Transcript

Ms. Akshara Menon: Hello everyone, this is Akshara Menon. Welcome back to the fund manager interview series with PMS Bazaar, where we bring you the sharpest minds in wealth management straight to you—no jargon, just the insights that matter for your portfolio. Today's guest has spent over 17 years in financial markets, from credit ratings at Crisil to some of India's most respected PMS platforms like Alchemy Capital, Karma Capital, and now he is leading equity management at Sundaram Alternates. I am talking about Mr. Darshan Engineer. If you are a PMS investor or thinking about becoming one, this conversation is for you. Let us directly jump into the questions. A very warm welcome to the show, sir.

Mr. Darshan Engineer: Thank you so much for inviting me to the forum. Thank you for the kind words you have mentioned.

Ms. Akshara Menon: Let me start with the first question. Tell us a bit more about yourself. You are a graduate in computer science engineering, then you went into credit rating, and then into finance and equities. Why was that arc?

Mr. Darshan Engineer: I think it was never planned in the first place. My surname is Engineer and I am an engineer by profession. I worked at Tata Consultancy Services for two years, but somehow computer engineering was never my passion. I wanted to do further studies, so I did my MBA in Finance from Jamnalal Bajaj. After completing my MBA, I realized that investing was something I was genuinely interested in. Unfortunately, I passed out at the worst of times—2009, during the global financial crisis. There were no jobs from campus, even from a great institute like Jamnalal Bajaj. But that is okay. Through my mother's blessings and God's grace, I was able to get into Crisil as a credit rating analyst. Interestingly, at that time, there was a lot of requirement for rating analysts because of Basel Norms implementation by the RBI. 

So I joined Crisil and spent two years there. I actually learned the ground reality of how the financial industry works. After spending two years there, I was looking for more interesting opportunities. I came across the credit fund management team at Alchemy Capital, who were looking to hire an associate analyst for their credit funds based in Singapore. I joined them as a credit analyst at Alchemy Capital in July 2011. When I joined, the portfolio was already made, so it was more maintenance work. I approached Hiren Ved, who I consider my mentor, and asked if I could also help out in equities. That is how my equity journey began. I spent a good number of years at Alchemy, and I am really thankful to them for giving me good exposure to how to evaluate equities and how to invest in the real world.

Ms. Akshara Menon: I think that is a very few—having debt and equity exposure to be very honest. Let us talk about this equity market. The valuation bucket does not seem very attractive these days. After December 2024, from September 2024, investors have not made good wealth or money or alpha for that matter. Where are they going wrong? What is the ideal framework for investors to think about before investing?

Mr. Darshan Engineer: That is a great question and there are a lot of angles to be covered. Let me take them up one by one. First, if you observe, let us go back into history right from the COVID days. Before COVID, the government had taken up some reforms and the impact of those reforms was percolating through the economy. We were seeing some signs of improvement in earnings growth. If you observe from 2014 onwards, all the way up till 2020-21, the earnings growth has been tepid. The markets delivered returns more on the back of rerating of the Indian market itself. What normally used to trade at say 14-15 times one-year forward earnings gradually rerated to around 20 times. There were multiple factors for the same. One was the change in the index composition itself at Nifty and BSE—a lot more companies with new-age business models, which were asset-light and high ROE, became part of various indices and pushed the multiples upward. Structurally, the inflation in the Indian economy came down from what used to be between 9-10% to structurally around 5% over the last 10-15 years. That has also played a role in the reduction of the cost of capital in the economy, and when that tends to happen, the market multiples tend to re-rate. The third aspect is the domestic flows, which have been so strong and consistently on an upward journey. Despite the negative FII flows we see, because of strong domestic flows, from a domestic institution point of view, there are a very limited set of companies they can invest in. The extra flows go into the same stocks, and therefore even if there is no change in fundamentals, the valuation multiples tend to re-rate.

Net-net, the Indian markets have seen a rerating over the past 10-15 years. At the same time, earnings growth remained tepid. Post-COVID, on a low base of FY20, we started to see a good earnings recovery set in. From FY21 all the way till FY24, we saw very sharp earnings growth at the Nifty level. Naturally, if large caps are going to grow at healthy rates, small and midcaps tend to grow at even better rates. We saw a very strong bull market starting somewhere in FY22 all the way up to September 2024. During this phase, while earnings growth was strong, because of the bull market phenomenon, a lot of companies rerated. 

A lot of suboptimal quality companies also ran up a lot. It created a lot of valuation excess and froth in the market. Naturally, when this goes on overboard, you do see a period of correction. It can be in various forms. In large caps, you would have observed a massive time correction in various parts of the segment. In small and midcaps, there is time correction and absolute price correction as well. 

We have seen sharp corrections in various companies, especially from the tops. The top was somewhere in September 2024, and from there onwards, for almost 18-20 months, we have been going through this long time and price correction. What is happening is that the valuation froth is getting reduced. Many parts of the markets are now seeing valuations becoming more normal. I would not say they are cheap. They remain around the fair zone. If you were to talk about the Nifty50 till February 2026, we were expecting that the market was set to enter a new earnings growth cycle. At around 24,000-25,000, the market on a one-year forward basis was fairly valued at around 20 times earnings. But if you had a slightly longer-term view, we were well placed for an earnings recovery growth upturn in the Indian markets.

What has happened is that the war has taken place and it has led to a lot of fiscal indicators and macro indicators turning for the worse. Naturally, the market is very quick to respond. We saw a sharp correction in March, but the announcement of a ceasefire and a potential resolution to the war has led to a sharp bounce back. What we are seeing right now is that the valuation froth in many parts of the markets has reduced and we are seeing that potentially markets have corrected or are near fair value zones from the froth that we saw in the last 18 months.

Ms. Akshara Menon: I completely agree with your point, and also when you spoke about the DII and FII part of it. This is the very first time that FIIs are pulling out money. If you see our history, even in the 2008 crisis or the 2020 crisis, whenever the FIIs have pulled out their money, DIIs have always been supporting. The inflows have been very consistent for that matter. I understand you are a bottom-up stock picker, but the point is—is it very necessary for a fund manager who is bottom-up to ignore or isolate the global macros?

Mr. Darshan Engineer: I would not say you have to completely ignore it. As a bottom-up stock-picking fund manager, we should obviously be aware of what is happening at a macro level globally and locally. We should be aware of how flows are and how certain decisions by geopolitical actors can impact your investment decisions. But at the same time, I think overthinking on those fronts can sway your decision-making away from what you are actually good at. 

I would say yes, you should be aware of what is happening at a macro level both globally and locally, and some other longer-term trends also. But use that to your advantage to figure out companies or sectors that are expected to do well in such a landscape, and accordingly position yourself through bottom-up stock ideas.

Ms. Akshara Menon: That was a very clear answer. Now that we spoke about macros and I understand that you are a bottom-up stock picker, let us talk about your framework, which is 3Q—Quality, Business, Management, and Financials. How has this particular framework helped you navigate markets like the last two years?

Mr. Darshan Engineer: It has definitely helped us in a very positive way. Let me build on the framework and explain how we go about identifying stocks and creating a portfolio. First, if you have observed post-FY24, from September 2024 onwards, because of the change in the RBI Governor, there was a lot of tightening done by RBI because there were excesses in various parts of the credit market. It was rightly required, but it also meant that the economy entered a period of slowdown. At the same time, the May 2024 election results did not turn out the way people expected, and there was uncertainty regarding government formation and economic decision-making. All of this combined to lead to a period where earnings growth became very tepid. The sharp earnings growth cycle from FY21 to FY24 was followed by a period where earnings growth was only around 5% from FY24 to FY26, which is now getting closed. 

In such a slow economic growth period and slow earnings growth period, the market valuation was very rich. Doing a top-down approach to investing would no longer work. That is where we decided to identify sectors and themes which were doing well despite the tough macro environment. After identifying certain top-down themes such as financialization of the economy or manufacturing excellence, we decided to do bottom-up stock analysis of companies in those sectors which were growing well despite the slow overall macro environment. 

That is the first aspect of our framework—we are constantly identifying new themes or themes expected to do well over the next few years. Second, we identify stocks on a bottom-up basis. We are basically marrying top-down themes with bottom-up stock picking.

Once we have identified certain sectors and stocks within those sectors, we use our 3Q framework, which stands for three forms of quality. One is on the business. On business, we identify several traits why a certain company in a sector should do better than other companies in the sector. It is a mix of qualitative and quantitative metrics. The second and most important aspect is management. 

This is a very subjective criterion. One management may be good for somebody, but for another investor it may be suboptimal. We have various qualitative and quantitative metrics to figure out whether we are comfortable with the management or the promoters. If we find that the business is good and the management is good, then generally it translates into good quality of financials, which is the third part of our 3Q framework.

We have got our top-down and bottom-up in place. We have got the growth matrix in place. We have got the business, management, and financial metrics in place. If everything is in place and meeting our checklist, the final part is valuation. This is something we have consciously tried to ensure—that we do not overpay for our companies. If everything is in place but valuations are already rich, as an investor I will not be able to make great returns if I am buying at that elevated valuation. 

For such stocks, we remain interested, we keep tracking them. If for some reason the stock corrects, we are more than happy to start taking some positions. Otherwise, the Indian market is blessed to have thousands of companies, so there is always some company available in our desired themes, and we can always build portfolios using alternative ideas. This has helped us create a bottom-up oriented portfolio over the last one and a half to two years, which has helped us navigate the macro challenges. Despite the poor earnings growth, a lot of our portfolio companies have delivered very strong earnings growth, which has translated to rerating of those companies over time and helped us deliver much better returns than the benchmarks.

Ms. Akshara Menon: You have given a hint about returns as well. My next question is on the returns part. We understand about the last financial year and how markets were volatile and investors were anxious, but all your four strategies—SELF, SISOP, VOYAGER, and Rising Stars—have given returns of about 30-35%, and Rising Stars on the top line has given around 42% returns. That is a huge number considering last financial year's landscape. How was this performance achieved and how was the alpha delivered?

Mr. Darshan Engineer: First of all, thanks. God has been kind to us. I would say all our fund managers at different points in time contributed to this current position. Each and every one, and I would also thank our research team for coming up with great ideas in the last one and a half to two years. Let me cover this aspect in multiple ways because it is not just about stock picking. First, the top-down themes helped us get into sectors like the power sector value chain, certain select lending companies, certain select healthcare companies which were a play on the CDMO opportunity or hospitals, which is an evergreen sector in the Indian market, and finally some select bottom-up stock picks in auto ancillary, consumer, and so on. 

We created our portfolios on the back of these select stocks with reasonable weights in each one of them. Thereafter, we did not try to disturb the portfolio much. We have been constructing portfolios gradually over time. We built portfolios over two months, deploying the capital in a staggered manner. Thereafter, we are not attempting to do any model portfolio approach. For every client, it was a fresh capital allocation decision. For some clients, if some stocks had run up significantly, we would have lower weights. For others, maybe some had become more attractive, so we increased the weight. Valuation was one of the strong determinants of the strong returns. We were more disciplined about the entry valuation multiples for all the stocks for every client who came in at different points in time.

The second aspect was patience. It is an unfortunate thing that in the last five to six years, patient investing has lost its advantage. I would say patience is a virtue. If you are invested in equities, you need to stick through companies through ups and downs. Sometimes stocks can be rangebound or go through time corrections for 6 to 9 months, and you may feel your investment thesis is not working. But you need to continuously evaluate and study the companies regularly to figure out whether the investment thesis is playing out. Fortunately for us, in many of our portfolio companies, the broader investment thesis was intact. For some temporary reasons, the stock would be rangebound or went through time corrections. We did not panic in those periods. In fact, in some cases, we actually doubled down or increased weights in those positions at appropriate times, and after a while, some of those stocks delivered on the fundamentals in terms of triggers.

As an example, one of our portfolio companies was a play on clean energy in the US. It had everything in place but was not yet receiving orders in a big way. Finally, from September onwards, it started getting good orders from US clients despite 50% tariff at that point in time. That meant we were at the right company because why would a company get big orders from a US client at 50% tariff unless that company is providing some very critical equipment and there is no other supplier of that size across the world? We were right in terms of our business quality, management, and financial profile, and we were also right in terms of valuation. Fortunately, that stock has been a big contributor to our portfolio returns, and because it was a high-conviction stock, it was present across all our strategies. 

We were mindful that being a small-cap stock, we needed to be very mindful of the risk weight. We did not go overboard in our weight creation. We had a disciplined weight allocation of around 4-5%. Because the stock has done so well, it is now today 10% of the portfolio. We know this company is going to continue on its growth journey for very long periods of time. There are going to be new growth optionalities in the coming years. So it is not a done and dusted story. That is why we have not exited from the stock. We have continued to stay put through the ups and downs, which has eventually benefited us in the form of not only share price appreciation but a higher weight translating into even higher alpha and higher returns for investors. 

Yes, we are mindful that at some point it will no longer deliver the returns it has delivered in the past. So we keep booking profits from some of these winners and use that cash generated to deploy into newer ideas within the same theme or in some newer themes that we are constantly on the lookout for. It is a constant rebalancing that we do at regular intervals. That helps us reduce the risk of the portfolio over time and helps us generate good returns for investors.

Ms. Akshara Menon: When you say this about deployment and how you have delivered these returns, last financial year many fund managers or investors preferred to stay in cash. What mattered more was capital preservation over capital appreciation. How do you see cash allocation in your portfolio?

Mr. Darshan Engineer: It is an interesting question, and a lot of people question what should you do—should you go into cash, should you go aggressively into cash, or should you totally stay away from equities because of whatever is happening globally and locally? I would say that as an equity fund manager, our job is to deploy in equity stocks with a view that they should fall lower than the market in a bad market and maybe do better than the market in an upcycle. Fortunately for us, most of the stocks we have in our portfolio have helped us achieve this. For example, March was a bad month for the markets. The indexes were down by around 11.5% on average, but because we had confidence in our stocks, we did not unnecessarily create cash. We decided to remain invested. We had done some partial profit booking in some of our winners in February, so we were at cash between 4-5% or maybe 6% in certain strategies. But we never went aggressive in creating cash—let us say going to 20 or 30% cash. I will tell you why. Aggressive cash calls can be a difficult and double-edged sword. You saw in April what happened—a ceasefire got announced and suddenly the market recovered like anything, up by almost 10-11%. If we had created that excess cash, we would have been under pressure to deploy the same cash into either the same stocks or new ideas. There is no guarantee that our new ideas will deliver the returns that our existing ideas are going to give. Secondly, it creates additional pressure and there tend to be mistakes that get made when you suddenly deploy cash into a lot of stock ideas in a fast way. It is better to stick to your existing ideas. 

That is the whole point—you have to go through the down cycles in order to enjoy the upcycle. If you are not willing to ride the volatility in stocks, you will never enjoy the fruits that those stocks eventually deliver. Fortunately for us, by not going aggressive on cash, that helped us deliver a great April month. All our strategies were up 22% in the month of April versus the benchmark, which was up around 11%. Not going aggressive on cash, staying put in our winning ideas, being patient with our investments on longer time frames—all of these have helped us in the returns you are seeing.

I would also like to highlight one more aspect. It is not just about being patient. Sometimes your investment thesis will not work out. There will be stocks where there is some drastic change in the quality of either the business or the management takes certain decisions which may not be in sync with what you are thinking about the business. Sometimes the financial profile deteriorates beyond repair. In such cases, we do need to take active, harsh calls in the form of exits. In the past one year, we have taken such hard calls as well. In many cases, we deliberately and actively took calls to exit from certain positions irrespective of where we were sitting in the form of loss. In some cases, we were sitting on drawdowns of maybe 5-10%, in some cases even 30-40%. But we decided to take those hard calls, and that also helped because post our exits, in most cases, the stocks have fallen even further. 

By taking those exit calls even at a loss, we were able to prevent further drawdowns for our clients. It is not just about finding winners, but it is also about exiting losing positions from time to time. We need to constantly monitor the entire portfolio, keep evaluating all the companies on a rolling basis, check whether the investment thesis is still intact, whether the growth outlook is strong, and whether valuations are still reasonable for the growth profile they are exhibiting.

Ms. Akshara Menon: For investors today, capital preservation means not just running behind alpha but also limiting your losers. That was wonderfully phrased. Let me go a bit more on a broader scale. Small caps and micro caps have turned cautious for investors. Earlier in 2023-2024, people were running around small and midcaps and a lot of investments went into that. Now if you say about small and midcaps, people are moving out and giving more allocation to large caps. Where do you see the risk-reward ratio coming in, and how do you see valuations popping up here?

Mr. Darshan Engineer: As I told you, what has happened in the last three to four years is that small caps and midcaps went through a sharp time correction and price correction. I would go back slightly into history because history gives you a lot of answers to your question. Small caps and midcaps, including even micro caps, have generally always traded at a discount to large caps, and rightly so because there is a lot of risk attached. But in recent years, what has happened is that a lot of strong earnings growth was seen in the small and midcap space, and therefore from a discount they have moved to a premium. If you see the data series of valuation multiples, you will notice that midcaps and small caps now trade at a premium to large caps. In some cases, I would say rightly so because they are exhibiting much better growth profiles on a more durable basis. That is one aspect.

The other aspect is that because of the top-down negative view on macro and economy, people do feel that it is better to be in safety and not take risk, and that is why the aversion to small and midcaps. But I would say this is precisely the time to increase your allocation to small and midcaps. I will give you a few reasons. First, over the last 18 to 20 months, we have seen that small caps have corrected quite a bit. You should not treat small cap as one category. It should be looked at on a bottom-up basis because there are different types of sectors in the small cap space. Some sectors are always doing well—every type of market will have one or two sectors or even more that will be doing well irrespective of what is happening at a broader economic level. As fund managers or investors, our job should be to keep identifying such opportunities and get positioned accordingly.

I would like to highlight a few things when it comes to small cap investing. First, they are generally illiquid. Second, they are under-researched and therefore under-owned. When I say illiquid, if you like an idea and have done your due diligence, but if you try to build a sizable position—I am talking from a fund manager's point of view—especially fund managers who manage funds at a decent size and scale, for them to invest in a small cap, many times they are only creating the price up move. You are not really making returns, you are only taking the share price up by creating some position because of the illiquid nature and high impact cost. Because of that, many fund managers tend to avoid these sectors. What happens therefore is that there is also lack of institutional coverage. I am not saying that having good institutional coverage on small cap would necessarily mean the small cap company is good, but generally because institutions are not keen, the sell side is also not incentivized to cover some of these names. Fortunately in recent years, through different IPOs, through exchanges, through corporate actions, a lot more companies have got listed on the Indian markets, and most of them are small caps. The universe is now very wide and it is a fertile ground for stock pickers. This is an ideal scenario to identify good small cap companies on a bottom-up basis.

Interestingly, if you observe in Q3 as well as Q4 results, many companies which had struggled over the last two to three years—not in terms of fundamentals but in terms of stock price—have been rangebound and gone through sharp corrections. Because of the good results they have thrown in this recent result season, they are now coming back to their previous highs. Fundamentally, these companies were never bad. It is just that because these are illiquid, there is some investor in the market who may have run out of patience and decided to exit that stock, creating that sharp drawdown. The stock corrected, but otherwise, on a fundamental basis, many companies and many interesting ideas in the small cap space are coming out looking very promising right now. I would say it is actually a good time to invest in the small cap space.

I would also want to highlight some additional data points over and above this. Our analysis of the markets suggests that every 18 months of stagnation in the Indian equity market has been followed by good returns on a one-year and three-year basis. In the past, whenever the markets have been flat or slightly negative on an 18 to 20-month period, it has generally been followed by very robust returns for the market over the next 12 months. On a three-year basis, on average you can say 20-25% return on a one-year basis and similarly 20-25% CAGR return on a three-year basis. Despite whatever negativity you may be hearing, this is in fact a great time to increase allocations to small and midcaps. There are many interesting opportunities. Many of the themes we like—generally when you identify a new theme or some new sector which is going to grow at healthy rates—you will not find them much in large caps. You will find them more in smaller market caps because that sector itself is small and growing at a rapid pace, and therefore the companies in that space will have much smaller market caps. That is precisely why they become good investment ideas because of their high growth rates and because their sectors are enjoying tailwinds. They will have a phase of very high earnings growth, and you will enjoy good earnings compounding as well as potential for rerating.

Ms. Akshara Menon: The biggest takeaway is that small and midcaps are no more a cautious thing. Probably people can consider more allocation towards small and midcaps.

Mr. Darshan Engineer: Yes, and I would say that you should not look at the index as one category. The index, for example, the Nifty Small Cap 250 index, can only accommodate 250 stocks and it can accommodate certain stocks from each sector and create a robust diversified index. But if you see our market, the BSE has around 6,000-plus companies listed. NSE also has a very healthy 4,000-5,000 companies listed. The Indian market is blessed that we have so many small cap companies to invest in. There are very good companies led by good managements out there. Each of them is going about doing their business, trying to grow their opportunity size, entering into new business domains, and trying to grow at healthy rates. Many of them are interestingly leaders in their space and sometimes global champions as well. They have good capabilities and are providing value-added products and services to global clients. The space is very fertile. You should treat it more on a bottom-up basis rather than taking a top-down view on small cap. The index may do its own thing, but if you are rightly positioned in certain stocks and sectors on a bottom-up basis, you can make money even when at an index level you may not have seen the returns.

Ms. Akshara Menon: That is a very blunt and true answer. Very well articulated. But the main part is when a stock will exit the portfolio—when the fund manager would divest or exit a sale into that particular stock. That is a very main part in having exact alpha creation in a portfolio. How do you see that?

Mr. Darshan Engineer: That is a very relevant question. It is actually a very tough question as well. It is a tough thing to do. You do get emotionally attached to your winners, and it is very difficult to get rid of names which have done wonderfully for you in the past. It is not an easy job. That is something you need to overcome. We have a good risk management framework in place. We have bolstered it over the last couple of quarters, put some rules in place so that we can take unbiased, unemotional decisions.

The first and clear one is—if the investment thesis is no longer working out or if there is some structural change in one of the three Qs. For example, the business quality is no longer as strong as what it was a while back. There is some new competition which has come up, meaning the company can no longer grow at the rates it demonstrated in the past. If especially the valuations are obscenely high for the growth profile of the past and in the changed circumstances the growth profile is structurally going to come off and valuations are reached, then it definitely makes a lot of sense to massively trim down the position and even exit if required.

Sometimes you also find new opportunities and you feel that you have a better risk-reward in the newer idea versus what your existing idea is. You feel that maybe on a ranking basis, this is the idea that has to go out. You cannot have infinite capital, so you have limited capital, and one of the ways to enter a new idea is by potentially exiting some of the older ones. We do give time to all our invested stocks to play out their investment thesis, and generally if they don't, then we do exits. But in case of our long-term winners, as long as the investment thesis is strong, growth outlook is good, and valuations are reasonable, we will be happy to hold on. If any of these changes, we do not mind exiting even if they have delivered us great returns. We have to be unemotional and diversified, so to say.

Ms. Akshara Menon: That was very well answered. But as you said, there is no infinite capital—you have only finite one and you need to deploy it. If you are getting fresh capital now and just imagine for the next 10 years, what are the themes that Darshan is betting on?

Mr. Darshan Engineer: I would say that we have five mega structural themes in India, and I am sure a lot of fund managers will also say the same thing, so we are not any different from them. The five clear mega themes from an Indian investor point of view are:

First, financialization of the economy. When I say financialization of the economy, I am not referring only to lending. As the average Indian improves in terms of economic prosperity, they will want to take up more financial products and services. They will no longer just be taking loans from banks or NBFCs. They will also want insurance, they will want to invest, they will want access to various forms of investing. There are a lot of options available beyond the traditional lenders. We have insurance companies, payment companies, general insurance companies, infrastructure companies around these sectors. Thereafter, we have capital marketplaces and a whole lot of companies who are helping the average Indian to improve their asset base over time. As Indians become more understanding about the investment journey, they are also shifting from real assets to financial assets. That means you need a lot of assistance in terms of financial advisory and financial management, which means wealth distributors and wealth managers will play a lot of role. There are a lot of opportunities in this financialization theme. Within that, there are multiple sub-sector themes which are going to be structurally growing opportunities. In some cases, valuations may be rich in the near term, but from time to time you will get opportunities across the landscape.

The other theme I am very positive on is manufacturing excellence. Indians by nature are very good at technical engineering, and that is reflected in various sectors like IT services, pharma, manufacturing. We are seeing a lot of interesting small cap and midcap companies which have transitioned to become global export champions and are competing well with players from China or other parts of the world. Manufacturing as a theme should do well. We are more oriented towards export-oriented companies because with the rupee depreciating to 95-plus levels, we become very competitive on the export front. But we have to be mindful that manufacturing is an asset-heavy industry. It requires a lot of capital expenditure, and therefore we would be on the lookout for capital-efficient players in this space. We want companies that do not require too much capex, can generate healthy return ratios, can grow using their cash flows to keep reinvesting, and maintain a good healthy balance sheet. In manufacturing as a whole, the theme is good, but within that we would be more mindful of capital allocation decisions and capital efficiency. We are more positive on sectors like certain engineering companies, certain chemical manufacturing companies, select auto ancillary companies, and select precision engineering companies. That is how we would be betting our stocks on a broader basis on themes like financials and manufacturing.

Apart from that, I would say health and wellness is a good theme to look into. Healthcare has done really well, but again it has to be subdivided into five or six subsectors. For example, you have US generics and domestic formulations, but they are very well discovered and the growth profiles are maybe low double digits or high single digits. From our point of view, they do not attract us so much. We are more positive on themes like CDMO—a lot of Indian companies are breaking the barriers and becoming important collaborators with global innovator pharmaceutical companies. CDMO as a theme is very strong. There is always the China plus one theme in case of manufacturing and chemicals or CDMO companies. Within that, as Indians prosper, they want better standards of healthcare, which means they are more inclined to go to private hospitals versus government hospitals. Private hospitals as a space can do very well over long periods of time. Diagnostics is another, medical devices is another—we do not have many ideas or names listed as yet, but I am just laying out some long-term themes in health and wellness that can do well. We have some select ideas in this space which have done very well for us.

And then of course you have consumption and technology. Unfortunately, consumption has been through a tough time in recent years, and therefore we do not have much exposure to it, but we keep evaluating from time to time. We may get some good ideas in that space. Technology is not just about IT services. It is also about product engineering services companies, engineering research and design services companies, software product companies, new-age technology companies which are actually at the intersection of consumption and technology, and a lot more new-age companies coming out with new forms of technology. For example, payments is a play on technology and financials. The lines are also getting blurred. These are some of the themes where a lot of interesting opportunities are there. We may not be exposed to all of them because of various reasons—some not meeting our 3Q framework or not meeting our valuation benchmarks.

Ms. Akshara Menon: You have covered most of the market caps of India because you spoke about manufacturing, then IT, and most of it is actually covered. But if I ask you—what is the one lesson, the toughest lesson Darshan has learned throughout the period of investing?

Mr. Darshan Engineer: I think the biggest lesson I have learned is that you should never be married to any one style of investing. I myself started out as a very value-oriented investor. My initial stock recommendations at Alchemy were deep value stocks. I remember those names—NBCC and Tata Sponge—they were deep value stocks. The cash on books was almost equal to the market cap, so it was like a no-brainer. But over time I did realize that such opportunities will be few and far between. You cannot continuously get ideas in that space. Over time, under the team there, I learned that growth as a style was picking up and you get many more ideas. India being a growth economy, growth companies do better on average and give better returns. But then of course over time, the market also evolved and quality came in as an additional factor over and above growth. Growth plus quality was one more theme. But from time to time, different styles of investing work. There are phases in the market when value as a style does very well, there are phases when growth does well, there are phases when quality does well, and there are phases when momentum does very well. You should be open to ideas from all types of investors and evaluate them through your own investing framework to see if it fits your style of working. Have a balanced approach. Have a bit of everything because that means some part of the portfolio will always deliver returns in every type of market.

At Sundaram, originally we were quality tilted. It did create a bit of pressure in the interim, but I think we navigated it successfully. We have bolstered our 3Q frameworks and overlaid it with multiple other aspects so that we can become more proactive and more adaptable versus what we used to be earlier.

Ms. Akshara Menon: With that, you have already answered the returns part as well. I think what we are trying to convey is already conveyed through your performance. It was wonderfully articulated, sir. The whole interview covered the macros, the investment approach, and about the stocks and how investors should exit and valuation exits. The whole thing is more like an investment book—anyone can carry it to understand this industry. Thanks a lot for taking time to educate us and our subscribers on this. Thanks a lot, sir.

Mr. Darshan Engineer: Thank you so much. Thank you for inviting me again, and I hope I added value to your viewers.