Transcript

CARE PMS Strategy Unpacked: Macro Outlook, Valuations & Themes Driving Indian Equities

Aravind Ravindran: Hello and welcome, everyone, to yet another edition of the fund manager interview with PMS Bazaar. I am your host, Aravind Ravindran, and today we are delighted to have with us Mr. Arpit Shah, Co-founder and Director of Care Portfolio Managers, a portfolio management firm with over a thousand crores in assets under management, managing Care Growth Plus Value and Large and Midcap strategy. Today our discussion will be on these flagship products. As the founder, director, and a qualified chartered accountant, he brings over 18 years of rich capital market experience. As a first-generation entrepreneur, Mr. Arpit focuses on in-depth research and business development, playing a key role in driving the company's strategic growth and establishing a strong presence in the financial sector. Welcome, sir.

Arpit Shah: Thank you. Thank you very much.

Aravind Ravindran: To begin with, tell us how do you view the current macroeconomic environment in India, particularly growth, inflation, and interest rate dynamics, and what does it mean for our equity markets?

Arpit Shah: The macroeconomic environment for India seems positive, mainly because of the above-normal monsoon, which we believe is one of the biggest positive factors, mainly for the rural economy which was not doing well in the last two to three years. Further, because of the good monsoon, inflation is under control and there is still hope of interest rates going down or being maintained at the same level.

Similarly, considering the overall geopolitical issues, the Indian government has done reasonably well; they stood by their point, so they are reasonably protecting the domestic consumption and domestic economy. Apart from that, four macro factors like GST reforms and the increase in individual income tax slabs will all help the economy to grow further.

However, looking at the overall scenario currently, we expect that we have to focus more on particular sectors which are immune to global geopolitical uncertainty. We recently, just two days back, got very good news that post the implementation of GST, Maruti delivered 30,000 cars on the first day of Navratri, which is the highest in their history.

Now, as far as the equity market is concerned, post-COVID it was more driven by liquidity. Of course, fundamentals were there, but liquidity was driving the market. In the last one year, the equity market has corrected, mainly to see some cooling-off period. Having these macro factors in mind, we believe that with a sector-specific approach, one should start looking for investment.

Aravind Ravindran: Thanks for that perspective, sir. It's interesting to hear how you connect the macro backdrop with equity market direction. On that note, let's talk about valuation. Do you think Indian equities have been trading at a premium to most global peers? If they are, tell us if this valuation gap is justified or should investors be cautious at these levels.

Arpit Shah: Yes, our markets are trading at a premium to global peers. However, that gap has been reduced substantially as, in the last one year, our market has grossly underperformed global peers. For example, Nifty is down around 3%, whereas NASDAQ is up 26% and the Hang Seng is up around 40%. So Indian equity markets have grossly underperformed and were probably the worst performer in the last one year, and that has reduced the premium we were commanding.

However, India is the fastest-growing large economy. Historical valuation will have to be adjusted upwards. So if historically Indian markets were quoting at, for example, 15 to 20 times, we will have to give more premium to the fastest-growing large economy.

Aravind Ravindran: Appreciate your take on this, sir, because valuations are always a tricky subject and it helps to hear your balanced view on whether this premium is a strength or a risk. Now, shifting gears a bit towards fundamentals and company performance. Tell us, when evaluating the growth potential of a company, how much weight do you place on historical volume growth versus future revenue and margin expansion expectations?

Arpit Shah: The market always works on the future, unless a particular company or industry is grossly undervalued compared to its peers. Historical volume growth or past performance is relevant only to judge the management capability and management execution capability, but it is not the deciding factor. The future can be immediate or long-term as well. So depending on what time frame we are looking for, we have to take a considerable call on whether this growth is sustainable, whether this growth is momentum-driven, and accordingly we can prepare the strategy for the portfolio.

Aravind Ravindran: Very well put, sir. That distinction between historical performance and forward-looking expectation really helps to understand how you assess opportunities. With that framework in mind, let's move to how Care PMS looks for businesses with either zero debt or strong interest coverage. In a country where leverage has historically supported businesses, how do you balance between conservative balance sheets and companies using debt strategically?

Arpit Shah: So, Care PMS's philosophy is always that the business has to be cash positive. We always invest in businesses which are generating positive cash flow. Apart from zero debt, a strong interest coverage ratio, if there is debt, is also what we look for. As we speak, our Growth Plus Value portfolio's weighted average debt stands at somewhere around 1950 crores versus the free cash flow of the business, which is 1975 crores. So that means we are quite conservative as far as the debt is concerned in the books of the company.

We avoid companies that have negative operating cash flow. And because we also want the company to pay regular dividends to its shareholders, for Care PMS, around a 2% yield is through our dividend yield.

Aravind Ravindran: Interesting point to note, sir, and that naturally brings me to risk management because in today's volatile environment it becomes even more crucial. As we all know, Indian equities have delivered strong returns since the COVID period, but the past year has been marked by heightened volatility. In such an environment, efficient risk management becomes crucial. So can you walk us through the risk management framework that Care PMS follows and how it acts as a shield for the portfolio?

Arpit Shah: We have a different portfolio structuring strategy at different points in time. Like when there is a correction in the market, we have a different portfolio structure. When we believe that it is the beginning of a bull run, we have a different portfolio structure. Accordingly, we structure our portfolio. In an extreme bull run, like last year, what we did was we actually exited many of our small-cap companies, either partly booked profits or did a full 100% exit, and we deployed that fund into large caps. That was one of the strategies that we implemented.

Within our Large and Midcap strategy, we went for companies which were immune to global uncertainties, like we invested heavily into the pharma and oil and gas sectors. So, depending on which market cycle we are in, our portfolio structure depends. Right now, we are balancing our exposure. We are balancing our risk by having exposure into consumer discretionary spending companies.

Aravind Ravindran: Thanks for breaking that down, sir. It's reassuring to know how Care PMS builds in strong guardrails to protect the portfolio, especially when markets get unpredictable. So, over the last 14 years, the Care PMS Growth Plus Value strategy has delivered, I think, a 21% CAGR, turning 1 crore into 15 crores. If you were to summarize this journey in just a couple of minutes, what key highlights would you share with us?

Arpit Shah: So, thank you. I would like to add a few lines to this. In the last 14 years, we have seen three very sharp corrections: Financial Year 2011-12, 2014-15, and the pre-COVID correction, where our portfolios were down almost 35-40% from their peak. So after seeing all these corrections, if our returns are 21%, we believe we are quite satisfied with our returns.

The reasons behind this are that we do not deviate from the fundamentals. For us, management is the most important thing to look into in a company, and I can proudly say that not a single company in our last 14 years' history has seen any corporate governance issue. Similarly, we invest in businesses which we believe are scalable in both topline and margin.

At the same time, we are conservative valuers. So we are very much focused on our weighted average P/E of the portfolio. As we speak today, our portfolio weighted average P/E is less than 20, which, if you have more than 80% exposure into small caps, is a considerably low P/E. We like to invest for the long term, so we normally catch the themes early. Like we invested into the agriculture theme last year, which we encashed very well. Currently, we are investing into the mining theme. At the same time, we don't shy away from booking losses. We have booked losses in many companies; that helps us to churn the portfolio and invest into better, brighter prospect companies.

Aravind Ravindran: That's a fantastic journey, sir. The way you have highlighted the consistency and discipline behind those numbers makes the performance story even more meaningful. Interestingly, your Growth Plus Value portfolio has around a 60% allocation to small-cap companies. How do you identify businesses in this segment that not only demonstrate strong growth potential but are also available at attractive valuations, which can often be quite challenging?

Arpit Shah: In the last 14 years of our history, our exposure to small caps has been above 80%. As I answered in your earlier question, because we felt that last year small caps had given a good run-up, we decreased that small-cap allocation. Now, as we speak, we are again going back to our historical weightage to small caps and we will increase it to 80 to 90%.

Normally, we try to catch the trend which allows us to enter a particular company or sector at a very initial stage, and if our judgment goes wrong, the losses are not much. For example, post the election of 2024, we had a strong belief that the government in the next five years would focus strongly on the agriculture sector and a lot of funds from other schemes would be shifted there, which exactly happened, and we encashed that really well.

Further, for companies, we believe that a reasonable scale with good market share is a key driver. Though our exposures are into small-cap companies—I can name a few like Dawat, JK Paper, Arvind, Saregame those companies are in the industrial leaders in their segment. So if I talk about Dawat, that is an LT food company which has 8,500 crores in sales and a 50% market share in the US market. Similarly, JK Paper, having around 7,000 crores of topline, has a 25% market share in copier paper in India. So those are very big companies, industry leaders, but they fall into the small-cap category. So even in small caps, we try to invest only into the industry leaders, and we believe that re-rating can happen when you try to catch the trend early. So it's a combination of things which is working well, and that is how our investment strategy and portfolio structuring is decided.

Aravind Ravindran: Small-cap investing often looks exciting on paper, sir, but the discipline you bring in by identifying quality businesses at the right valuations really sets the foundation for sustainable long-term returns. That also connects well with the broader growth story of India, because my next question is: as India progresses towards its Viksit Bharat vision, which three themes or sectors do you believe will create the most sustainable wealth over the next decade, and how are you positioning your portfolio to capture them?

Arpit Shah: So at Care PMS, we have an industry cap of 20% and a company cap at the time of investment of 12%. So we don't have more than a 20% exposure at the time of purchase in any particular industry. Post the China ban and the recent rare earth mining crisis, we feel mining is one of the sectors which is crucial to our self-sufficiency and where there would be a lot of focus from the government over the medium term. Further, good dividend yield and reasonable valuation in the current market scenario gives us more confidence.

At the Care PMS level, we have kept 20% as the ceiling for any theme to play. So any industry will have a maximum 20% weightage. There can be a mix of companies within the industry, but at the industry level, we will have a 20% cap. However, the Care PMS Growth Plus Value approach is more of a stock-specific approach instead of a theme play.

So I would like to share two company names which we have recently started buying. The first is Mahindra Logistics. The appointment of Mr. Hemant Sikka as CEO shows the importance as well as the inherent potential of the company. In his tenure, Mr. Hemant Sikka was the president of Mahindra & Mahindra's farm equipment division. Further, considering the bright prospect of the industry, management is guiding to increase their revenue by three times in five years, and it is available at a very cheap valuation. So we feel that the risk-reward ratio is quite favorable.

Another company is S. Kumars Nationwide (SKNL). The core business of the company is providing shirting and suiting fabric. However, using the stable cash flow from the core business, the company has ventured into the retail B2C segment, which can be a game-changer if executed well. The initial execution of that strategy has been commendable. A strong balance sheet, good dividend yield, healthy ROCE, and it's available at only 15 times its earnings, with an excellent brand recall, gives us the confidence that the downside is limited and there is strong upside potential.

Aravind Ravindran: Wonderful perspective, sir. It's fascinating to hear which themes you believe will drive wealth creation over the next decade. While we have spoken a lot about your portfolios, I would also like to touch upon the philosophy and structure of Care PMS as a firm. Despite having a large and experienced team, Care PMS continues to operate as a boutique firm with just two PMS products. Why have you chosen this focused approach and how does it give you an edge over competitors who have multiple strategies?

Arpit Shah: So, Care PMS is a promoter-driven company and we always believe that our focus approach is allowing us to mitigate the risk in the market. We take 100% accountability for all our strategies, our performance, and our bad performance. We believe that we have just crossed a thousand crores of AUM, which is just the tip of the iceberg, and a lot of penetration is available.

So we would continue to focus only on this PMS business, and we believe these two strategies are enough for the market. We are still quite a young player and quite a small player, and we have a good investable surplus. So we would like to focus there only. At the Care PMS level, our hunger is for high returns and our hunger is for multi-baggers, and those segments are normally available in small-cap or mid-cap categories of companies. So I think we will continue to focus on these two strategies only until we cross another 4-5,000 crores.

Aravind Ravindran: A refreshing take, sir, because in an industry where scale often comes with complexity, your choice to stay focused really highlights your commitment to depth, specialization, and client-centric outcomes. With that, we have come to the end of this conversation. Thank you so much, sir, for joining us and sharing your valuable insights. We truly enjoyed having you with us.

Arpit Shah: The pleasure is entirely mine. Thank you very much, Aravind, and thank you very much, PMS Bazaar team, for having me on this show. Thank you.

Aravind Ravindran: To our audience, stay tuned for more such engaging and insightful interviews with PMS Bazaar. Until next time.