'Confident that as recovery sets in, value investing will outperform'

Stock markets are hitting new highs every day. At this juncture, growth comes at a premium. Since the bulls are in firm control of markets, many new investors credit the buoyancy in their portfolios to markets. This couldn't be farther from the truth. In fact, it is stocks and companies that ultimately create wealth. To emphasise this crucial point, PMS Bazaar and ICICI Prudential AMC held a special webinar on the topic: "Businesses generate wealth, not markets". The speaker at the event was Anand Shah, Head - PMS & AIF, ICICI Prudential AMC and the anchor of the session was Sivaram.

23 Aug 2021
'Confident that as recovery sets in, value investing will outperform'

Key traits of wealth creators

Anand opened up the webinar by making investors aware of a very important subject: what drives stocks. Drivers of stock price are Price to Earnings aka PE and Earnings Per Share aka EPS. "The most important thing is the Delta in the earnings. A large part of our focus lies in identifying companies that can grow earnings for a long period of time," Anand said.

He gave 4 examples of stocks where a large part of stock price growth comes from massive earnings improvement. These stocks are Balkrishna Industries, Eicher Motors, Kotak Mahindra Bank and Titan Company. Two key metrics to pay attention in companies with good growth is RoE or Return on Equity and revenue growth.

Core belief

Businesses generate wealth, not markets. This is the core belief of ICICI Pru AMC PMS. Explaining how the construction of a portfolio starts, Anand said the task first is to identify all high conviction ideas, while remaining mindful of the longevity of idea.

Once this is done, the portfolio manager takes high active positions that can be overweight or underweight vis-a-vis benchmarks. There can be high sectoral tilt compared to benchmarks at different points. Also, a higher style tilt compared to respective benchmark can be present. The value tilt is currently evident. "Wherever we have high conviction, we have reasonably high OW position there. Our portfolios have very high value bias as well, " shares Anand.

He went on to say that his fund-house is very confident that in economic recovery, the value style of investing will outperform.

The secret sauce!

For investors, it's important to understand how ICICI Pru AMC identifies high conviction stock ideas. Anand shared that this is done by referring to the BMV (Business, Management and Valuation) framework. The goal is to spot prominent businesses with competent management at reasonable valuations.

Explaining the 'Business' part, Anand said it is checked whether the company is growing faster than the industry and the industry is growing faster than the market. The businesses have to be structural, long term and sustainable. In terms of moats or competitive advantages, key parameters are brand franchise, industry structure, technology/patents, cost advantage, licence area, distribution, etc.

If a company does pass the B filter, management and valuation are not looked at.

Anand said due diligence is also done on any foreseeable changes in business that is leading to positive outcomes, or any receding competitive intensity. In general, he said, sectors which have witnessed consolidation of players have created long term wealth.

ICICI Pru AMC PMS products are boutique offerings for discerning investors. Naturally, the institutional set up and team also bear mention. While Anand is Head of PMS and AIF, there is Anand Sharma, fund manager PMS and AIF, and Suraj Nanda, fund manager PMS. The dealing team consists of Dhawal Desai and Priti Agarwal. The investment team is supported by an integrated common research team

Current market opportunities

Anand mentioned some top down potential growth drivers for earnings.

First: Global recovery - Hence, there is a focus on sectors that are expected to benefit from global economy opening up. Sectors to watch out for are metals, chemicals, textiles, IT and pharma.

Second: Domestic recovery - There is focus on sectors that are likely to benefit from government spending and reforms. Sectors to keep an eye on are banking, cement, domestic pharma, consumption and telecom.

Third: Late recovery - There is focus on sectors that are likely to benefit when lock down restrictions are eased and mobility improves. Key sectors to keep track are NBFCs, hotels and restaurants, multiplexes and airlines.

Growth opportunities for Indian cos

Talking about emerging areas, Anand talked about large profit pool in certain industries which can be tapped into with a unique proposition or strategy by a company. This then becomes an opportunity worth monitoring.

The formalization of sectors has also opened the door ajar. Access to capital markets can help organized players to gain market share over time, Anand said.

In terms of consolidation within sectors, Anand talked about market share migration that results in gradual yet major shift in how current market and future profit pool in an industry is shared. He shared anecdotes on banks, cement, telecom, ports, insurance, aviation, steel sectors. Incremental market share gained between FY17 and FY20 garnered by a few players and that has led to better pricing power.

Key structural reforms or developments such as RERA, GST, IBC, corporate tax rate cut, China plus one also have led to interesting growth opportunities.

Portfolio positioning and strategy wise performance

All the knowledge, skill and experience finally come to play when it comes to the portfolio. This is when the rubber meets the road.

Sharing key details of ICICI Pru AMC PMS portfolios with PMS Bazaar subscribers, Anand disclosed earnings of growth of 3 main portfolios.

In the Covid year of FY21, ICICI Prudential PMS Contra Strategy portfolio constituents profit growth was over 120 per cent,  ICICI Prudential PMS Flexicap strategy reported 51 per cent profit growth and ICICI Prudential PMS PIPE Strategy clocked 8 per cent profit growth. Excluding outliers, the profit growth for the same portfolios in FY21 stands between 15-25 per cent.

Elaborating on contrarian investing, Anand said that this is not low PE investing. In fact, contra investing requires the fund manager to spot high entry barrier businesses undergoing unfavorable business cycles/conditions. Opportunities can also come up when there is a special situation or when there is consolidation happening in the sector.

Sharing details of ICICI Prudential PMS Contra portfolio, Anand said the basket has over 72 per cent exposure to largecaps, which offer stability and growth, while 17 per cent is in midcaps and the rest in smallcaps. Top holdings are SAIL, Tata Steel, ICICI Bank, Bharti Airtel and SBI. There are 23 stocks with top 10  holdings accounting for two-thirds of portfolio weight. This strategy has delivered since inception CAGR of 20 per cent versus less than 13 per cent by BSE 200 benchmark.

Talking about ICICI Prudential PMS PIPE strategy, Anand said this basket invests in growth stories that seem sustainable,  targets businesses that can see demand explosion and offer margin expansion opportunities, and focusses on businesses that are mispriced today. Largecap exposure in this strategy is minimal, with 54 per cent in smallcaps and 44 per cent in midcaps. Top holdings are Godawari Power, Sarda Energy, Vardhamam Textiles, UTI AMC and Tata Metaliks. All together there are 29 stocks, with top 5 sectors having 57 per cent portfolio weight. Since inception, PIPE strategy has delivered 40 per cent CAGR vs. BSE Midcap return of 34 per cent.

Anand also took part in a comprehensive Q&A session with PMS Bazaar subscribers.

If you missed the opportunity to listen to the experts directly, you can relive the entire session through the appended link below:

For more information, please contact info@pmsbazaar.com

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