SMART TALK WITH SHREYASH DEVALKAR

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Shreyash Devalkar, Senior Fund Manager, Axis Asset Management Company Limited has over 15 years of experience in equity research. He has an MMS in Finance from Jamnalal Bajaj Institute of Management Studies and a Bachelor of Chemical Engineering degree from UDCT, Mumbai. Devalkar manages Axis Bluechip fund which is recommended by Geojit under large-cap category.He speaks to Geojit Insights about Investment Strategy in the current market scenario.

What are the strategic differences you follow while selecting stocks for an open-ended and close-ended fund?

Our stock selection strategy is governed by our core investment philosophy and does not change by fund. The key determinant of our stock selection process is the investment mandate that investors give us while investing in our schemes. We maintain a long-term view while investing in businesses across all our equity funds.

While checking the portfolio of your funds, we find that the allocation towards small-cap stocks is comparatively very less. Is this a part of any investment strategy?

Mid and small-cap stocks had a stellar run from 2015 to 2017. Over longer investment timelines, Mid/small caps outperform large cap due to higher earnings growth profiles as compared to large caps. Further discovery of such stocks by the broader market also leads to rerating. Since the market has seen significant up move, rerating led by discovery has been priced in by the market. Hence the earnings growth is very critical as partly it is in expectations built into their valuations.

At a fund house level, we were uncomfortable with the valuations that some of these companies were trading at and hence took a prudent decision to stay away from these names. In general, our portfolio construction process aims at a focused portfolio based on the investment mandate of the fund.

Most of your funds have outperformed their benchmarks in almost all periods. What are the stock selection strategies which you follow while selecting a new stock into your portfolio?

If you notice, it is only a handful of stocks out of 50 stocks in the NIFTY50 that have helped the market rally to all-time high levels. At Axis, we diligently follow our clearly defined investment process and focus on bottom up stock selection approach with a quality and growth bias. We pride ourselves on building portfolios that are index agnostic and build portfolios with a long term investment outlook. Market has rewarded quality and growth style of investing post demonetization, which is reflected in our outperformance.

Our approach to quality involves an in-depth understanding of the businesses that we invest in. This process is twofold. Firstly, we evaluate the quantitative aspects like financials, past track record and other key metrics. Second and most crucial is our interpretation of the qualitative aspects like management credentials and the potential of the business.

Over the past six months you have reduced the exposure towards cement and construction materials in your mutual fund portfolio. What is your outlook on this sector while the country still holds a strong consumption story?

Cement sector has witnessed significant cost pressures in recent past. Price increases are just sufficient to mitigate the impact. Further the capacity addition trend is quite aggressive. With already high valuations we don’t see much upside in the sector.

IT-Software is one of the top five sectors in your portfolio apart from Banking and Finance. This sector has outperformed the market in the last six months while others were struggling. What is your outlook on this sector in the medium and long term perspective?

We are strong believers in bottom up stock picking and hence select pockets of the IT space. Within IT our focus has been companies which are looking to take projects in the new age Digital space (Cloud, Social, Analytics, Mobility). These companies are moving out of the traditional orbit and are gaining traction with new deal wins. Improving prospects in key markets like the U.S. on the back of strong macroeconomic conditions have been the key reasons for our call on IT. Improving deal pipeline and premiumisation of offerings by these companies have been driving factors for these companies and this has been highlighted in the respective management commentaries as well. A strong dollar is also likely to aid bottom lines of these companies.

What is your call on the extent of stressed assets in the economy and what precautions have you made in your portfolio to help further shocks from banking sector?

The corporate banking sector has seen significant pain and asset write-downs in the last few quarters. While we believe that a significant portion of these assets have been provisioned for, we will wait for positives from the management commentary to take an investment call on such banks. Our portfolios at present have marginal exposures to public sector banks and have been largely unaffected by their asset deterioration. This further highlights our emphasis on quality and investment process. However, we believe barring few sectors like Power, the stress in remaining part of economy is broadly identified.

The way dollar is strengthening against rupee and oil price is rallying. It is burdening trade balances and inflation numbers. What short term impact do you expect on bourses and what is your advice to investors?

The events unfolding in the global market are a result of geopolitical tensions flaring up across eastern Europe, China and other pockets of the global economy. India continues to remain largely unaffected in the global context. The Indian rupee has been fairly resilient in this context and has been one of the better currencies in the EM basket. Oil prices have remained at the US $70/bbl which has been budgeted for by the government. Any further jumps in Crude could be a cause for concern for both the RBI and the government.

The global sentiment is likely to add to market volatility on domestic shores in the medium term. This is likely to present buying opportunities as days go by. We continue to remain bullish on the India growth story. India remains a bright spot in an otherwise gloomy EM market. Investors should stay invested in Indian equities with a long term investment outlook. Earnings growth in the quarter gone by has indicated significant opportunities for growth investors like us and we will endeavor to capture these opportunities even if the gestation period of these investments may be long term in nature.

The current repo hike by RBI might weigh high on cost of funds for mid and small caps. Will the return of bulls be postponed for this category?

Interest rates have been rising in the post demonetization era. This is not necessarily a bad thing. Corporate balance sheets have been recovering and the propensity to spend has spurred domestic demand. This bodes well for companies and financial institutions and their earnings. We remain optimistic on the economy and are positive on the long term potential of equity markets.

As mentioned earlier, small and mid-caps have seen a significant fall this year on the back of repricing of investor estimates on growth. While some opportunities do exist in the mid and small caps space, our portfolios currently have a large cap bias.

What is your opinion about the current rally in the market led by large caps? Is it sustainable? What will drive the markets in CY19?

The first half of the year saw performance driven by a handful of stocks. The rally post the first quarter results has gotten a little broad based giving us confidence that the rally continues to have some legs. For the year ahead, we continue to believe that large caps with sustainable business metrics and sound business models will be favoured by investors. Earnings, however, will need to be closely tracked for further signs on market direction.

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