PORTFOLIO MANAGER | VINAY PAHARIA | NDTV Profit
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00:00 Hello and welcome to the Portfolio Manager. I am Neeraj Shah and there is a show when
00:14 we talk to portfolio managers about the portfolio construct in the current times and why is
00:21 it that they believe this portfolio will be the best way to generate alpha over the respective
00:28 categories that they are benchmarked against. Our guest today is Vinay Pahariya of PGM and
00:37 you know the market stance seems to be that large caps currently offer a better risk reward
00:42 versus mid caps and small caps. Vinay great having you, thanks for taking the time out,
00:45 hope all is well. Hi Neeraj, thank you for having me on the show. No pleasure is entirely
00:51 ours. So Vinay can you tell us what's the portfolio stance and why is this the stance
00:56 for the overarching portfolio? I believe this is the stance or this is the thinking behind
01:02 your large cap and mid cap funds that you will be starting off. Sure, so Neeraj there
01:10 are two broad aspects with which we are looking at constructing portfolio currently. One is
01:17 very tactical with respect to large caps and mid caps. Large caps in the current market
01:24 environment are offering superior risk reward payoff simply because the valuations are reasonably
01:31 attractive, the earnings growth is good and hence the risk reward seems to be much superior
01:37 whereas mid caps in general are pretty expensive and there while the earnings growth is far
01:45 far higher the valuations have also seen a material re-rating in the last one year or
01:51 so. Having said that this entire space consists of a larger number of companies and hence
01:59 there is more opportunities to pick from. So generally we are overweight large caps
02:05 compared to mid caps in this fund purely for valuation reasons. Second and this is much
02:13 more important and less talked about, I think one broad theme which we are seeing in the
02:20 last one to two years is that quality companies and high growth companies have actually underperformed
02:29 very significantly companies which are actually very poor quality and having weaker growth.
02:36 And this is a trend which is sort of unprecedented because in the last 20 years we have consistently
02:44 seen good quality and high growth companies delivering superior returns compared to their
02:50 weaker counterparts and hence we are capitalizing on this trend today having tilted the portfolio
02:57 significantly towards good quality and high growth companies and I think these are currently
03:03 out of favour and offer significantly superior risk reward payoff. I think that's one aspect
03:09 of the portfolio construct currently.
03:13 Now I think I was looking at your market stance Vinay and one of the statements that stood
03:19 out was how and you probably referred to that briefly, but many fast growing quality large
03:25 businesses are available at reasonable valuation. My question is that will always be the case
03:29 right why is it that this time it is different for you to favour these kind of large caps
03:35 because some of these might be quality large businesses at reasonable valuations, but the
03:42 growth may be cyclical in nature for example, or unpredictable relative the or lower relative
03:48 the growth that some of the broader end of the spectrum companies are offering.
03:52 Sure, so I think we can always consider a few cases here and there which could exhibit
04:00 this kind of opportunity. However, when we look at a large number of companies, let's
04:08 say we analyzed more than 500 companies and looked at the data on a quantitative basis
04:15 which removes all sorts of bias and looked at companies which have better than average
04:21 sales growth and better than average returns on equity and how have these companies performed
04:27 relative to everyone else. And when you looked at this data of such companies, it could be
04:33 anywhere between 150 to 200 companies. The average median return has been significantly
04:40 weak in the last one year especially compared to any time ever in the past 20 to 25 years.
04:49 So I think we are talking about big data numbers which are spread over a large number of companies
04:55 and not biased towards a few companies.
04:58 Yeah, which is fine. Okay, I am trying to understand where is it for example, that you
05:07 would look to make exceptions? Are there some base criterias for example, in the current
05:14 market context that a company within a particular ROC or ROE or margin growth or debt levels
05:20 will or will not be considered?
05:24 So Neeraj, one of the aspects which is always a no-go area for us is companies where governance
05:31 track record is checkered. So I think we will never want to deliberately go in areas where
05:39 there is weaker governance track record. Second, we would want to avoid businesses which are
05:46 structurally weak. Like for example, commodity companies which have no sort of competitive
05:51 advantage which are purely let's say having a good time right now because the underlying
05:56 commodities are good. So I think those are kind of businesses which we would want to
06:01 avoid. Of course, extremely leveraged businesses, extremely weak sort of growth profile companies
06:09 which are being disrupted. These are all examples of companies which we will want to avoid.
06:15 Don't you miss out the cycles then Vinay? For example, I mean, if you avoid commodity
06:21 companies and let's say if China were to go ahead and give stimulus in the kind of
06:27 gains that some of these ferrous companies or non-ferrous companies as well, but base
06:32 metal companies will give will be quite stupendous. So why avoid them at all costs?
06:38 I think the key thing is to look at businesses within those segments which are attractive.
06:46 Say for example, a cement sector. Not all cement companies are weak. For example, there
06:52 are a few companies which have across the cycle earned significantly higher returns
06:58 on capital compared to everyone else in the peer group because they possess some sort
07:02 of a competitive advantage. So our objective is not just avoid any particular sector or
07:09 company but look at on a bottom up basis, where are those companies which have some
07:14 sort of a competitive advantage? If there is no competitive advantage, I would highlight
07:20 Neeraj that look around some of the cyclical companies, their long term track record on
07:27 a rolling three, five year basis is extremely weak. So when we are attracting long term
07:34 investor pools of capital, our objective is to build wealth over a longer period of time.
07:39 I think many of these can be just like noise in the overall big picture scheme of things.
07:49 Let's try and get your sector stance going, Vinay. And amongst things, you've talked
07:55 about healthcare as being a space which is looking interesting and please correct me
08:00 if I'm wrong. So what within this, because your stance and particularly your comments
08:07 around domestic formulation companies is very, very interesting.
08:12 So I think healthcare is a sector which we are significantly overweight on and within
08:18 that we are overweight domestic formulations and healthcare services, particularly hospitals.
08:26 So domestic formulation companies are more like FMCG companies. These have significantly
08:32 higher returns on capital. In fact, many of them have negative working capital. They don't
08:37 require too much of capex to do this business. And over a longer period of time, they have
08:44 grown at a much faster pace than FMCG companies driven by new product launches. So I think
08:51 that is a very clear, interesting case for domestic formulation companies.
08:57 And secondly, the hospital services space. This is another space where the penetration
09:04 is growing significantly for organized healthcare providers driven by high level of penetration
09:12 for health insurance and also demand for quality healthcare. So I think all of this combined
09:18 together is the impact is visible in the financials of the listed hospital chains, which are showing
09:26 very high growth, which are showing high returns on capital. And these companies are also able
09:31 to deploy capital in newer territories and displaying similar returns on capital on that.
09:40 So that's as far as healthcare goes. Now, lending financials for the longest time now,
09:46 people have been grappling with why is it that private banks are not growing? Maybe
09:49 the supply is high, what have you. But we are entering a period wherein the margins
09:57 will not be sustainable. If you will, they'll come off as well. Do you think growth will
10:05 make up and valuations are supportive enough? And is the argument convincing enough for
10:11 you to stay high overweight on private banks?
10:16 In fact, this is a good example of cyclicals, Neeraj. We just had a discussion of some time
10:22 back on cyclicals. And these are examples of cyclicals where there is some sort of a
10:27 competitive advantage. So once again, it highlights that we are not against cycles, but we are
10:33 against investing in companies which do not possess any motor competitive advantage.
10:39 Coming back to lending financials, you're right. There could be instances where the
10:45 margins may be under pressure in the near term. But what we have seen is that most of
10:51 the companies in this sector are able to pass on most of the cost pressures. They have grown
10:57 at a better than GDP growth rate. And their returns on equities are on a long run basis
11:05 clearly higher than 15%. So I think this is an excellent sector to capitalize on India
11:11 growth story, which is today available at a very attractive valuation, by the way. So
11:17 I think all of the aspects which we look out for investing in a company from a long range
11:24 basis are present in many companies in this space.
11:30 The other aspect is what you've highlighted in your note around QSRs. I'm just trying
11:37 to understand how do you juxtapose the valuations that they are trading at vis-a-vis the recent
11:46 growth trends shown by these companies?
11:53 Once again, these are shallow cyclicals. They are currently going through a weaker demand
12:00 environment. And I think that is a great opportunity to invest in many of these franchises. Why
12:08 do I call them as franchises? Because these are consumer facing businesses, have very
12:14 high returns on capital. And clearly, they possess very, very strong brands in many cases.
12:20 Quick service restaurants, for example, as a category is growing at a very fast pace.
12:26 A lot of these companies are actually adding more and more units of restaurants right now,
12:32 despite market headwinds for the simple reason, long term, this is a great opportunity for
12:38 India. And most of the consumers are actually favoring this sector, coming out and dining
12:46 more, ordering more. And hence, the business environment looks very attractive for most
12:53 of the companies in the sector over a three to five year period. Once again, highlights,
12:58 we are not against investing in companies which are undergoing weakness in their business
13:04 environment purely on a cyclical basis.
13:09 So I think QSRs is one of that example. However, auto components is a good example of companies
13:16 where there is a structural growth story. Most of these companies are actually good
13:21 exporters. They are developing niche capabilities in electric mobility side. And I think they
13:29 are big beneficiaries of China plus one strategy adopted by many global OEMs. And hence, I
13:36 think this is one more sector which is very attractive within this entire consumer discretionary
13:41 basket.
13:42 Well noted. Vinay, so good to understand your stance around portfolio construction. Thanks
13:49 for taking the time out and being with us today on this leg of the Portfolio Manager.
13:53 Thank you very much, Neeraj. Happy to be here.
13:56 Thank you.
13:57 Thank you.
13:58 Thank you.
14:03 (upbeat music)