- Outlining the key triggers for asset classes
- Stocks to invest in bull dominated market
Samina Nalwala in conversation with Spark Capital Wealth's Devang Mehta.
- Stocks to invest in bull dominated market
Samina Nalwala in conversation with Spark Capital Wealth's Devang Mehta.
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TVTranscript
00:00 Hello and welcome. You're watching the Portfolio Manager Show. Devang Mehta, Director, Equity
00:19 Advisor, Spark Capital Wealth Management joins us. Hi, Devang. Thank you for joining us.
00:25 Devang, let's start by talking about a quick view on the broader markets. You know, we
00:31 thought we were going into a price and time correction, but that's not how things are
00:34 playing out. There are lack of triggers, but the markets clearly have a mind of their own
00:38 at this stage. Do you feel like calendar year 24 could beat returns of calendar year 2023?
00:46 Thanks Amina for having me on the show. It's great to be on NTT Profit. I think clearly
00:51 what we feel is that last six months there has been this type of corrections, maybe starting
00:56 September, October, November, December, Jan and now Feb. There has been these corrections
01:00 to the tune of 3-4% where mid caps and small caps would have corrected a bit more the indices
01:04 as well as the individual businesses. But what we have seen is that these falls have
01:08 been got bought into. And that's the strength. I think it's a confluence of factors, Amina,
01:13 where there are people coming in with a lot of great liquidity. The domestic investors
01:18 are still wanting to pump money into the equity markets. The asset class is now clearly distinguished
01:24 as an asset class where even people are talking about money not going into FDs and coming
01:29 into sort of stocks and mutual funds and stuff. So that's one important part. Liquidity from
01:34 Indian markets, from Indian domestic investors is huge. Domestic macros have been sort of
01:38 very good. Micros have been good. If you look at the interim budget or the vote on account,
01:43 that also talks about a bit of growth, right, 11-12% growth over a base of 10 lakh crore
01:47 for infrastructure spend, low borrowing. I think this all has sort of spurred the market
01:51 in a different tangent. And earning season, which just came to an end also, actually didn't
01:55 disappoint it. So I think there are a lot of green shoots there as well. So I probably
01:58 feel that now we are in sort of good hands. Whether you beat 2023 returns, that's going
02:04 to be a bit tough because in '23 people were starting to talk about x returns, right? How
02:08 many x you would do the money, right? Percentages were sort of forgotten. I don't think that
02:12 type of a market will get in 2024. The rally probably would narrow down a bit. It would
02:17 be a bit concentrated. It's not the entire broad spectrum of the rally or the market
02:22 that would now participate. That's the only thing that can happen.
02:25 Srinivas Devankar, talk to us about the PMS that you run. I believe it's a non-discretionary
02:29 PMS. One, what is a non-discretionary PMS for the sake of our viewers who don't know
02:33 that? What is the assets that you're currently managing? And also, what is the minimum ticket?
02:38 Because most discretionary PMSs are 50 lakhs. So help us understand that.
02:42 Sure. So non-discretionary PMS is something where we call it a driver navigator type of
02:46 a model where we work very closely with the clients in sort of establishing the investment
02:52 policy statement with them. We also sort of again get into the portfolio construction
02:57 or portfolio management or portfolio advising in terms of how the clients want that portfolio
03:03 to be like. For example, is it a diversified portfolio? Is it a concentrated portfolio?
03:08 Whether the portfolio needs more of a flexi-cap or a multi-cap approach? Whether the portfolio
03:13 is only large cap, mid cap, small cap or micro cap? That's the type of portfolios differentiation
03:19 in terms of portfolio. Second, I think mutual funds, PMSs, AIFs all have a model portfolio.
03:24 Here we clearly, of course, we have certain universe of businesses, but there is no model
03:29 portfolio. The client itself is a model where we sort of design the portfolio in and around
03:34 his requirements. So that's in short NDPMS. We currently have around 500 crores of pure
03:40 play EUM and around say 400-500 crores of family office type of EUM in terms of my non-discretionary
03:47 PMS which is called bespoke investment ideas is what we name it. And I think that's about
03:53 it and that's the type of NDPMS we run. And here we customize, tailor made, make it a
03:59 sort of a scientific holistic approach towards construction of portfolios. And this is purely
04:03 for a long term horizon, anywhere between three to five years. I would love to talk
04:07 10 years, but I think the horizons are increasingly shortening. So three to five years is I think
04:12 a decent time frame where one can probably compound, we call it a wealth creation, more
04:17 importantly preservation and sinner multiplication strategy.
04:20 How, what is the average number of stocks that your portfolios hold across various risk
04:28 profiles?
04:29 Yeah, so a good question. So basically the newer portfolios where we receive EUM in terms
04:34 of cash, ideally are between anywhere between say 10 to around 18-20. If I can put a broader
04:39 number, the average would be somewhere around 14-15 types, 12-15 types. There are certain
04:44 even legacy portfolios or family portfolios which are probably having even 80-100 stocks
04:49 to begin with. There also we sort of take this portfolios and over a period we try and
04:53 trim them down to businesses which should be sized up. For example, today the bulk of
04:59 the returns will become when you size your portfolio to a certain extent, right? Buying
05:03 50 stocks with 2% sort of allocation everywhere will not take you anywhere. Having 15 businesses
05:09 and making 5%, 6%, 7% and letting them also mature in the next three-five years where
05:13 these stocks can become 2x, 3x as well and 4x as well somewhere. And to hold that is
05:17 an art and science according to us.
05:19 So your top say 3-4 stocks, what percentage of the portfolio do they carry? I want to
05:24 try and understand how do you split that 100% of the assets?
05:28 So interesting. So I think just a classic example, again this business that I hold in
05:33 the portfolio are not recommendations, they are holdings for our clients. There was a
05:37 business called Vanun Beverages, right? It's sort of done extremely well. Since listing
05:41 in 2016, it is 18x and some of the portfolios from 2018-19, this stock would have given
05:47 around 10-12x type of returns. Now for example, if we would have bought this 4% in the portfolio,
05:53 5% in the portfolio, some of these portfolios after trimming down also would have 15-18%
05:57 type of holding in the portfolio. Now this is as I said, it's a very concentrated portfolio
06:02 where we also engage with the clients and say that we feel this business is going to
06:06 do increasingly better. It's 2 lakh crore in terms of market cap, but whether probably
06:11 it can touch in the next three years 4 lakh crores of market cap, the answer seems to
06:14 be yes. And then we sort of take a hold decision on even this large position. So yes, some
06:18 of these businesses are large. Some of these businesses do not perform. Probably you also
06:23 say that no, this is the time that there are better meritorious candidates sitting outside
06:28 the portfolio. Why not look at that if this company does not deliver for the next say
06:31 one, one and a half, two years. You give ample time to the management and the promoters to
06:35 perform very well, but if the business and the commentary is not great, we sort of then
06:38 get out of this business.
06:40 So if you had to build a fresh portfolio with an average risk profile, so medium risk profile,
06:47 not high risk, not low risk, you know, 70/30 equity debt kind of allocation. So you've
06:52 got the 70% of equity there. Sectorally, what is the portfolio construct that you would
06:57 build today? What I want to understand from you is what sectors you'd overweight on and
07:01 you'd add to, where there are no valuation concerns and what you're underweight on at
07:05 this stage.
07:06 So I think clearly the three sectors or three themes which we feel will do very well, and
07:12 this I've been talking about last six months, seven, seven months, are the three C's for
07:17 operational is I call them three C's. The first C is CapEx. And I know everybody talks
07:21 about it, the capital expenditure. India has got into this cycle after a hibernation of
07:26 around say eight, nine, 10 years. And we are increasingly seeing government CapEx one,
07:32 which has spurred the entire, I can say the infrastructure sector, power, defense. I think
07:36 all this has done very well if I count this as a part of CapEx, even certain building
07:40 materials, home improvement, all this are part of CapEx, capital goods. CapEx is a theme,
07:45 one from the government side. Second, even the private side now seems to be jumping on
07:49 the bandwagon. There are now announcements of greenfield projects, brownfield projects.
07:53 So I think this theme, CapEx, which includes a lot of capital good businesses, a lot of
07:57 ancillary businesses of capital goods, transformer businesses, energy, energy efficiency. I think
08:03 this as a theme, if you probably hold say three, four, five businesses in the portfolio,
08:07 this theme will do well. The second C is credit growth. Now we all know that we are into again
08:11 a historical credit growth type of an environment, which we saw somewhere during 2004 to '08.
08:16 So credit growth, again, by credit growth, I don't mean the run of the mill banks, but
08:20 there are certain banks, there are NBFCs. Again, credit growth as a theme, there are
08:24 a lot of microfinance institutions. A lot of such themes can come to the fore, smaller
08:28 banks, where I think lending is going to happen very fast. Right now also, if I'm not wrong,
08:33 the credit growth is somewhere around 15%, 16%, 17% in the mid and the late teens. So
08:38 this also has to be an integral part of the portfolio.
08:41 The third C is which I call consumption. But by consumption, I mean more of discretionary
08:46 consumption, the premiumization trend, the aspirational Indian coming to the fore. So
08:50 where there is, even Maruti talks about this, people don't buy now hatchbacks more. SUVs
08:56 are a larger part. There are waiting lists for the Mercedes and the BMWs of the world.
09:00 So I think this also discretionary consumption is a theme where people are moving towards
09:04 luxury. What was necessity, what was luxury earlier is now becoming necessity. That theme
09:08 also probably three, four, five businesses over there. This can be a portfolio construct.
09:12 And of course, then there are niche IT companies, niche technology companies, pharma companies.
09:17 Probably this four or five sectors along with 12, 15 businesses should be the order of the
09:21 day.
09:22 Right. And in terms of funds, are you allocating 100% lump sum? Are you going staggered? If
09:28 you are staggering it, what's the time horizon? How are you approaching the construct?
09:33 I think, again, that depends upon the asset allocation, as you rightly talked about. For
09:37 example, the private banker normally does an asset allocation himself. So a second thing,
09:42 if I also get into asset allocation or increasingly investing in equities as an asset class, there
09:48 are two things. One, we say that if you are really meaning for the longer term, if you
09:52 really talk about the next four or five years, I think you can probably do it at one go as
09:57 well. But yes, if you are a bit skeptical about the markets and that everybody is, because
10:00 this will be an event for you for sure, being US elections, Indian elections, the narrative
10:05 around inflation interest rates in the US. So I think, yes, probably you can phase it
10:09 out over the next three, four months. You will, probably volatility will come and disturb
10:14 you, but it will become a friend if you're a long term investor. So you can do it in
10:17 couple of tranches, three tranches if you are a conservative investor. But if probably
10:20 if your horizon is three, five years, and if you are trusting that the Indian economy
10:23 and Indian markets or other, the businesses that we are picking with a lot of conviction
10:29 would bear fruits, I think we can probably do it at one go as well. But ideally, yes,
10:32 to be safe, a couple of tranches at this levels of the market or at this valuations would
10:37 be a little bit more comfortable for everyone. Right. Let's talk about a few stocks that
10:42 you know, you seem to like and I think Hitachi is one such Hitachi Energy is one you like.
10:48 Now this stock is not a very large company. It's what 25,000 crores of market cap. The
10:53 stock trades at 21 times the return on equity has also been fairly low for the last couple
10:58 of years. So what makes you constructive about Hitachi and would you add incremental money
11:03 to Hitachi is what I want to know. Yes. So this business has already seen around four,
11:08 five, six x from the buying prices over a period in the last three, four years. The
11:13 biggest trigger for this company, the history is that there was a company called ABB, which
11:18 is still there. This company de-merged as an entity called ABB Power Product. Hitachi,
11:22 a global giant came and took it over. Now this company is into everything right from
11:27 power automation to grid integration to transformers to power data centers. And it's an annuity
11:32 model. It's a high niche type of a business that it is into and you can call it as a power
11:37 ancillary business or an energy efficiency business. It also sends robots to the transformer
11:43 and checks the oil efficiency and when the oil is getting over, it also does something
11:47 which is very interesting that today there are so many, so much different types of power,
11:52 for example, solar or wind power, or even your thermal power. It differentiates between
11:56 what power is getting generated. What is the unit per power cost? There's a software called
12:01 Lumbra, which it uses for doing this. Now I'm talking a lot about this. The EPS somewhere
12:06 right now would be around say 35, 40 rupees. In the next two, three years, the EPS probably
12:10 would reach a 140, 142 type of a level. All the orders of the larger companies, capital
12:16 good companies, infrastructure companies flow into Hitachi Energy. So this is again as a
12:20 proxy play, a big theme to play the CapEx or the power efficiency story, or even a renewable
12:25 story. Somebody playing an EV. This lays down the infrastructure for electric vehicles as
12:29 well along with BP, IOC, HP. Right. Thank you for that. Deewan, great talking to you
12:34 today and discussing about the markets and your non-discretionary PMS. With that, we'll
12:39 take a quick break. We'll come back. There's a lot more on the other side, so stay with
12:42 us.
12:43 [MUSIC]
12:53 (whooshing)