The Portfolio Manager | Tridib Pathak's Secrets To Build An Alpha Generating Portfolio | NDTV Profit
#AvendusOlivoPMS' Tridib Pathak talks about how to build an alpha generating portfolio, the pockets of opportunity in #SMID cap funds and more.
Watch him in conversation with Niraj Shah.
For the latest news and updates, visit: ndtvprofit.com
Watch him in conversation with Niraj Shah.
For the latest news and updates, visit: ndtvprofit.com
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TVTranscript
00:00 Hello and welcome to Portfolio Manager. I'm your host, Nihat Shah. On the show, we try
00:13 and get into the minds of the portfolio manager to try and understand how is it that she or
00:19 he is building out the portfolio or making the portfolio construct to generate alpha
00:25 over the next 12 to 24 to 36 months. Our guest today is Tridib Pathak, who runs the Avendus
00:32 Olivo Core Equity Portfolio. It's a scheme with an AUM of roughly 420 crores and since
00:42 inception has had a decent performance related to the benchmark index, which is the S&P 500,
00:50 BSE 500 TRI. Tridib, thanks so much for taking the time out and being with us on the show.
00:55 Can you tell us a bit about the scheme and about yourself? What kind of portfolio manager
00:59 are you? Well, Nihat, thank you very much for inviting
01:03 me. So we are basically fundamental equity investors, more focused on businesses which
01:12 are capital efficient and which have sustainable growth. And at the same time, we don't like
01:18 to overpay for things. So we are very cautious about what we pay for. So in a way, we are
01:24 more fundamentally driven, long term oriented. We like to invest in businesses rather than
01:29 investing in stocks, I would say. And we very strongly believe that stock market returns
01:37 are generated ultimately and finally only through the underlying business growing and
01:44 it getting reflected over a period. In the meanwhile, there's always a lot of volatility
01:49 and noise in the markets, which we tend to ignore.
01:54 So a particular index or a sector may find it difficult to have very substantially higher
02:01 growth relative to maybe the economy, at least the economy link sectors to deep. I'm just
02:06 trying to understand at the current juncture with the global growth looking a bit fragile
02:11 and Indian markets not necessarily cheap, are you getting quote unquote, the GARP valuation
02:18 or growth at reasonable price valuations within this Indian landscape when you're trying to
02:24 choose stocks for the next 12 to 24 to 36 months?
02:28 Certainly yes, Neeraj. And surprisingly so, we find a number of opportunities even today.
02:35 I guess the fundamental reason is over the last few years and 10 years rather, the depth
02:41 and the breadth of the Indian market has expanded quite dramatically. So even today, we do find
02:48 a number of opportunities across various sectors where we find much higher growth possibilities.
02:55 Some examples would be manufacturing. Nearly 40% of our portfolio is focused on manufacturing
03:02 companies which derive their competitive advantage from much improved infrastructure, lower labor
03:09 costs and all that. Some examples out here would be EMS companies or textile companies
03:15 or even auto banks. We find them growing at a much faster pace. Other things in other
03:23 sectors where we find much higher growth is obviously private banks and insurance companies,
03:29 life insurance to be specific. Now with every investment comes this argument
03:36 that there is always a way to look at it, a glass half full or a glass half empty. So
03:42 I'm going to try and probe a little bit into your portfolio and the psyche that you have
03:46 when you're trying to choose some of these. So banking, if I'm not wrong, banks and NBFCs
03:56 together constitute about 22.9% of your portfolio. Now this would make you, unless I'm very wrong,
04:02 a bit relatively underweight to the index weightage that we have. Correct me if I'm
04:07 wrong. And if so, is that because you believe that while there might be growth, supply side
04:14 from maybe global institutions who are selling some of these banks and are overweight there,
04:19 a reason why the true valuations may not get captured in the next 12, 24 months? Or why
04:25 is it that it has the weightage that it has? And what within this landscape do you like
04:29 more? Because while the top tier banks, sorry for the long question, but while the top tier
04:34 banks have not performed as well, we've had idiosyncratic reasons as instances of mid-sized
04:40 banks having done really well in the last 12 to 24 months.
04:44 Fair enough. Our 22.9% weightage is definitely a little lower than what is represented in
04:53 the benchmark. But as such, our strategy involves independent and individual stock selections,
05:00 and we don't really get to measure ourselves against a particular sector weightage and
05:07 all that. Having said that, our individual positions do add up to our sector position,
05:12 which is what you are able to see. We do, within the financial services space also,
05:18 we also like life insurance, as I said, I'll come to that later. But within the banking
05:23 sector, our focus continues to remain on the larger private banks, including the mid-sized
05:29 private banks. Both of them, there are equally good opportunities available. And you mentioned
05:34 about the fact that they have underperformed, which is all the more reason to believe that
05:39 there is a far more higher opportunity. In fact, the private bank sector is one area
05:44 where we find stock opportunities which are at a lower valuation than their past averages,
05:51 ironically, whereas the market is at a higher valuation than what its average valuations
05:56 have been in the past. So we do find a bargain out there. We are quite patient. And from
06:03 a longer term point of view, the larger private banks, as well as the mid-private banks, will
06:10 continue to gain market share as we go forward. They're growing quite well. And they'll be
06:14 able to manage, we believe, their overall asset quality as well as net interest margins
06:20 quite stably. So I would think, you know. And just to mention about the fact that about
06:27 the 23 percent, from a bottom-up basis, we find very interesting opportunities in the
06:34 life insurance space. Most of these companies, the share prices are telling you, if I were
06:41 to do a reverse DCF, they're telling you that the premium growth in this industry is going
06:48 to be only in the region of 2 to 3 percent or 4 percent max, which is not the case. So
06:53 we do find a lot of opportunities which are attractive from a valuation perspective as
07:02 well. You could have made a similar argument around
07:07 life insurance, Trudip, 12 months ago as well, maybe, wherein they looked attractive then
07:13 or they looked attractive even 24 months ago. But I was looking at either the private ones
07:18 since 2017, circa 2017 when they listed, or the PSU ones. They haven't quite generated
07:25 well. Now, you could argue that because they want to perform, they'll outperform. But that
07:29 could extend itself for another one year as well. What is ailing these businesses or these
07:34 stock prices, if you will? I guess there has been a connection in the
07:39 valuation that I agree with you. Maybe partly there were too much of expectations probably
07:48 two, three years back. There has been some regulatory interventions off late about the
07:54 surrender value thing. But if I were to just look at a little longer term in terms of the
08:00 prospects for the sector, in terms of the fact that there is a lot more to go on penetration
08:08 and more importantly, I think the overall product mix slowly as you go forward, will
08:15 keep shifting towards the protection policies, which have much higher margins per se within
08:23 the basket. We find that the whole sector is moving towards more protection over a period
08:33 of time. And certainly it will be able to take advantage of the underpenetration as
08:37 well. And when the valuations tell you that the growth, embedded growth in the share prices
08:42 is only 2, 3, 4%, when the actual growth possibility could be anywhere in the region of 10 to 15%,
08:49 it basically shouts at you to say that from a longer term perspective, there is definitely
08:55 a good amount of ability to gain from this scenario.
09:00 Okay, fair point. Before we take that break, moving from something that has been a large
09:06 portion of your portfolio or is a large portion of your portfolio and yes, viewers, I mean
09:11 22.9% on banks and NBFCs and about 9% on life insurance. So, that's collectively a fairly
09:16 hard large or a reasonable allocation to both lending and non-lending financials. What I
09:24 found absent and again, I may be wrong, but based on the sectoral breakup that I look,
09:29 some of the high flying sectors have been the likes of defence, railways, the last 12
09:36 odd months, they don't find a place in your portfolio, do they?
09:41 Yeah, they don't directly. There are a couple of businesses which do benefit from the railway
09:49 capital expenditure. We have a business which is a part of the Vande Bharat train system.
09:57 But specifically what you're saying is right, we don't have direct exposures to defence
10:02 or railways. We find valuations have stretched out quite a lot now. In fact, most of the
10:11 entire PSU sector, I would think there is a lot of higher valuations now than it was
10:19 earlier. And we probably are not able to gauge good opportunities, bottom up opportunities
10:27 which are at attractive valuations. I think that would be the fundamental reason. Let
10:32 me admit, we may have missed a couple of these opportunities in the past, but we have been
10:39 relooking our whole portfolio strategy and we think we are okay with not having them
10:43 in our portfolio at this stage.
10:45 Siddhi, coming on this, I wanted to ask this to you. Does this worry you? There's so much
10:50 chatter around how small caps have become completely avoidable, untouchable, what have
10:55 you. And here I have a portfolio which has got a refreshing mix of large caps and mid
10:59 caps as well, and small caps too.
11:01 A fair point, Niranj. It's an interesting question and in the right context. But let
11:09 me step back and explain our thought process. We are market cap agnostic in a way, in the
11:17 sense that we do not believe and we think investors also should not fall into what we
11:22 call as the definition trap. A lot of people use the words large cap, mid cap and small
11:28 cap and they invest according to the size of the market cap. We think what matters in
11:33 investing again, fundamentally, is the underlying business. It doesn't matter what is the size
11:38 of the business or the size of the market cap per se. But there is a mentality which
11:43 happens and allocation happens towards market cap sizes and all that. We are aware of that.
11:49 But our whole way of working has been that, look, we are going to look at the underlying
11:54 business because, you know, no two mid cap companies are the same, right? If you compare
11:58 two mid cap companies or two small cap companies, they're not the same. It is just that they
12:04 belong to a certain size categorization. But their businesses could be completely different
12:09 with a very different horizon in terms of growth, in terms of prospects and all that,
12:14 you know. So we would rather focus on the prospects. And that is why, from a liquidity
12:19 management point of view, obviously, it's important to have a balance. So we've always
12:24 maintained our stance that we are a multi cap offering, which in a way, because it is
12:30 multi cap, it is also market cap. And if I were to go into the historical ranges, our
12:36 large cap exposure has ranged from 40 to 60 percent and the middle small cap also in the
12:42 same way, 40 to 60 percent. But it is more focused towards the choice of the businesses
12:48 rather than the choice of their size.
12:51 So when I look at the sectoral breakup, Sridip, and we discussed the two ends, but now I'm
12:55 talking something in between. So I could argue that maybe textiles, maybe select pockets
13:01 of real estate, etc. would certainly or maybe auto and sell it would certainly be the mid
13:07 cap small cap flavor. What forms a part of the mid cap small cap space? I know you're
13:14 not investing by market cap, but if you're choosing to invest in a small cap company
13:17 in a particular sector, it'll be interesting to know.
13:20 Sure. No, certainly. So I refer to manufacturing, you know, and I refer to a lot of opportunities
13:28 within manufacturing, the EMS part, the textiles part, the auto parts, you know, and, you know,
13:35 there is another part of which is housing, housing finance. So that forms a part of our
13:41 mid cap strategy. Interestingly, our portfolio is focused on consumer discretionaries and
13:47 we find a lot of consumer discretionary ideas in the mid cap in the small cap space, as
13:54 opposed to consumer staples, you know, which are largely in the large cap range. We feel
14:00 that the consumer discretionary sectors would do far better, okay, simply because there
14:07 is a rise in per capita incomes. What was considered as a discretionary consumption
14:14 very soon and very fast. It is turning into non discretionary, I would think, you know.
14:20 So we find a lot of opportunities. Some examples of there would be QSR, quick service restaurants,
14:26 even real estate for that matter, you know, and so on and so forth.
14:33 Interesting. Okay. Auto ancillaries has an auto and auto ancillary. I would love to talk
14:38 a bit about that, considering that here's one pocket wherein I've heard completely chalk
14:44 and cheese commentary post Q3. If Baba Kalyani's comments around what could happen to demand
14:52 was one end, some of the others that we spoke to a Sonar Comstar, RK Forging, what have
14:57 you, they're all citing that they are not seeing any issues thereof. I would love to
15:01 understand what is your view on autos and auto ancillary in particular.
15:06 Right. So I think again, in autos, of course, we are focused more on the premium side. We
15:14 find, you know, there has been premiumization and as I said, consumer discretionary part.
15:19 We've seen low ticket items, consumption at the low ticket item level has not been growing
15:27 much, but at the premium end, there has been a good amount of growth. So within auto, our
15:32 focus is more on the premium end. And coming to your question about auto ancillary, I think
15:37 it's more company and business specific. I would think it's quite a large sector and
15:43 a lot of auto ancillary companies are export oriented as well. So it all depends on what
15:50 chain they belong to and what is the competition out there in terms of the product categories.
15:57 So it would be difficult to really paint one brush, but we are focused on businesses within
16:02 that which are more futuristic in terms of technology, where they're able to, rather
16:10 they've already taken strides in terms of competitive advantage to their technological
16:15 edge and are into the new sunrise applications and sectors. So I would think it is more business
16:22 and company specific. Okay. Point well noted. You do have an exposure to information technology
16:34 as well. Is this ER&D, is it IT services, is it large, is it small? And why is it here
16:40 when discretionary demand in the words of the companies isn't quite turning around the
16:44 corner anytime soon? Interesting. So within that space, we have an exposure to the advertisement
16:54 in the ad tech space and also to a product company in the banking platform. So unlike
17:05 we don't have much exposure to IT services per se, by choice, it's more towards platform
17:13 companies within the technology side, be it the advertisement technology platform or be
17:18 it the banking products platform. Okay. Point well taken. Okay. So this is more the platform
17:26 companies which got de-rated for a bit and have just suddenly found resurgence, say for
17:30 a fintech player which is under the eye of the storm. Most others seem to have done reasonably
17:34 okay. So I think it falls under that bucket. Not exactly. I would think in the sense that
17:42 not in that loss making so-called new generation companies per se, but highly profitable companies
17:53 in the technology and platform space with a return on equity of more than 20%. And that
18:01 is where our focus has been. Okay. Do you guys buy and hold for a really long period
18:07 of time or is it there's no such framework that you come in? You may take the gains when
18:12 they come and it's not necessarily held for a long period. Just trying to understand your
18:17 psyche. So our investment horizon, the way we look at things and expectation wise and
18:23 all that, investment horizon is anywhere from three to five years. But the holding period
18:30 could be different. We may have to book profits in case our position really does well and
18:38 we need to size the position per se. So we do take action when we have to size it. But
18:44 typically our horizon is definitely three to four years, not less than that. Our holding
18:48 period could vary depending on what is happening with the stock or with our position within
18:54 the portfolio and the size and all that. Got it. My final question, Pradeep, you told us
18:59 about a few pockets like defence, railways, et cetera, and some of them where you now
19:04 don't find the risk reward to be favourable. Where is it aside of that that you are negative
19:09 on? Wherein you believe that either the valuations or the growth prospects are firmly stacked
19:18 up against the fortunes of the sector or the companies?
19:22 So if you look at the large vast majority of the kind of businesses which we don't have
19:28 in our portfolio, they would belong to the IT services space. I'm talking the services
19:34 space. They would belong to, I would think, the overall commodity, the global commodity
19:41 space if you normally like to avoid, because we don't have much knowledge or ability sitting
19:46 here in India to take a gauge on how the commodity prices are going to move. So I would think
19:51 metals, commodities, IT services, businesses out there, we don't have any exposure, I would
20:00 think, in our portfolios at this stage, because of the reasons which you pointed out.
20:06 Got it. Okay. Great, Pradeep. Lovely trying to understand how you think about some of
20:11 the markets and the investments and your portfolio breakup as well. Thanks for taking the time
20:16 out and speaking to us today and giving us your thoughts.
20:18 Thank you, Dinesh. Thank you for inviting me and it's been a pleasure talking with you.
20:23 Thank you.
20:24 Likewise. And viewers, thanks for tuning into this edition of The Portfolio Manager.
20:27 [Music]