Rajesh Kothari, Smallcase Manager & Alfaccurate

27 Feb 2023 , 09:36 AM

Have you made any significant changes to your portfolio to factor in India Inc.’s performance in the December 2022 quarter? If yes, share details with reasons.

The third quarter earnings seasons is satisfactory in general for corporate India. Our portfolio companies have deliver strong earnings growth of ~30% compared to Nifty earnings growth of ~13%. The strong performance by our portfolio is due to right selection of stocks within each sector.  Hence, no significant change in our portfolio post 3Q results.

What is your reading on earnings and have you seen more upgrades than downgrades?

While aggregate earnings growth is in line with street estimates, there were many companies which positively surprised market and there were also firms which disappointed the street. In auto companies, for instance, improvement in product mix led to better margins. In banking sector, most firms reported better net interest income growth driven by better net interest margins. In capital goods space, both order intake and execution resulted in upgrades of street estimates. On the other hand, healthcare and metal sectors continued to report weak numbers, leading to downgrades.

As an investor manager, our job is to be little ahead of the market as the market is forward looking rather than rear view mirror driving.

Where do you see Nifty 50 and Sensex by January 2024?

Nifty delivered 13% CAGR on a 3-year basis – one of the most painful periods for the world – despite the pandemic and Russia-Ukraine War crisis. I don’t think such events will happen again during the next three years. Hence, I think, equity will continue to deliver double digit returns over the next 2-3 years.

What is your view on the Indian market in the backdrop of the current global situation?

I think the debate in the USA market is – mild recession or deep recession, whereas debate in India is whether growth will be 5% or 7% – that’s huge difference. So clearly India will remain the fastest growing economy in the world. While generally, recession in developed markets causes pain for EMs but this time impact is likely to be limited for India as it benefits from China + 1 and Europe + 1 trends. Many global companies like Apple, Timken, Schneider, etc have already announced their capex plans for India to make it a global sourcing hub. Net-net, I think, while the next 2-3 quarters can see some impact of global slowdown, India is at an inflection point of growth within 3-5 years.

Which sectors are looking attractive to you for 2023? Which are the ones you are avoiding?

During 2021, companies with poor balance sheets and poor governance outperformed the good quality companies significantly. In 2022, that trend has started fading. I think 2023 will see firm reversal of that trend. It will be a year of bottom-up story. It will be the year of companies which have high quality growth and high quality balance sheet. We avoid businesses which have poor governance and poor financials.

What kind of diversification in asset allocation would you recommend to your clients amid volatile market conditions?

 

Remember one thing: consider Volatility as your friend. Use it to your advantage. During the last three years, investors who took advantage of volatility made more returns. Equity as an asset class has potential to outperform any other asset class but one needs to keep faith and patience.

Despite global equities not performing well, India has managed to outperform the other emerging markets. What are your views on it?

increasing formalization of economy, unleveraged corporate India balance sheet, a decade low credit cost for bankers and increasing digitalization of the economy has made Indian economy resilient compared to global economy. On top of it, we have a demographic advantage and strong domestic market compared to any other EM. Presently, India is 5th largest economy in the world and likely to become 3rd largest in next 7-10 years. As that happens, one will witness huge transformation in manufacturing and consumption patterns and that’s when wealth creation happens. Clearly, next decade belongs to India. And there is a big opportunity for Investors to make huge wealth in the long term.

Do you consider ESG metrics/performance of a company before investing in it?

ESG is not new for us. As an investment philosophy, we invest in businesses that are market leaders with strong cash flows. And only cos with cash flows can invest into innovation for long term sustainable growth. In fact, many of our cos are at the forefront of not only committing to be 100% green but will provide solutions to make the world greener in future.