Meet the Manager. ‘Look for businesses that are scalable and have competitive advantage’

Sachin Relekar, Fund Manager - Equity, at LIC Mutual Fund, says a balanced approach towards risk management and picking the right businesses are important in this market. Excerpts from a chat with BusinessLine:

What is your outlook on the Indian economy and equity market?

On the macro front, economic performance has been impacted due to demonetisation and GST. Earnings as a percentage of nominal GDP have been quite low for the last two years. But as things normalise, the economy should gradually recover.

Banks, with the cleaning up of their balance sheets, have now started reporting lower stress. This could be a big driver for the broader market. Bank recapitalisation and continued focus on reviving investments should yield results.

At the micro level too, some sectors such as IT have seen disruption due to the growing trend of digitisation. So, old models of IT delivery services are coming under pressure. New business is getting created because of this change, which is much more nimble and much more efficient. It is a question of when these new businesses become dominant, which is a long transition. Until then, the growth rates of large companies will be less than double digit. At the same time, valuation within the sector is attractive.

There are other domestic oriented businesses we are positive on. A lot of emphasis on public or infrastructure spending will drive cyclicals. GST transformation will see a shift from unorganised to organised, and some companies benefiting from this. Companies in the capital goods industry, which had low capacity utilisation, could see it improve because of revival in the investment cycle. So we are positive on the earnings.

The more important part is how much of that is already captured in the price. There are some companies where higher earnings growth justifiably commands a higher multiple. There are certain sectors within the mid- and small-cap space where one needs to be cautious. A balanced approach towards risk management as well as picking the right companies or right business is important in this market.

How do you choose the right stock or sector? Which are the sectors likely to do well, going forward?

Our entire equity basket is managed as per two strategies. One is value investment strategy and the other is growth. Both follow a bottoms-up approach.

In growth, first we look at risk management. We reject businesses that are not sustainable from a long-term point of view and corporate governance issues are there.

Post that we look for three important parameters — businesses that are scalable and having clear competitive advantage and capital efficiency. This is where the wealth gets created over a long term.

Value investment also considers these parameters. But there we are buying businesses that are victims of too much pessimism but with an inherent business model on a long-term basis. That’s why a lot of our investments are towards PSU banks and telecom, which have handsomely paid off. It’s a contrarian strategy. But for that kind of strategy you need patience.

These strategies are deployed for all our schemes. They don’t change for market capitalisation.

In the mid-cap space, our portfolio is conservative in terms of the way it is allocated. As of now, a significant portion of our investment has gone towards not-so-small companies — they are mid and large companies.

On sectors which are likely to do well, the investment cycle is expected to pick up. We expect the infrastructure sector to do well. However we don’t confine infra to a narrow scope. We look at a broader definition of infrastructure. Importantly, investment strategy doesn’t change because it is infrastructure.

Given the pricey valuations in the mid-cap space, what factors would you consider when selecting a stock?

Mid-caps have to have a distinctive value proposition. You can’t have businesses which are already done by large companies. So mid-caps must come with some kind of differentiation and value proposition. They can also take advantage of their small size, and since they don’t have legacy businesses, they can adapt to changes very fast. This is where a long-term growth potential gets created.

What would you advise investors at this point in time?

The important step for an investor is asset allocation, based on his/her investment horizon and risk appetite. If you are thinking about investing for more than five years, you should look at allocating money to equity. Within equity, one can allocate between large and mid-cap funds based on risk profile and financial goals. As you near retirement, a larger portion of investments can move into fixed income options.

COMMENT NOW