ETMarkets Fund Manager Talk: Why does this fund manager avoid capital-intensive businesses like power, roads?
“We would avoid businesses that delve into long duration capital intensive projects, such as power and roads. The regulatory risks as well as duration risk make the construct of such business unattractive,” Hardik Doshi, a WealthBasket Curator and fund manager at the firm, told ETMarkets in an interview. Edited excerpts:
Which are the key parameters/metrics you look at while choosing stocks in your portfolio?
Our ‘White Whale North Star’ WealthBasket is focused on navigating the Indian public markets using a private equity mindset. We back outstanding management teams spearheading incredible businesses that have the ability to compound capital over a long period of time. We look to invest in 10-15 well-researched positions where we have high conviction.
There is a high emphasis on deep bottom-up fundamental analysis in order to deliver differentiated returns.
We view risk as a permanent loss of capital and, hence, believe in investing only within our circle of competence and in companies with the highest standards of corporate governance. We minimise risk through in-depth research and diligence, which is ingrained in our DNA.
The start to the New Year has not been good for markets. Given the volatility due to persisting global risks, how should investors approach markets?
Timing the market is very difficult and, therefore, we are strong advocates of staying invested in the markets in the long term. As the old adage goes – time in the market is more important than timing the market.
Equities and real estate are the only asset classes that protect wealth erosion related to inflation.
Over the past 20 years, the average return for the Nifty 50 has been 11-12%, much ahead of inflation.
Therefore, any excess savings that one does not foresee to be utilized over the next five years should be invested in equities. At the same time, for fresh deployment of capital, we would advocate a gradual deployment of capital over a 6-12 month period on a monthly basis.
Do you foresee a capex-heavy Budget this time in view of the PLI schemes and infrastructure boost planned by the government?
Post COVID, the government has done a remarkable job in tilting its spending towards public infrastructure and capex, which was much needed, given that India has always been a supply constrained economy.
The continuous expansion of PLI schemes across industries has also provided a major incentive for the private sector capex to finally pick up. We expect this trend to continue in the current budget also.
In the run-up to the Budget, which are the sectors that will see most of the action? Which are the sectors you would recommend getting into?
Given our long-term time horizon, we don’t base our investment strategy around events like the budget. Also, over the last thirty years, the importance of the budget has steadily reduced, given privatisation and opening up of the economy.
Which sectors/stocks are looking attractive to you and would want to add to your portfolio in 2023?
We are excited about a turn in the corporate capex cycle, which India has not seen for over a decade now. This positive trend is being driven by several factors. Firstly, corporate balance sheets are very healthy. Secondly, banking sector NPAs have been cleaned up, which has led to a sharp acceleration in system wide credit growth. Growth now stands at 16% YoY, again a decadal high.
Add to this, capacity utilisation has inched up to 74%. Government incentives on time-bound PLI schemes, shift in supply chain away from China as well as investment in green capex – we believe the ducks are in a row for a turn in the corporate capex cycle.
While we are excited about this trend, from our portfolio perspective, we would avoid businesses that delve in long duration capital intensive projects, such as power and road.
The regulatory risks as well as duration risk make the construct of such business unattractive. We are bullish on the industrial goods and banking sector from a 3-5 year perspective.
Retail inflows remained buoyant in 2022, do you expect the buoyancy to sustain in this year too?
Domestic investors have remained remarkably resistant over the last five years in spite of several events such as demonetization, ILFS bankruptcy and most recently the COVID pandemic. While it is difficult to predict retail flows on a short-term basis, we believe this trend will sustain in the long term.
The increasing acceptance of equity as an asset class by domestic households has double benefit.
Not only does it provide capital to an economy that has traditionally been starved of risk capital, it also improves the wealth of Indian households. Equities generate superior returns in the long run compared to gold and bank deposits, where a disproportionate amount of savings have been parked.
What kind of diversification in asset allocation would you recommend to your clients in an expected volatile market conditions?
One cannot predict the markets in the short term. Therefore, positioning for potential volatility in the short term is not advisable. As discussed earlier, we strongly believe that any excess savings that are not expected to be utilized over the next five years should be invested in equities. At the same time, one must keep at least one year worth of expenses in liquid funds or bank deposits.
Which pockets within the midcap and smallcap segment look attractive to you and why?
As discussed earlier, we are quite excited about the industries that would benefit from a turn in the capex cycle in India. Therefore, many mid-sized banks and NBFCs would benefit from the pick-up in loan demand. Along with that, industrial goods companies that would supply products needed to build factories and infrastructure would also see strong growth over the next five to ten years.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
