Well run mid- and small-caps seeing strong growth: Emkay Investment CEO

Global interest rates are likely to remain benign for long, says Vikaas Sachdeva in interview.

Vikaas Sachdeva, Chief Executive Officer of Emkay Investment Managers, sees "the search for alpha" driving sophisticated investors to the alternates industry. Sachdeva, in an interview with Ashley Coutinho, said there is a strong undercurrent of growth among mid- and small-cap companies, which will benefit from consumption growth. Edited excerpts:

Nifty has gained more than 5 per cent year to date. What’s your view on the markets?

The earnings along with strong foreign flows over the last few months have helped equities gain. We believe that with capex-focused Union Budget and support provided by the government to consumption, the outlook for Indian equities continues to remain positive. Key things to watch out for will be inflation and gains on employment. There is a strong undercurrent of growth among well run mid- and small-cap companies. These will be the key beneficiary of a strong outlook on consumption and we continue to like specific bottom-up stories.

What is your take on valuations? Any particular sectors or pockets where you find value?

Valuations at times are a relative concept: It should not be viewed in isolation, as the global interest rates scenario too plays a major role. Combined with liquidity, the global interest rates are likely to remain benign for a much longer time as central banks world over are likely to loosen the purse strings to support growth. We find value in financials where the Covid-driven pain on asset quality has been far lesser than expected.

Low debt/debt-free infrastructure companies are appearing attractive. We also like auto ancillaries as a quasi-play on strong private consumption expenditure as well as exports. We believe Covid-19 has accelerated the spending on IT locally as well as globally and it could be a multiyear spending story and hence we like the IT sector. Last but not the least, we have always been the believer of Indian CRAMs story in pharma as well agro and hence we continue to like that sector.

Corporate earnings grew at a good pace in the December quarter. What are your thoughts on earnings growth in Q4 and projections for the coming quarters?

Coming in from a year like 2020, we believe it is unfair to comment on QoQ performance in corporate earnings - hence commenting on short-term performance metrics in the current scenario would be difficult. Having said that, we believe that it has been a baptism by fire for most companies, which has augured well for their survival and growth. There are structural changes that are being seen across corporates.

Boards are now talking about implementing capex plans to grow, rather than just being conservative and waiting for things to tide over. It is reflected even more so in the bellwether companies in the Nifty, wherein the Nifty earnings are likely to grow at a CAGR of 25 per cent over FY21-23, according to consensus estimates.

What are the key risks that could impact overseas flows into India?

Flows chase growth. So far, as India continues to offer strong nominal GDP growth, the flows should be comfortable. We believe that growth would be a more important driver of flows than the rates.

There is a belief that PMS is far less regulated than mutual funds. Last year, however, the regulator introduced norms to bring in standardisation and greater transparency. Has this given investors more confidence to invest in PMS schemes?

A PMS scheme is subject to stringent regulatory overview by Sebi. By virtue of the fact that the investor here is an ultra HNI investor and is supposedly far savvier than a retail one, an investment manager can certainly implement more sophisticated strategies to manage the funds at his disposal.

Recent Sebi regulations ensure that there is more standardization in terms of investor communication, as well as far greater transparency which is yet another step in the right direction. For example, comparison of returns on a TWRR basis now gives investors a like-to-like comparison of returns across similar schemes enabling them to make more informed decisions.

The search for alpha will drive sophisticated investors to the alternates industry, resulting in a geometric rise in the number of investors and assets in the next few years. We also see a lot more emphasis on improving customer interaction, be it in terms of on-boarding or in terms of information dissemination. Digitization will up the ante both in terms of customer expectation, as well as in terms of industry deliverables.

The coronavirus crisis has come as a blessing in disguise for sustainable investing, globally. Will the ESG theme gain traction in India this year?

ESG as a concept that has been around for some time in India with the focus being more on governance than anything else. Emkay’s “E-Qual Framework” is an example of how a robust governance filter can keep dodgy management at bay and back very high-quality promoters. With increasing focus on the environmental and social aspects of a corporate identity, it is a matter of time before ESG becomes a mainstream consideration for stock picks. While the pandemic has accelerated the focus, ESG will gain momentum only if there is a secular institutional and/or governmental buy-in to these concepts.

I believe the alternates industry is already ahead of the curve in terms of identifying and managing ESG portfolios. We run a 12 stock large-cap portfolio called Emkay’s 12 which is very high on ESG standards. However, there is no standardized or cost-effective way to rank and showcase high-quality ESG stocks as yet. Once that stabilizes, you will find a lot of funds flexing their credentials as compared to what is being done currently.

What are your plans for Emkay Investment Managers for 2021?

This year we look to be deepening our distribution reach by working with select right-minded partners whom we believe will be in alignment with our vision of customer-centricity. I am personally excited about the role technology is starting to play in the alternates segment and [I] am looking to implement a few smart initiatives as well.

Be it the recent Emkay Duet initiative which enables clients to invest in more than one portfolio simultaneously, or 10/10 which allows him to stagger his investments, we have been tuned into listening to the investor very closely.