Market correction has made valuations more palatable: Jiten Doshi

India's valuations will always command a premium, says chief investment officer of Enam Asset Management Company

Indian markets will benefit from structural changes to the economy, says Jiten Doshi, co-founder and chief investment officer of Enam Asset Management Company (AMC), a portfolio management services (PMS) firm. He told Samie Modak in an interview the three factors that drive markets—sentiment, liquidity and fundamentals—are turning favourable.

Here are edited excerpts from the interview.

The market has seen a time correction for nearly 18 months. How has been your scheme performance?

During the last 18 months, we made a couple of changes to our positions which helped us outperform the market. Volatility germinates nervousness, which is a basic human trait. However, we are fortunate to have a mature and informed client set, who are engaged for long-term returns and are not perturbed by short term volatility. Our 22-year track record for steering through similar phases of volatile market cycles also helps in maintaining client confidence.

How have your schemes performed in FY23?

At Enam AMC, both our platforms are concentrated long-term, low-churn strategies. The year 2022-23 (FY23) has been a year of strong outperformance. Against our benchmark of Nifty 500, our flagship PMS, Enam India Core Equity (EICE), delivered a return of 11.4 per cent, generating an alpha of 13.7 per cent. Our second strategy, Enam India Diversified Equity Advantage (EIDEA), has delivered a return of 7 per cent, with an alpha of 9.3 per cent against the same benchmark.

Are current valuations attractive? Is there scope for further fall in the markets or valuations?

Post January, on-ground demand environment, sustained foreign outflows and rising interest rates have resulted in softer share prices. As things stand, the recent correction in the market has made valuations more palatable at about 17 times' one-year forward earnings. As much as 56 of the Nifty100 stocks now trade below their 10-year historical valuations. There are three components of multiples: sentiment, liquidity, and fundamentals. The market is consolidating on all three. Sentiments are a tad negative with concerns about the on-ground demand recovery and the effects of monsoon on rural incomes. The markets have withstood substantial selling by foreign portfolio investors (FPIs) of over $5 billion over the last 12 months.

The valuation (one-year forward consensus P/E) has declined 25 per cent from March 2022 levels. Further, recent improvements in current account deficit, weak commodity prices, a softening wholesale inflation and recent weakening in Brent crude augur well for India’s macroeconomic scenario. India’s valuations will always command a premium, given the long-term growth potential, the durability of businesses, the visibility of corporate earnings growth and superior return profile compared to most other emerging markets.

What factors will drive markets?

In the short term, markets are like voting machines but in the long term they are like weighing machines. They reflect economic performance, interest rates and earning expectations. In the near-term market sentiment would reflect developments from global markets, rate-related actions by regulators, on-ground developments such as monsoon and policy push on infrastructure. In the longer term, the markets are poised to perform on the back of sustained economic growth driven by demography, policy initiatives, and a favourable investment cycle driven by strong capital flows, efficient balance sheets, and enviable dual position of large domestic market with emerging space in global manufacturing supply chain opportunities.

Which sectors or stocks are you bullish and bearish on? What is your investment philosophy?

Our philosophy is to marry business quality, growth and margin of safety. We feel value and growth are tied at the hip. Returns, business model sustainability and medium-term cash flow growth remain our core filters to build a rational judgement to play the margin of safety (the price-value gap). We operate through a bottom-up stock selection process, and thus any sectoral preference is a derivative of these selections. We expect India to benefit from multiple concurrent mega trends like digitisation, financialisation, formalisation, industry consolidation, premiumisation, urbanisation, manufacturing renaissance and resurgence in capex. This will enable a 360-degree growth.

What are the challenges, or opportunities, of running a PMS scheme vis-à-vis a MF?

PMS services were introduced to provide customised, high-engagement models and superior service to the discerning and informed high net worth individuals (HNIs). PMS is meant to be a bespoke solution (like a tailor-made suit) as against a fit-to-all product (a readymade shirt). The portfolio construct here focuses on core tenets of concentration, high conviction, in-depth research, and low churn. Therefore, it requires high involvement both from the customer as well as the asset manager, making it an intense personalised engagement. We at Enam AMC have always remained true to this spirit (as compared to prevalent practice).  Unlike a mutual fund, an incremental subscription or redemption in a PMS does not impact or dilute individual client portfolios. However, the incessant focus on customisation and personal engagement make managing a low-ticket size client a huge challenge. 

How do you go about acquiring new clients? How has the sale of Enam to Axis Bank impacted your business?

Since inception Enam AMC has been operating as an independent entity in terms of its construct, functioning and compliance. Hence, it was unaffected when Enam divested its sell side business to Axis. The strength of the product, proven processes, understated-conservative approach, focus on long-term wealth creation and sustained client engagement have developed a network of satisfied clients. Most of our clients have been with us for a long period.

How will the new benchmarking norms and other regulatory changes play out for the PMS industry?

The idea is to provide a minimum friction and fair evaluation of products across the industry bringing in greater transparency for the client. The new benchmarking norms have just been introduced, and are one more step in the evolution of the PMS industry. We feel regulatory intervention is always intended to bring positive changes for industry and the investors. Initially, any change may find resistance but ultimately gets accepted over a period of time.