Our investment philosophy is centred on participating in quality businesses

Accept our heartiest congratulations on your Emerging Blue-chip Fund winning the Best Mid/Small Cap Fund award from Morningstar! The performances of Mirage Asset India Opportunities Fund and Emerging BlueChip has been stellar and one of the best in their respective categories. These two schemes are very popular amongst IFAs and Investors. What in your view are the factors that enabled you to deliver robust performance and get ahead of the pack?

Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver satisfactory returns. Overall, being in the right pockets generated alpha, as divergence was significant, both across sectors, as well as stocks within a sector.

Do you rely on a top down sector selection approach or bottom up stock selection?

It is a combination of both “top-down” and “bottom-up” approach. The focus however, is more on the stock selection which is driven by a bottom-up approach. The industry selection is done through top down approach which is mainly based on growth prospects. Thereafter, the decision to include a stock is essentially driven by the individual traits of the company which include analysis of its business model, understanding management bandwidth and review of valuation.

What are the 3-4 main features you use for stock selection?

Stock selection process has three aspects related to Business selection, Management analysis, and valuation. While selecting businesses, we look at growth prospects and quality of growth as defined by the ROCE (i.e. Return on capital employed). Management analysis evaluates factors related to the past track record, capital allocation, corporate governance, etc. The last factor is related to valuation. It is important to have a decent “Margin of Safety”, i.e. the gap between value and price should be decent.

Are you proposing any changes in the scheme in keeping tune with the recent market trends? What broadly will be your style and strategy going forward considering the fact that the expectation from these two schemes is very high?

Our investment approach is to focus on stock selection as we believe that the returns are driven by individual merit of business. Our investment philosophy is centred on participating in quality businesses up to a reasonable price, and holding the same over an extended period. From portfolio construct perspective, the approach is to have diversification across sectors and stocks for an optimal risk-adjusted return.

Do you believe that the valuations are expensive in midcap space? Should investors continue to bet on them?

An important point is that universe for mid-size businesses is large – almost 4 to 5 times that of large cap companies, which are typically classified as top-100. Thus, the ability to choose from wider universe, as well as improving trend in economy offers decent opportunities within midcaps even at the current levels. We would advise balanced allocation between multi-cap funds and midcaps funds in ratio of say 75:25. Over longer time frame (5yr+), midcap segment would continue to do well. However, we would continue to see divergence in performance of stocks, driven by individual merit of business.

We find that the top 5 sectors for most of the AMCS in India are now Banking and Financial, Energy, Technology, Services and automobiles. Are you going to follow the same sectoral allocation trends for your equity funds? If no, then what other sectors you are bullish on? If yes, do you still think more is expected from these sectors?

Of particular interest to us are companies where there is overlap of some of these themes. We are looking at companies which will benefit from multiple factors like revival in economy, consumption, GST etc. However, it is pertinent to keep valuation filter, as few of these companies may not be cheap, and investors need to be certain of not to overpay for growth in individual companies.

For the benefit of our readers, please also give us your outlook on the stressed assets problem in the public sector banks?

Gross NPA has reached at about 7.8% Vs 3.1% in FY15. We expect incremental asset formation to reduce – however, recoveries will be gradual. Economic revival, low interest rates, and initiatives like implementation of Bankruptcy code could help accelerate recoveries.

Demonetization is expected to have favourable impact on the economy in the long term. Which sectors, do you expect, will benefit the most from demonetization?

The demonetization largely impacted discretionary consumption, and MSME pockets. We see the negative impact reducing except for high end consumer discretionary. The key positive impact was conversion of idle cash to deposit and the resultant high liquidity, some of which has gone to productive savings.

Can we expect to see benefits of GST on 2017 earnings and stock prices in the next fiscal year?

As GST kicks in it would be positive for the organized sector for two main reasons – once, the cost of compliance for the unorganized sector could increase and thus the loss in market share. Two, a unified market along with reduction in raw material and logistics cost would be again advantage to players with scale, i.e., the organized sector.

When do you expect to see a recovery in corporate earnings?

CRISIL in its latest outlook, expect FY18 revenue growth highest since FY14 – while still at 8% the growth will be driven by significant change in WPI (Vs last year), improvement in global outlook which has positively impacted commodity producers and exports, and impact of low interest rates on demand, and low base effect. Given these four factors the consensus estimate is 20% CAGR in EPS in FY18 and FY19.

What is your view on global economy, and related improvement in commodity prices?

After a decade post financial crisis, global economy is exhibiting a broad based upswing. Data points like - Fed rate increase, Euro area sentiments index best since 2011, Japan fastest growth in capex, and rebound in exports in South Korea, Taiwan, and even India – these are indicators vindicating the recovery. Developed markets, led by USA, has seen positive impact of reflationary policy yielding results with inflation inching up. In case of most EM, there is overall macro stability which creates room for fiscal support to lift growth.

What is your advice for the retail Mutual Fund Investors? What they should do now and how to invest in the current market situation?

We would advise investors to invest in a disciplined way in equities with equal weight allocation towards equities. With funds we would recommend about 70% in multi-cap funds, and remaining in midcaps from 3yr+ view.