Ambit’s Coffee Can Portfolio aims to deliver steady returns over longer periods of time.The frenzy is back once again in mid and small cap names. What is your assessment of all the developments that took place in the last few months?
In the last six months or so, we have seen a see-saw behaviour both from the economy perspective as well as from the market perspective. We have seen Nifty go down to 8000 levels and today it is back to over 11,000. One can’t blame the average investor if he is confused. A lot of the investors I know personally have exited the market in late March at around 8000-8500 levels on Nifty and they are very confused today.
On one side, there is this fear of missing out (FOMO) on the rally that you are witnessing as the market is going up and on the other hand, there is an apprehension that the market has also run up a lot. What do you do? Do you play for the recovery which is going to come through in the coming quarters? The rural revival or do you look at the current situation and remain afraid in terms of the numbers of coronavirus that are coming through, the GDP numbers that are coming through?
When the whole situation is inasmuch a turmoil as it is today and the way it is behaving today, the best thing to do is to play it from a long term perspective, Have a two- to three-year investment horizon and have a clear head that the market might be intermittently a little volatile, your investments might be minus five or plus five percent down, but then you have a clear trajectory in terms of the amount of time you want to stay invested for.
You have a clear timeframe in terms of the target return that you are targeting and then you stay put for that timeframe through the whole upheaval and turmoil. The way I look at it is if you take a slightly broader term view, if you take a slightly longer term two-three-year view, then clearly the economy is on a mending path. Q1 is going to be the worst quarter that we are witnessing. We continue to remain very optimistic as far as banking, consumption and the whole rural play is concerned,
Sectors like pharma should do really well and we have seen things playing out over there as well. My sense is that when you look at discretionary consumption, BFSI and pharma, there are things to play out for from a two-year perspective and there is no doubt in my mind that FY22 and FY23 are going to be years when there is going to be a significant amount of mean reversion in the economy from a GDP growth rate and inflation perspective.
Rate cuts are going to come back. My view over here is do not try to time the market but try to spend as much time as possible in the market and invest from a two-three year view perspective. There is a lot of money to be made in the equity markets. The rally that we have seen in the last two months is just the tip of the iceberg, it is just a starting point for a very long rally that is going to come through in the next two years.What are the concerns that some of your clients have been flagging off over the last couple of months?
The biggest concern everybody at the moment has is valuation and this is something that has been consistent for almost two, two and a half, three years. Since the start of 2017, we have spoken so much about polarisation. We have spoken so much about valuations in certain sectors and certain stocks rising to the level where they have risen. The only question that I keep getting intermittently where people are concerned is how to get around these valuation multiples and how to invest correctly in these quality stocks, if you want to call it, at the valuations they are trading at.
I often tell people two, three things; one is that in the last 10 years, Nifty has seen a significant deterioration as far as the earnings growth trajectory is concerned. We started off in the last decade in 2011 with a 28% earnings growth in the Nifty. Today we are in the negative trajectory and the trajectory has been sliding down year after year every single year.
The multiples that the Nifty is trading at has remained by and large in a very narrow band of 15-22 times. So we have not really seen a significant performance as far as earnings growth is concerned from the broader markets and we have not really seen multiples being rerated at all. That is why if you look at the last three or four years of returns an average mutual fund has given or the Nifty has given is abysmal.
On the other hand, companies that have performed consistently in the last 10 years, for instance, if I may look at the coffee can portfolio, look at the good and clean portfolio that we have, nine out of the last 10 years saw a double digit return in terms of profit growth that these companies have given and the market has rewarded them very rightly.
When you look at the composition of balance sheets, when you look at the composition of their consistent growth in the past and the future growth outlook, these multiples automatically get justified. What I tell people is to do two things; one, to look not at multiples in isolation but at risk versus reward; the second thing is that as long as earnings continue to grow, you will always outperform the market irrespective of what happens or does not happen to the multiple.
Talk to us about any of the recent analysis you have done with regard to what is suitable for the long term investor and which could have potential to create significant wealth? Are there any changes in your portfolio?
There are two things that we have done in the last three or four months as coronavirus has unfolded in front of us. One is to do a survival test on companies and our belief here is that if you take a two-year view and you believe that companies which are going to survive are market leaders in their segments, they are not just going to survive but they are essentially going to thrive. There is going to be a certain shift in market share from smaller companies to bigger companies.
The MSMEs, the smaller manufacturers are going to find it a little difficult to hold on to their market share positions, the way they currently are or were before the coronavirus crisis, Hence the big guys are going to become bigger and also there is a certain revolution which is waiting in the wings to happen as far as logistic sector in India is concerned.
When you look at the way automation is going to come in, when you look at the way robotics and artificial intelligence is going to come in, people are going to cut down on layers that exist today. There is a certain bit of increase in profitability which is also going to happen and so the big are going to become bigger and they are also going to become more profitable.
Guys who are able to survive for the next few months are guys who are going to thrive over the next two years so irrespective of the sector in which you are investing in -- be it BFSI, pharma, retail or consumption discretionary, invest in leaders,
If you invest in market leaders,the portfolio is going to do much better than average Nifty is going to do so, that is one. Secondly in terms of the changes in the portfolio that we have made, we have not sold anything yet. We have not cut down our weight on anything yet but we have deployed a certain bit of excess cash that we were sitting on into two sectors -- life insurance and modern trade or retail. We believe both of these sectors are going to see a significant amount of benefit coming through at a category level or at a industry level because of the coronavirus crisis that growth is going to accelerate from here onwards,
We have taken a slightly longer term view. The valuations were far more compelling than what they have ever been and those are the two sectors where we have taken a slightly bullish stance.
Could you also give us a sense of how the portfolio earnings estimates are looking given the recent disruptions and earnings that have slipped further? Has there been any revision in your estimates of portfolios earnings?
Not really, may be a few and far in between intermittently. But by and large, if you look at our portfolio composition and at the F&B companies in the portfolio that we hold, we have all market leaders in the BFSI segment.
When you look at the discretionary consumption names in our portfolio, by and large, the earnings so far have been either ahead of estimates or they have been significantly ahead of estimates as I may call it. Even in Q4FY20, we were still in double digits as far as earnings growth bottom line of the portfolio is concerned.
When you look at full year FY20, we were in double digits and FY21 really is going to be a bit of a Europe disruption, especially in the first half. But we are very confident of a very significant V-shaped recovery happening not just in the markets, but also in the earnings as well and more so in our portfolio.
So there has not not really been a very significant negative reaction to the results. It has not really seen too much earnings cut coming through in the stocks that we have had. If at all, our portfolio continues to perform really well from a six month, one year, two year, three year view consistently.
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August 25, 2020 at 07:06PM
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Positive on banking, consumption and the whole rural play: Ambit - Economic Times
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