We have concluded three of the six episodes of this Alpha Moguls series, and as usual, the opinions, investment philosophies, and pockets of interest vary, with most views sounding convincing enough. Diversity in the fund managers’ outlook, with Sumeet Nagar (Malabar Investments) and Prashant Khemka (White Oak Capital) more growth-oriented and Kenneth Andrade (Old Bridge Capital) more value-oriented, ensured that we got opinions across the investment landscape. This piece is my attempt to highlight the key elements in the three interviews; from what stood out in each of these conversations to identifying common trends playing on all of these intelligent minds.
Waiting For A Capex Revival
Kenneth Andrade spoke on Alpha Moguls after the union budget, and was able to crystalise his thoughts on the current market scenario and how he would go about approaching his portfolio model, with the falling cost of capital as the bedrock of his investment philosophy.
What stood out for me in this interaction was Kenneth’s stoic belief of staying away from financials and information technology, something that he has been consistent with for the last few quarters now.
While skeptics may argue that anyone underweight on financials would have lost out in the great run-up, the ensuing bloodbath in a bunch of financials resulted in a steep fall in portfolio s, which would not have impacted Kenneth’s firm, Old Bridge Capital.
Kenneth believes that deleveraged balance sheets and higher efficiency have made some companies very attractive investment candidates.
You are seeing efficiency on the ground improve. The efficiency is being pushed by higher utilisation levels, which is also a factor for no incremental supply coming through. All of these three have tied in together. There was a capex freeze, which has resulted in higher utilisation and that has resulted in a higher return on equity.Kenneth Andrade, Old Bridge Capital
The arguments of when the capex revival will happen has had supporters and detractors of equal measure, but Andrade firmly believes that we will see that theme playing out, albeit with a bit of a lag. And he has built up his portfolio accordingly.
Make Sure You Talk To The Management
Sumeet Nagar largely stressed on the importance of groundwork while choosing companies, especially in these times of uncertainty. The most important takeaway though was the belief that while the philosophy and approach to investing remain the same, what an investor emphasises at different points in time would change a little, depending on the market environment.
“There are points in time where you want to be more aggressive and there are times when you want to be more defensive,” Nagar said.
The gist, according to me, is that just because one likes a particular stock or is holding the stock, doesn’t mean that he or she should keep holding on to it or freshly buy it, if the broader market conditions indicate otherwise. A lot of investors tend to commit this mistake repeatedly, without recognising the consequences it has on their portfolios.
Unlike Warren Buffet, who has spoken several times about not being in the habit of meeting managements, Nagar emphasises that in the Indian context, it has to be your groundwork that gives your conviction.
Management meets are important, more so at times when the company is going through a tough time. This exercise gives you an idea about what the management is thinking and planning to do. Nagar said he also validates what managements are saying by checking with dealers, customers and other related parties. Simply put, the conviction to invest cant be because you heard it from somebody or read a research report.
Looking Beyond P/E Ratios
Prashant Khemka, a veteran in the emerging markets scene, having served as a chief investment officer of global emerging markets equities at Goldman Sachs Asset Management, believes that one way of achieving investing success is to have a bottom-up investment philosophy. The combination of business quality and (due to right pricing) are the must-haves. Khemka’s firm, White Oak Capital, has this unique way of valuing companies via an asset-light cash flow multiples projection. They divide a company into two parts, the asset-heavy part (termed as the ‘fin-co’) and the asset-light part, which is labelled ‘op-co’. While readers need to watch Khemka's explanation for the nuance in this bifurcation, this asset-light method normalises for capital structure and capital intensity and helps Khemka make better investment decisions. Incidentally, Khemka’s style of valuing companies or markets makes India look relatively less premium a market versus in multiples, to other markets like China, as compared to a normal P/E multiple valuation of different markets.
The interesting part about Khemka’s investment style is that he never looks at P/E multiples, as he believes the P/E multiple doesn’t adjust for capital structure or capital intensity.
‘We may investigate a company, invest in it for years, own it and sell out without ever talking or mentioning P/E multiples,’ Khemka said. It sounds unique because, in most reports or conversations, the starting point or the point of elimination is the P/E multiple of a company.
Like Sumeet Nagar, Khemka also mentioned travel and tourism as a theme. The underlying assumption is around how the average Indian will spend her wealth once the per capita income increases from the current levels to 1.5x or 2x over the next five years.
One thing is for sure – all three gentlemen are fervently hoping that the road towards a $5 trillion economy is smooth and not delayed, as the delayed gratification of stock price rise and lower alpha is not something that fund managers are happy about.
Niraj Shah is Markets Editor at BloombergQuint.
As a Subscriber you get
Stories
RECOMMENDED FOR YOU
POPULAR