In an interview with ETMarkets in association with PMSBazaar, Shah who manages AUM of over Rs 120 cr said: “Small-cap Stocks go through times of euphoria, but in the long term, they should do well. In the last 5 years, the midcap index has done better than Nifty, whereas the small-cap index has underperformed” Edited excerpts:
The Multicap Strategy has given impressive returns since inception approximately double when compared to the benchmark index. If someone had invested INR 50 L at the start of the fund how much money would he have made?
We launched the fund on 20th March 2023 and as of 12th July 2023 an INR 50 Lac portfolio invested on the launch day has now become an INR 64 Lacs portfolio (28% Return) vs the benchmark return close to 16%.Though it is a very short duration to measure the performance.
What is your take on the markets amid global interest rate headwinds?
CPI inflation in the USA is currently at 3% which is the lowest since March 2021, vs the peak of 9% touched in CY22 which was at a 40-year high.
It seems the USA interest rate cycle has peaked out; hence, interest rates are no longer a headwind. It seems that interest rates have peaked in India as well barring unforeseen circumstances.
Nifty50’s earnings grew by 11% in FY23 on the back of 34% growth in FY22, we expect earnings to grow between 13%-15% this year where Nifty currently trades at 20 times PE which is reasonable.
We expect earnings growth to be strong in the medium term and markets are expected to do well.
Take us through your investing style and how do you manage risk in the fund?
We follow a combination of top-down (importance to industry outlook) and bottom-up (importance to companies that are doing well) investing styles.
To manage risk, we take smaller exposure in smaller names (in terms of market cap) since the small caps tend to be more volatile.
We always try to capture a higher margin of safety in our portfolio allocations and a well-diversified portfolio helps keep our portfolio less volatile during turbulent times.
Small & midcap space looks interesting. It touched fresh record highs recently. What is your take on space in the next 6-12 months?
Small-cap Stocks go through times of euphoria, but in the long term, they should do well. In the last 5 years, the midcap index has done better than nifty, whereas the small-cap index has underperformed.
5 Year CAGR as of 30th June 2023: Nifty50: 12.4% Midcap Index: 14.5% Small-cap Index: 8.6%
Choosing the right stock is important and not the market cap segment that it belongs to.
How do you pick stocks for the portfolio? Tell us about your ‘VIABLE’ investment approach.
We follow our ‘Viable’ investment Philosophy for stock selection, this philosophy majorly looks for the viability of a stock for investments.
It takes into account the blend of various fundamental factors for the right selection. The factors which cumulatively build our ‘Viable’ investment philosophy are:
V => Valuation (Favorable)
I => Industry (Innovating)
A => Authority (Good governing)
B => Business Metrics (Top Quartile)
L => Leverage (Low)
E => Earnings (Consistent)
What makes you so optimistic about Banking, consumer durables, and auto ancillary sectors?
Credit growth was steady at 15% yoy in June 2023 which was driven by the retail and SME segment, we expect it to be strong in the medium term as well.
We expect slippages to be under control and hence credit costs will also remain under control. GNPLs and NNLs are at a multi-year low. Corporate net debt to equity is at a multiyear low leading to healthy corporate balance sheets.
While the net interest margins (NIMs) shall moderate from elevated levels from FY23, we still expect strong pre-provisioning growth and that along with muted credit cost would result in healthy earnings for the banking sector.
Valuations are in line with long-term averages.
Consumer discretionary segments are expected to grow at an accelerated pace in India in the medium term at current levels of USD 2,200 per capita income.
This consumption uptick was noticed in China where discretionary consumption categories grew at a CAGR of 17% – 25% when their GDP per capita crossed USD 2000.
Hence, we believe there is significant consumption spend capacity in the country and the sector is expected to do well.
Considering sector cyclicality in mind, we expect good growth in the sector in the medium term. India is among the top 5 auto markets in the world and presents a strong growth opportunity considering favorable demographics and rising per capita income.
We are playing the auto theme through exposure to the auto component sector as it would benefit from growth in OEM business, rising exports (China + 1 advantage), and replacement market.
Any recent entries or exits you have made in the fund and why?
Play on revival in capital markets & duopoly business. There is huge under penetration when it comes to the demat accounts and active users on exchanges. Currently trading at 33 times FY24 earnings estimate.
EMIL is the largest electronic retailer in AP and Telangana, now expanding in North India showcasing large opportunities in consumer retail in India. Currently trading at 26 times FY24 earnings estimate.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)