frenzy, we are actually seeing a lot of premiums (in terms of multiples) and money chasing these new unknown names for public markets when actually more credible similar companies with track records being available at much cheaper levels. That dichotomy will at some point in time get bridged.

The sector(s) mentioned in this document do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s).

Q) What do you make of the June quarter results so far which have come? And, your estimates for FY22, and FY23?

A) The results season has been a mixed one. Given the very benign base from which one is looking at, the growth numbers are looking fairly buoyant. If we look through from a 2-year CAGR basis, even then, there is clear growth.

Revenue expectations have been largely met but margins have been a tad below expectations given the steep inflationary pressure that is running across.

PAT also consequently seems to be a tad below expectations. The overall EPS estimates of the street (as per Bloomberg) for the benchmarks like Nifty/Sensex to that extent have been largely plateauing vs an increasing trend seen in the last two quarters.

The good part is that the leading businesses across most sectors seem to have taken the pain upfront and hence barring a very bad subsequent wave(s) of Covid-19, we seem to be reasonably well positioned. So from the earnings perspective, we believe we are reasonably positioned for a mid-teens earnings growth in the next 24 months.

As a sector, for a minority investor, it is a fairly cyclical one and hence one needs to be very careful about the stage in which invests. That said, there have been some decent franchises that have created wealth for investors in this sector as well.

Q) As India’s Independence Day is around the corner, how can one become financially independent by the age of 40 in case he starts planning by 25.

A) Starting to invest early in life and also within one’s capacity are good points to start with. Like for our health we consult doctors, and teachers for education and lawyers for legal issues, it is good to consult a financial advisor for one’s financial needs.

Like health, financial investing is also very personal – the horizon to invest, the goals one is working towards, the age from which you start off etc. are very different for each individual and hence the investment approach needs to vary as per their needs.

Having the right allocation and doing a periodic reset with discipline, go a long way towards generating returns in the long run.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.