The 2017 Morningstar Investment Conference was held in Mumbai on October 10-11. At the conference, Nikunj Dalmia, Senior Editor at ET Now, chatted with Ajay Garg of Aditya Birla Sun Life Mutual Fund.
Where are we in terms of your understanding of valuation versus market cycles?
I, as a fund manager, don't focus on markets. I focus on the companies.
If we look back 8, 9, 10 years, or at 2008 when our market first time climbed to the peak in line with the global market peaks. From then till now in CAGR terms, the Nifty would have given 4%, 4.5% returns, or in dollar terms, a little less than or around 1% returns. But a couple of the funds in India they would have given in excess of 10% return.
Hence, it's always better to focus on stocks or the companies that adapt to the changing environment. I would say, one should focus on the future leaders rather than the historic leaders and establish a benchmark on P/E levels. We have always heard people saying looking at the historic P/E levels things look expensive or things look cheap. But I don't think it is a right benchmark. If we look at the top global companies - Google, Amazon, Apple - these are the ones who have emerged from nowhere. And these are not brick and mortar companies.
You are saying that markets on a historical/relative comparison, may look expensive. But the stocks in the portfolio, which you are managing right now may still be reasonably priced.
Yes.
We try to buy things which are relatively cheaper than the rest of the market or that have established themselves or that have processes in place to establish themselves as future leaders.
Rather than going back and drilling down and how have they done on the stock market, I would rather focus on their profitability and the process part and what kind of investment goes into the research and what are the new areas they are trying to tap.
So, this is where we try to focus on.
Would you agree that liquidity is a necessary condition, but not a sufficient condition where markets are going higher?
Yes, to some extent.
Liquidity is required for a couple of corporates, especially the ones who are stressed on the balance sheet. But probably, the ones who don't dilute capital, whose business model doesn't require capital to be diluted, liquidity is not a criterion. They continue to grow whether liquidity is there or good times or bad times. It is always good for them.
The construct of your portfolio is not really tilted towards neglected stocks. You own rather popular names. Why is that?
My focus has always been what kind of products are popular with the masses.
Give me an example.
My approach has been like if it is popular with the masses the sales will grow for that company. And they don't have to advertise on the media. Actually, the consumer himself he acts like a brand ambassador. And once the sales or market share keeps growing, he is bound to make profit. And profit is what we are rewarded as investors.
So, the names which I own in my portfolio are very common names. No exotic stuff. And most of the companies, I would have – they rarely are leveraged, except in the financial services space where they need capital to grow.
So, your tilt is towards consumer discretionary. You own a lot of consumer staples. You own little bit agri-based?
In fact, the answer is yes or no.
I feel it is all about solution-oriented companies. So, I would have a company in the industrial space where industrial IIP has struggled to grow over the past six, seven, eight years, but the company has delivered phenomenal returns. I don't remember any year where they have degrown on the sales.
So, it's all about bottom-up stock picking and doing lot of ground research and the ingredients that go behind the sales of the company and meeting the employees, or the lower employees, the customers, or try to be a customer and to experience the products yourself.
Then you kind of gain confidence and you can have sizeable weightage and you can be ahead of times.
Why are you buying banks?
For me, it is a crowded trade. For me it's avoid…
Both private banks – as in retail banks and wholesale banks?
I'll give you a perspective. In India, we saw disruption on the telecom and globally, we are seeing disruption on the EV side. And probably at some point of time where the Aadhar coming in we may see a disruption on the lending and borrowing side. Probably the ones who are banking on fee-based income will do very well whether they are from NBFC or banking side or they can be distributors of financial products or wealth managers. That is where they can do very well. But at the same time, disruptions on the lending and borrowing, I think, it will come any time.
Looking at the market capitalization of D-Mart, should we all stop business and start kirana stores? $10 billion, you've got to be kidding me. $10 billion, 4% margin.
Yeah.
Have you bought the stock?
No.
Then you can criticize.
I own one of the retail-focused stock in my portfolio.
So, I feel – we would have all seen Amazon getting into grocery and other online companies getting into selling grocery and a couple of companies cribbing. But my assessment is, if there is a standard item, then there's no monopoly or there's no moats around it, and it is easy for people to shop through mobile, whereas like in clothes or shoes, you require a personal touch, especially for Indians like the shape, sizes; they vary a lot. You need to feel it to buy it and probably this is a much better model for offline stores rather than the grocery one.
