Interesting trend playing out silently has immense potential
Aniruddha Naha
Fund Manager
DHFL Pramerica Midcap Opportunities Fund
WF: You have taken over the reins of the fund only recently (Since April, 2018) – What are the key strategic changes that you are making in the fund’s investment strategy to drive performance going forward?
Aniruddha - The number of stocks in the portfolio has reduced and the strategy will be to have a portfolio of 40-50 stocks. We have stayed away from PSU stocks in the portfolio. The fund went overweight IT and Pharma and has reduced exposure to the Financial sector. Given the macro volatility, it was a conscious decision to reduce the beta of the fund.
WF: Would you characterize the recent sharp correction in midcaps as the end of the cycle or a healthy correction in a longer bull market?
Aniruddha - Equities as an asset class in India will continue to be a superior performing asset class reflecting the higher growth rates in the economy. Midcaps as an asset class will continue to generate wealth over the next decade, as higher profitability nudges industries to graduate from small caps to midcaps and midcaps to large caps.
The next one year will continue to see a tussle between weaker macros and stronger micro numbers. In such a scenario, where earnings visibility is improving, the correction in share price of midcaps is an opportunity to participate in the longer bull market.
WF: Despite the correction, there is a general view that the stocks have not reached realistic valuations, quality continues to come pricey. Do you subscribe to this view? How do you propose to navigate through such stretched valuation scenario?
Aniruddha - Despite the correction, quality definitely continues to be pricey. There are segments in the market which are not so expensive but are good businesses going through a tough patch in the near term. Our idea will be to identify and focus on such businesses and build the portfolio accordingly. A reflection of that is in our overweight stance on engineering goods.
WF: Many experts believe that mid and small caps are more vulnerable to macro instability compared to large caps. Do you agree with this view? How might earnings forecasts of your midcap portfolio get impacted by our currency situation, rising interest rates and worsening CAD?
Aniruddha - Midcaps and small caps are definitely more volatile but not necessarily vulnerable. There are many businesses in the mid and small cap space, which are leaders in their space, have access to technology and have strong balance sheets. These companies will more likely wade through the near term uncertainty and graduate into bigger businesses.
Given our overweight positioning in consumer, IT and Pharma and an underweight positioning in Financials, should help in insulating earnings of the portfolio against the macro vagaries.
WF: Your exposure to engineering stocks is quite high (11.54% vs. benchmark 3.8%) – What is the story that you foresee in this space?
Aniruddha - A very interesting trend seems to be silently playing out across corporate India. Capacity utilization has risen above 75%, from a low of 68% in 2015, indicating to strong ground level demand. This is also reflected in corporate profitability to GDP, which has rebounded from a low of 2.8% to today at 3.3% and improving. Finally, Debt to Equity levels (ex financials) has also come of from 92% in FY15 to around 77%. The picture for corporate India hasn’t been better in the last 5 years. Higher utilization levels will invariably kick start the private sector capex in the next 12-15 months, and corporate India now has a far better balance sheet to support it. Engineering companies will stand to benefit from the revival in this capex cycle.
WF: Your fund has a historical turnover ratio that is quite high. Is the fund more opportunistic than long term focused in the midcaps space? Do you see turnover ratio coming down, going forward?
Aniruddha - The idea is to build a portfolio of good businesses at the right price. As and when these are available at reasonable valuations, they become a part of the longer term portfolio. With passing time, as we build on good businesses, the portfolio turnover will definitely move lower. The focus is to build businesses for the long term.
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