Tridib Pathak, Co-head of Equity, Ocean Dial Asset Management India and Fund Manager at Avendus Olivo believes in fundamental investing driven by bottom-up stock selection. He says their goal is to achieve a fine balance between quality of the business and the valuations.
Pathak has an overall experience spanning more than three decades.
The FII flows into India should not be affected by the US Fed tapering, unlike during the 2013 ‘Taper Tantrum’, as India is in a much better situation now due to the macroeconomic stability, he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Edited excerpts:
Q: After Evergrande-led correction, the market seems to have gained more power. Do you think it is an expensive market?
Market valuations appear high in comparison to historic averages. We are not too perturbed about valuations, and we think that the market valuations are reflecting the following:
a) Rebound in overall economic growth with normalisation of economic activity post Covid. In our opinion, GDP (gross domestic product) growth in the next few years should be much stronger than what we saw in the last few years before Covid. Benefits from many ‘disruptive’ economic reforms (such as GST, IBC, RERA etc.) will now start flowing in.
b) This will lead to a strong corporate earnings growth cycle in the next few years. BSE500 Corporate Profit-to-GDP ratio fell to 2.4 percent in 2020 from 4 percent in 2011. With higher topline growth and thus operating leverage, cost rationalisations and lower interest rates, corporate profit-to-GDP will rebound smartly from here. We expect Nifty50 companies to average a PAT growth of around 27 percent per annum over the next two years.
c) Corporate profitability will improve rapidly. Average Return on Equity (RoE) of BSE500 companies fell from 15 percent in 2011 to around 9 percent in 2020. This has clearly bottomed out now with higher profit growth and asset utilisation.
d) Corporate India has deleveraged substantially in the last few years and the balance sheets have improved in quality, comparatively.
Q: September 2021 quarter earnings season will begin next month. What are your broad earnings expectations for Q2FY22?
We normally do not have specific expectations on quarterly growth. Having said that, we expect a strong topline growth due to base effect, but there is some pressure on margins relatively due to raw material cost inflation. Overall, the results season should be strong with growth returning owing to the normalisation of economic activity.
Q: Given the market at record high levels with the Nifty50 moving towards 18,000-mark and BSE Sensex near 60,000. What strategy should one follow?
We continue to focus on fundamental investing driven by bottom-up stock selection. Our investment process is designed to help us achieve a fine balance between quality of the business and the valuations you pay for it. We will continue not to compromise on the quality of business, but at the same time will not compromise on valuations as well. Our focus remains on ‘growth at a reasonable price’.
Q: What are the pockets that one can look for investment right now and the same could give hefty returns in coming years?
There is a diverse set of opportunities available in the market. Consumption (mainly consumer discretionary), banking (mainly private banks) and financial services (mainly platforms) account for nearly 70 percent of our portfolio strategy. We are also increasingly focussed on businesses that are benefiting from next generation mega-trends such as ‘mainstreaming of digitalisation’ and ‘China +1 – i.e. diversification of global supply chains’.
Q: With a multibagger gains in the benchmark indices and broader markets from March 2020 lows, should one reduce the exposure to equity to some extent now?
That, we think, is always a function of asset allocation mix of investors. We are proponents of long term and ‘patient’ investing, in line with an investor’s asset allocation framework.
Q: Do you think India stock market should be worried for Federal Reserve’s expected tapering? Will the tapering impact FII flow to India?
We do not think so. Unlike last time, during the ‘Taper Tantrum’ period of 2013, India is in a much better situation now due to our vastly improved macroeconomic stability. Our vulnerability has reduced substantially. Unlike 2013, when inflation was in the range of 8-10 percent, it is now much lower at 5-6 percent. Also, our current deficit is expected to be low at around 1 percent now compared with a very high level of around 4.5 percent in 2013. Our forex reserves are now the fourth highest in the world at around $ 630 billion.
Q: What is your investment mantra for new investors? Why should investors invest in companies that are ESG (Environmental, Social, and Governance) compliant?
We think that ESG considerations are growing in relevance to the long term sustainability of business models. ESG issues have the potential to impact investment risks and thus returns. We believe, integration of ESG factors in our investment decision making, will help improve our long term risk-adjusted returns.
ESG is not a style factor but is an integral part of our investment process.
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