Naveen Chandramohan is the Founder & Fund Manager at ITUS Capital.
“In India, we have a stable government that is focused on business. Moreover supply chain global uncertainty has helped India in a big way. So, it’s hard to expect the market to be cheap under these circumstances,” Naveen Chandramohan, Founder & Fund Manager of ITUS Capital, told Moneycontrol in an interview.
Commenting on industrial commodities, which have rallied quite sharply in the past few months, he said: “Generally, supply-driven rallies tend to normalise as we will see additional capital (in the form of capex) getting set up. However, this time around, I surprisingly do not see additional capital coming into oil & gas globally at these high prices. In this dynamic, I would not be surprised if we continue to see higher oil prices from here,” he said.
Do you think the market has priced in expected weakness in margins on higher inflation?
I do not believe the margin pressure will be across the board. You will find certain companies that have the ability to pass on prices and maintain margins in spite of their raw material and logistics costs going up. It’s one of the reasons that higher inflation will make the good companies stronger and will make the weaker balance sheet companies struggle.
What are the triggers that can take the market to new highs again in 2022?
I continue to believe that it is important to focus on individual companies here and less on the market. Markets will make new highs when you are in the regime of easy liquidity. Individual companies will generate consistent returns on the back of robust cash flow growth. Liquidity is not something we are in control of, but we as investors are always in control of the micro and the fundamentals (as opposed to the macro).
I maintain that investors are better off asking questions of individual companies that will give sustainable returns with an adequate margin of safety and build exposure into them.
What are your thoughts on the quarterly and full-year earnings announced by IT majors recently? Is it time to go overboard on these stocks? Do you expect the Fed rate trajectory to impact the IT sector’s performance though they have a healthy orderbook?
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If we look at the global earnings of Accenture and the earnings release by TCS, it is clear that the earnings growth and order book are both robust. In fact, some of the large billion-dollar-plus deals that TCS has won would accrue in the form of revenues over the next seven years. For the first time, you are not only getting a strong order book but the benefit of longevity in revenues too.
I always tell our investors, your returns are commensurate to the uncertainty you are willing to accept. If you wait for all the data to come and then invest, you will make returns but this would be to the tune of 12-15 percent compound growth from here. So, if someone wants to go overboard here, they need to understand this from a return expectation perspective and then make that decision. People need to remember that it’s as important to pay the right price as it is to buy good businesses.
Finally, an aggressive Fed could cause volatility but that again goes into the realm of the macro, where you start getting into unknown unknowns. I prefer to focus on risks that are known unknowns.
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Do you think Indian market valuations are still expensive and will the expected change in stance by the RBI put pressure on valuations? Also are higher valuations compared to other Asian counterparts the only major reason behind FII outflows?
It is important for investors to understand that the markets will not be cheap when you have an element of robustness and growth in your economy. Today, why is China cheap? Because, they have meddled with free-market dynamics and have played the hand of god from the government. You have some of the best platforms available to you at a multiple of 13x forward earnings. This is unheard of in the last seven years. However, you also have a government that does not back away from taking decisions that are capital markets-inefficient. Markets never like uncertainty.
In India, you have a stable government focused on business. Moreover the global supply chain uncertainty has helped India in a big way. So, it’s hard to expect the market to be cheap under these circumstances.
With regard to the RBI, if you believe that we are in an environment of rising rates due to inflation, it becomes all the more important to own businesses with pricing power and those that generate cash flows. These are the businesses that will give you better downside protection during any volatility.
Do you expect commodity-linked sectors to do well in the coming quarters given the sanctions imposed on Russia by Europe and the US?
I believe commodities do well or badly depending on supply-demand dynamics. In the previous commodity bull market (2004-10), it was a demand-led dynamic (driven by China). Today, it is a supply-driven dynamic driven by a host of issues. Generally, supply driven rallies tend to normalise as you will see additional capital (in the form of capex) getting set up.
However, this time around, I surprisingly do not see additional capital coming into oil & gas globally at these high prices. In this dynamic, I would not be surprised if we continue to see higher oil prices.
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How do you approach the banking and financial services space now given the rising expectations for rate hikes in the second half of FY23?
We do not think about risks with the expectation of rising or falling interest rates. If you look at the building blocks of lending financials (banks and NBFCs), they have access to cheap capital (through deposits and CASA) and they lend on this at a margin, which is their net interest margin (NIM). Due to running a leverage, with a strong focus on risk and keeping their NPAs (non-performing assets) down, the banks generate sustainable margins.
For lending to pick up, we would need continuous capex to continue to flow through downstream, which is currently happening in pockets. So, inherently, banks benefit from the core economy’s growth. While they are relatively cheap from a valuations perspective, at ITUS, we are relatively underweight versus most of the other funds I know as I see better opportunities today (rather than to focus on second-order demand effects). I would not look at rate hikes and say, I want to own banks, as that would be missing the forest for the trees.
Is there any possibility that India’s growth can be below 7 percent for the current financial year? What could be the reasons?
The interesting thing about macro questions like the above is there is always a probability that it could happen. However, as a risk manager today, the odds of that are low. We need to be making bad policy decisions at the top for this to come into fruition and I do not believe that is a realistic scenario today.
I continue to worry about risk in the US and I maintain that India will be a strong beneficiary of this. I do not believe ‘geographical diversification’ is warranted today, especially to the US.
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