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‘Index Is Just A Data Point’

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‘Index Is Just A Data Point’
Yagnesh Kansara - 02 July 2021

One of the oldest financial groups with a legacy of over 150 years, Dharamdas Samaldas Purbhoodas (DSP), stands strong even today. DSP group’s mutual fund (MF) arm DSP Investment Managers is one of the top-rated fund houses in the country. Its business is presided over by young and energetic Kalpen Parekh, who manages funds worth more than Rs 1.15 lakh crore. Parekh shared his views on various issues related to the mutual fund industry, economy and stock markets with Yagnesh Kansara in a freewheeling interview. Excerpts from the interview:

There is a visible disconnect between the market and the economy. Why do you think this has happened? Moreover, how the stock market is going up despite the disconnect?

Markets always look ahead, whether they are heading upwards or downwards. Generally, they look to the future over the next 2-3 years and how the economy would look like. India has always been seen as a growth market, notwithstanding the fact that in the last 10 years, the average profit growth was less than 10 per cent. However, during the last year, corporate profits have risen much faster than before. Reacting to lockdowns, a lot of companies have either redesigned their business models or taken advantage of their industry consolidation and picked up market share from fragmented smaller players.

The overall economy had significantly slowed down and has just started to revive. We could have temporary glitches because of new lockdowns, but the stronger companies have got stronger.

Second, for the stock prices to move either up or down, liquidity also plays a very important role. Today, the world over as well as in India there is a lot of liquidity in the hands of investors, that is getting invested in equity funds and stocks. So the demand for equity as an asset class has only increased over the last few years.

Hence, it’s a mix of improved performance of corporate India, excess liquidity in markets and low interest rates driving stock prices up. Interest rates are at all-time low. Good companies are borrowing money at rates as low as 5 per cent. Fixed income returns which used to be 8-9 per cent five years back have also come down. So, to increase returns, new investors are investing in stocks and their experience has been rewarded because whatever you have invested in the last year, has given handsome returns.

How long do you think this party will last? And, what about the broader market performance?

The Sensex started at 100 and today is at 50,000 and at some stage may also go to 60,000, 70,000 and 80,000. So, all-time high should not worry us. It is actually just a data point. What is more important is how you look at the next five years. There are two scenarios. The global data points are saying that most global economies are now recovering much faster than ever as their economies open. Also, 23 per cent of capital invested in Indian stock market is global capital. So, when they look at it through their lens, they are seeing that the world is normalising at a faster clip and what is left to open up completely is emerging markets, or a country like India. So, they would look to allocate more capital there.

If you notice the big trends in Corporate India over the past five years, one of them has constantly been about the strong getting stronger. When demonetisation happened in November 2016, it ensured that organised sectors continue to benefit and improve its leadership. When a single tax regime came in through GST (Goods and Services Tax), again organised companies and businesses which were tech-enabled, which could operate across the country in a unified tax regime, became stronger and better.

So, unintended outcome of the past five years of events is a huge consolidation and, in every industry, the top three players have increased their market share. This trend will continue. We are becoming a more organised, consolidated market  across sectors. Such companies will continue to grow and reward their investors.

Coming to stock selection, what strategy do you follow while making a choice?

We prefer companies that have survived and are becoming better in this phase of consolidation. When we construct our portfolio, we look for companies that are increasing their market share, adding capacity without too much debt or going through significant improvement in their balance sheets.

We have a mix of market leaders across sectors as well as survivors in difficult sectors across our funds depending on the mandate of each fund. Each of our fund is managed basis specific rules. Good companies create wealth in the long term and our funds continue to own them. It is also true that the best companies are never cheap and vice versa. It is a very unique phase in the market cycle, where growth rates are moderate, but valuations are not.

For investors who are anxious about high valuations, we introduced a value fund, where the first criterion is elimination of weak businesses, then most expensive companies and finally filter for good companies from the balance universe. To differentiate from the overall product range in the industry, we replaced the largest weight (banks and NBFCs) with international stocks, giving a very diversified and differentiated portfolio. To sum it up, our core remains investing in good businesses across sectors.

Which are the key sectors that will see growth over the next two-three quarters?

We look at a company and assess its prospects by comparing it vis-à-vis the sector it belongs to. There could be times when the sector doesn’t show up well but if the company is a market leader, has cost advantages, and has competitive advantages, then we will buy that company even though the sector may not look so good.

Our investing horizons to start with are two years and above and not in quarters. Our portfolios are invested across stable banks, NBFCs, insurance companies, cement and consumer companies that benefit from home improvement trends in play.

There is a steady rise in consumer demand for homes across the country as more people are working from home or bettering their homes. There are many companies that fall under the category of fast-moving electrical goods (FMEG) companies. They are providing cables, switches, wires, tiles, sanitary ware and paint.

We also have holdings in healthcare, technology and consumer companies as these businesses are more stable and have higher RoEs and free cash flow and form the core of our funds.


yagnesh@outlookindia.com

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