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’Company management/promoter has no luxury to change strategy every year based on something announced in the Budget’

Author: Kumar Shankar Roy/Wednesday, July 3, 2019/Categories: The Finapolis Conversation

’Company management/promoter has no luxury to change strategy every year based on something announced in the Budget’

With the 'Big 'B' (Budget) day fast nearing, everyone from investors to salaried class have a hope that finance minister Nirmala Sitharaman will have something for them in her bag. Expectations seem to be high that the Budget will contain measures that will give a much-needed boost to economic growth so that there would be job creation and increased consumption. But, some long-term investors still feel a Budget is just a government exercise and investors should treat it in that manner. Raunak Onkar, Fund Manager (Equity) and Head - Research, PPFAS Mutual Fund says that investors need to put themselves in the shoes of the promoter.

"The management has no luxury to change its strategy every year that is based on something that is announced in the Budget. There will be tactical changes from the side, but that does not mean there will be a complete change in the direction of a company just because Budget is announced," he says in an interview to Kumar Shankar Roy. Onkar, who is the dedicated fund manager for overseas investments for Rs 1,900-crore Parag Parikh Long Term Value Fund, talks about corporate defaults, why his fund-house avoided NBFCs, and how every company that treats minority shareholders well does may not find a place in his investment portfolio.

Some say the macroeconomic situation is not rosy. Falling automobile sales, corporate defaults. This was not the picture a few years back. As a fund-house that always prefers to look at company and sector specific issues than macroeconomic scenario, how difficult is it to do your job now i.e. find the best investment opportunities?

Any operation has a cyclical nature. A lending operation will go through cycles. An industry's cyclicality will also affect the lender. These things keep happening. When we start our research process, we have a filtered list of companies based on longer trend of return on capital i.e. for a 5-10 year period, their average return on capital must be above a certain threshold for us to even look at those companies. Businesses may have benefitted from a tailwind and we have to accept such things when we do the research.

Qualitatively, we must be convinced that a company promoter has a good track-record of treating minority shareholders well. That is a obvious thing to say. What does treating well mean? It means the promoter should not take the rights of minority shareholders away. They should not treat them as trespassers. They should treat them as silent partners.

How are you looking at the Budget? It is the first Budget of this regime that has been re-elected. There is an expectation that they will set the foundation of next 5 years with this Budget...

As a long-term investor, our role is to understand business performance over a cycle. A cycle can last for 5, 7, 10 years depending on the industry. We need to put ourselves in the shoes of the promoter. The management has no luxury to change its strategy every year that is based on something that is announced in the Budget. There will be tactical changes from the side like take advantage of taxes etc. but that does not mean there will be a complete change in the direction of a company just because Budget is announced. The Budget announces a lot of things for the economy. It discusses how the government is going to earn its money and spend its money. Like you said, it may be a statement that sets the foundation of the investments that the government is willing to make.

But apparently it is only the government has been investing in the economy. We have been told the private sector is hardly making any investment. So, from that perspective, isn't the Union Budget this time around much more important? The government could do something that incentivizes the private-sector to invest more?

That is always the expectation from every Budget! Wouldn't know but this time there is no indication that (the government would something to incentivize private sector investment). Although there has been some talk of start-ups being favoured. That talk always happens. These are all marginal changes, don't you think? Government is going to spend money on government projects. There may be some private sector participation where government gives them to contractors. But that does not mean every listed company will benefit.

There are examples of private sector companies investing, such as those from e-commerce, and helping the ecosystem grow, but most of them are in the non-listed space. So, there may not be a direct impact on the listed space and on the stock market. The stock market is not the entire economy. A large part of the Indian economy is not available for us to participate. For us at Parag Parikh Long Term Equity Fund, fortunately we can invest abroad.

How many companies are there in India that are so-called minority shareholder friendly?

There are hundreds of companies that are good at treating minority shareholders well. At least, they treat them professionally instead of showing total disdain.

Then, why do all those companies not find a place in your portfolio?

Some companies do, but the valuations are a constraint. Everybody knows that these companies are well-run and managed by decent people, whom you can trust. But, the valuations of those companies may not be conducive to buying right now. So, we may not be able to deploy capital in those companies despite the fact that we know that these are good people running the business. We are conscious of valuations. The first filter is management quality. The second filter is business performance over a period of time. If those two are okay, then we look at the valuations. People, business and price...that's how it goes. If you look at some of the companies that have defaulted, there were never part of our investment universe to begin with. Each and every default happens due to the jamming in the liquidity process. Those companies think that liquidity will always persist and they will roll over the debt, but that doesn't always play out.

We know that equity fund managers study companies for investment. But, of late, we are seeing debt mutual funds in the news for all the wrong reasons. Rating of companies are being downgraded, defaults with respect to interest payment or principal repayment are happening. In such a time, are you also looking at the debt side more carefully?

Our preference on the equity side has always been not to follow leveraged companies. Even in the banking space, leverage is a natural thing in this space, we track a few banks because it is easy to track a small number. We do not go across all the banks. For NBFCs, we always have had a stance that the businesses are very specific and do not give you a diversified feel. We have not invested in NBFCs that, except for a handful.

But by avoiding NBFC stocks, you would have missed out all those mind-numbing returns generated by some companies in that sector?

That is alright. We avoided them. In the beginning, there was a lack of understanding about NBFCs about their evolution and market opportunity etc. In such a situation, you have to take a leap of faith in terms of the fact that we know the NBFC promoters and we trust them to deliver. What we did, was to invest in holding companies. So, it was like buying the same story but at a discount. For instance, Bajaj Holdings has exposure to Bajaj Auto, Bajaj Finserv etc. We did benefit, but not in the manner a direct equity exposure to Bajaj Finance would have.

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