Q3 results in line with expectations, banks only outliers: Anand Shah

Investing is now about finding the businesses that are inherently good and triggers that could change outlook for a specific sector or companies, says Anand Shah, head of portfolio management services (PMS) and alternative investment fund (AIF) investments, ICICI Prudential AMC, in an interview with Abhishek Kumar. Edited excerpts:

Which sectors do you prefer right now? Has there been a major shift in the last 2-3 months?

We have a bottom-up approach when selecting companies. At present, we like many companies in the manufacturing theme, as the risk-reward appears to be favourable. Manufacturing activity might have improved in two ways—through import substitution and growth in exports. Import substitution will lead to higher gross domestic product (GDP) growth rate even at similar consumption levels as imports replace domestic manufacturing. Export is another lever that we see significantly playing out over the next few years. Companies in manufacturing space hold the potential to improve both in terms of earnings growth and return on equity. Apart from this, as manufacturing activity gathers steam, the outlook for industries related to manufacturing such as corporate banking, logistics, and utilities is also improving.

Do you see an increased risk for export-oriented sectors in the near term because of a global slowdown?

The export-oriented sectors have been under pressure since last year owing to global slowdown concerns, which are visible through sectors like textiles, metals, IT, etc. At the same time, domestic-focused companies, too, witnessed softening of demand due to persistent inflation and a high base effect. In effect, India too saw a certain amount of slowing down. Since this was on expected lines, there was not much of a loss in share prices, at least in those sectors where valuations were not trading at a premium. In sectors where valuations were expensive (like IT services), the price correction was sharp.

Most firms’ December quarter (Q3) results are out. What conclusion have you drawn from them?

Q3 has been subdued and earnings were largely in line with expectations. Banks were an exception, as they exceeded expectations on all fronts. Apart from this, there were very few positive surprises.

In your note, you talked about using the ‘BMV strategy’ for portfolio creation. How does it work?

BMV stands for business, management, and valuation. BMV is a strategy for identifying businesses that can grow earnings sustainably over long periods, and be a part of our investable universe. Each of these aspects is important in a company we look to invest in. If we do not like the business, there is no point in considering management and valuation as those alone cannot yield returns over the long term.

Is it becoming difficult to find good businesses at the right valuation?

Over the years, the market has definitely become more efficient and so good businesses today are largely fairly priced. However, there will always be businesses that are inherently good and are getting better — for example, the manufacturing basket. Over the last decade, the cycle or certain management decisions were such that even strong businesses suffered and were de-rated. This does not necessarily make them bad quality businesses. This is where research becomes relevant as it helps identify companies with good business quality.

We also consider companies that are operating with high entry barriers but delivering subdued profits as well as low return on equities. Watch out for triggers that hold the potential to change the outlook of such companies. For example, China’s crackdown on pollution was a game changer for the Indian specialty chemicals industry.

The other set of businesses that interest us are those where investments have already been made and now it is time to generate returns, i.e. reverting to normalised returns like telecom.

What investment strategy would you like to share with retail investors?

The most important aspect is the ability to differentiate between volatility and risk. Volatility is a temporary loss of capital, while risk is a permanent loss of capital. Once the investment horizon is determined, an investor should endeavour to avoid permanent loss of capital. This can be achieved by avoiding businesses one is unable to understand, avoiding speculation, and refraining from investing based on hearsay. So, always check the portfolio’s quality of businesses, management quality, and valuation.