Naveen Chandramohan, founder and fund manager of ITUS Capital, said over the last 1.5 years (since March 2020), any portfolio constructed in the market would have generated between 80 percent and 140 percent returns (irrespective of how bad or sound the logic of construction was). But he feels these returns are not sustainable.
He believes investors need to now turn cautious on the process of building portfolio and re-evaluate businesses which were bought without sound fundamentals. “To reiterate, investors should not be buying businesses for momentum but for growth of earnings through cash flows,” he told Moneycontrol’s Sunil Shankar Matkar in an interview.
Edited Excerpts:
Q: Currently the markets are at record high levels. Do you think the momentum will continue in the next one year?
The Q1FY22 earnings that have come out have been robust. There have been pockets of pain in auto, pharma (predominantly from pricing pressure in the US), however, on the bright side, manufacturing, IT and domestic pharma companies continue to show robust growth. I believe investors would need to learn to differentiate today, rather than look at how the markets behave. Investors positioning their portfolio towards growth will continue to see returns accrue to their portfolio. It would be wise for investors to price in increased volatility in the portfolio today.
Q: What are the sectors that could boost the returns of a portfolio by next Independence Day, and why?
Again, markets are not meant to price in returns from one Independence Day to another, or from one financial year to the next. The returns are never meant to be smooth, which is why equity investing will be challenging. Its important investors focus on individual companies today, rather than sectors. There are niche pharma companies which have gastro and anti-respiratory portfolios (with a domestic and export focus) that have shown robust earnings, whereas, there are pharma companies with a very different product portfolio mix which has seen pricing pressure. The sector is pharma, but the underlying dynamics are extremely different. Investors do not have dislocations in the market like last year, hence, it’s imperative, that company fundamentals are understood rather than playing sectors.
Q: PM Modi said that the decision to repeal the contentious retrospective tax will lead to greater trust between the government and Indian industry. What is your view and what would be the impact (positive as well as negative) on segments that relate to this decision?
The retrospective tax was onerous and had set a poor precedent to FDI investments. Repealing this, I believe, is a first step in the right direction which will certainly set the tone for a conducive environment as we go ahead. It’s important to realize that trust takes time to build, and repealing the tax does not say that all is good to go again. It reinstates confidence to the investors that the government has the intent to do the right thing. It’s imperative that we continue to follow through on this decision into creating an environment where the government is serious about protecting investor interests.
Q: What are the major reasons that led the sharp sell-off in midcap and smallcaps. Is it because of additional surveillance measures introduced by the BSE?
Certainly the sequence of news flow does make you have the view that this resulted in the sell-off in stocks. One needs to put this into perspective. The indices corrected 6-8 percent alongside and many individual stocks corrected 15-20 percent. This is what I mean by investors pricing in volatility for the rest of the year. The moment you understand the fundamentals of a business, an investor has to look at this as a buying opportunity – again I do not mean indices or broad market caps, but select companies. We have forgotten about volatility over the last 8-10 months and we tend to extrapolate the same, which are the biggest dangers today. I would look at these price corrections as par for the course.
Q: The benchmark indices more than doubled from March 2020 lows and broader markets are way ahead of them in terms of returns. Do you think it is the time to turn cautious or the momentum will continue?
Over the last 1.5 years (since March 2020), any portfolio constructed in the market would have generated between 80 percent and 140 percent returns (irrespective of how badly or sound the logic of construction was). Do I think this is sustainable – certainly not. Investors need to understand that a well-constructed equity portfolio is meant to annualize at a high teens internal rate of return (IRR) today. These are businesses we own, and not pieces of paper one trades in and out depending on the price at which they trade.
I believe investors need to turn cautious on the process, and re-evaluate businesses which were bought without sound fundamentals. To reiterate, investors should not be buying businesses for momentum but for growth of earnings through cash flows.
Q: After recent policy meeting, do you think the RBI has started the process of sucking out excess liquidity or will start in coming months?
I believe the process of easy money and low rates is here to stay for now. We clearly have asset inflation across the board, but economic growth is on the verge of picking up. The capex spending is coming through from the state budget today and should translate into private capex over the next few years. I do not believe RBI will want to spoil that today by immediately raising rates when wage inflation has not yet come through.
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