Naveen Chandramohan is the Founder & Fund Manager at ITUS Capital.
“If I was to look globally, India seems best positioned for growth from a capital allocation perspective,” says Naveen Chandramohan, Founder & Fund Manager at ITUS Capital in an interview to Moneycontrol. There is a reason that supply chain expansion and manufacturing is coming through in India, and the geopolitical risks are adding to this narrative, he adds.
On the stocks front, the ace financial services professional having worked across fund management, fundraising and fundamental research says they do not own any real estate stocks in their portfolio, but own real estate ancillary businesses which have clean balance sheets, reducing working capital cycles and would be beneficiaries if the real estate cycle continues to pick up.
There is little margin of safety in the real estate stocks, he feels. Hence, “we would not want to own equity in any of them.”
Federal Reserve, in line with market expectations, raised rates by 25 bps for the first time since 2018. What is your view and do you still expect 6-7 hikes in FY23?
In the last decade that went by, the Fed went into two tightening cycles and had to reverse their decisions due to external environments and growth slowing down. Currently, we are in a third such cycle where we expect the Fed to tighten, on the back of growth.
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Currently, due to extraneous factors, one has to question the growth at a global level with wage inflation coming through. As we speak, I do not see the Fed going through with 6-7 such rate hikes.
FY22 was a tough year for equities. Do you think the coming year will also see a similar situation and what are the biggest risk factors that the market can face in the coming financial year 2022-23?
The challenge at every stage that will face markets is demand side growth coming through. There will be hiccups at different stages and the reasons could vary (sitting 3 months back, I do not believe anyone could predict or factor the geo-political risk and Oil prices settling above $ 100).
So rather than worrying about the risks, I would use this macro uncertainty to pick up good businesses which continue to grow cash flows, reinvest capital and gain market share. There are multiple businesses that are doing this, and our focus would be on the micro.
Even after the perceived global slowdown, do you think India will report much faster earnings growth than most markets in FY23?
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If I was to look globally, India seems best positioned for growth from a capital allocation perspective. There is a reason that supply chain expansion and manufacturing is coming through in India, and the geopolitical risks are adding to this narrative.
Today, even if you look at halving your growth estimates for FY23, India still seems to be in a good place for double digit growth in FY23 across a few industries and sectors.
Is it the time to buy and stay invested only in stocks or sectors that enjoy pricing power and leadership position? What is your view?
When a business exhibits pricing power in a difficult market, they typically do this by gaining market share. When this is accompanied by a good return on incremental capital, we like to study such businesses. This has been the core thesis of our investing style since the start of the fund. This has ensured that the drawdowns are minimised and downside protection is maintained.
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I do not think one should change their investing style based on times – that would be a recipe for disaster. Every style goes through difficult phases when the market does not reward you through a share price increase during brief times, this is where the fund manager’s conviction and process will get tested. If this changes, it would be the onset of bigger problems.
New age companies like Paytm corrected 70 percent from its issue price. Cartrade Tech declined 65 percent, Zomato fell below issue price etc. In fact, Macquarie in its recent report lowered target to Rs 450 now after regulatory issues. Is it the time to buy these stocks?
To me, as a fund manager it is important to focus on the business, cash flow generation, return on capital and corporate governance. This has a direct impact on the pricing power of the business – be it old age or new age. Valuations come later. Companies like Paytm, CarTrade etc operate in very different sectors whose competitive intensity and value creation are very different. I wouldn’t bucket them into one, calling it New age, as that would miss the forest among the trees.
For me, the price comes into question after the business model is sticky and is value accretive to returns. The businesses mentioned would not fit into our criteria, today.
After recent low, several sectors including auto, bank, capital goods, FMCG, healthcare and IT gained in the range of 6-9 percent. Do you still expect more upside in these sectors and where do you want to put your money among these sectors?
Again, we are not sector based investors but bottom-up stock pickers. We have exposures across all of the sectors you mentioned above, but for us, it is in businesses which fit our cash flow growth where the management is obsessed about growth through internal accruals. As investors, we are not reacting to prices, whether they are down 10 percent or up 10 percent to decide what to do next.
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Realty clearly stood out strong among sectors rising 11 percent from March 7, when the market hit seven month lows. What is your view?
While we do not own any real estate stocks, we own real estate ancillary businesses which have clean balance sheets, reducing working capital cycles and would be beneficiaries if the real estate cycle continues to pick up. In an environment where rates are at a decadal low, the demand for real estate will continue to be strong.
You are also faced with an environment where the supply is limited from a select set of developers (as many of the unorganised players are out of business) and inventories are off the balance sheet. This should bode well from the demand side.
However, there is little margin of safety in the real estate stocks and we would not want to own equity in any of them.
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