"It has to be remembered that a good economy does not necessarily ensure good markets. Bear markets and bull markets are a confluence of certain macro-economic factors." - Satish Ramanathan
Starting his career as a research analyst at ICICI Securities, Satish Ramanathan, Director & Head, Equities at Sundaram Mutual Fund, has climbed up the rungs to become one of the most prominent figures in the Indian fund management industry. A veteran market player, with an experience of more than 18 years in the capital market, he spoke to Saikat Mitra, sharing his investment philosophy and what investors should do to succeed in the market.
Can you describe your investing philosophy for us?
My investment philosophy is to buy into stocks that are fundamentally sound. We look forward to investing in companies that have the capacity to generate strong cash flows. We also look forward to companies that are available at better valuations and a reasonable price. In brief, you can say that a company must be able to generate cash and should be in a position to pass on the benefits to its shareholders.
How did you enter the fund management industry?
I started off my career as a research analyst at ICICI Securities. After completing my stint there, I got an offer from Franklin Templeton, where I took over the role of a fund manager. Since then, I have been in the business of managing funds.
You have started from the sell side and moved on to the buy side. How smooth was this transition?
Well, the shift that I have observed is that the responsibility increases manifold. After coming to the buy side, you have to deal with other people’s money. You have to understand that here you are not just making a recommendation. You have to be more cautious and that much more diligent in following up your actions and arriving at a decision.
What was your first big investing idea, and how did you develop it?
My first big investment idea came when I was working as an analyst with ICICI Securities. It was Tata Motors, when the company was actually passing through a lower commercial vehicles cycle. It was also the time when the Indica project was bleeding the company. At that point, I moved ahead and found out the intrinsic value that was still intact for the company. This was the first big investment idea that I had generated at that point of time.
What are the most crucial signals, according to you, which would determine the entry and exit points in stocks?
To be very frank, it is indeed very difficult to predict the entry and the exit levels of stocks. One has to be patient and look forward to entering at his/her comfort levels, and the same is true of when you are making an exit from any particular scrip. But one has to control his/her ambition of making hefty earnings from a particular stock.
How important is it to meet the management? Is it not that the company will share only the better things with you?
This is true, in a sense. There will always be some kind of bias in what the company speaks. What we do is, at the point when we meet the management, we are through with our own due diligence on the company. Moreover, we frame questions more on specific issues rather than basic questions. Here, I must mention one more thing. Before taking a call on a company, we also make sure that we meet the competitors and, if possible, their dealers. This ensures that you get a feel of the sector as well as of particular scrips.
Technical analysis is considered to be a very important and integral part of market success. What is your take on it?
Technical analysis is one of the important tools that helps you understand the market psychology, and in further fine tuning your entry point into a particular stock. But at the end of the day, most of the emphasis has to be laid on fundamentals. The company should have the capacity to generate cash flows to become viable to form a part of one’s portfolio. The company also needs to have good earnings prospects and good dividend payout.
Have you gone wrong on your investment ideas at any time after having generated and followed them?
Nobody is perfect. There are some instances where the calls that we have taken on a particular stocks have gone wrong. At that point of time, what we do is that we re-assess the entire scenario once again, taking into account the recent developments. We also look at the opportunity cost of the money, and if we feel that there are other viable options that are available in the markets, we sell off the underperforming scrip.
How important is the selection of the correct sector in a stock’s performance?
See, as mentioned earlier, we buy into stocks that are fundamentally sound and have the capacity to generate strong cash flows. Therefore, what I can say here is that we not only have to focus on the sector, what we have to look for is that when we buy a stock, apart from the earlier mentioned point, we also have to make it a point to buy into companies with good managements and good business models.
Buy-and-hold as a concept is widely followed and preached by mutual funds. Is this concept completely foolproof, according to you?
See, there is nothing that can be termed as foolproof with regard to investing in equities. There may be some sectors where this strategy works. We have to remember that the buy-and-hold strategy depends a lot on how what strategy a particular company is following to take it to the next orbit of growth. Also, if the strategies that a company have put in place are not working, we can say that the buy-and-hold strategy is not viable.
The buy-and-hold strategy held true for Infosys three years ago, but today, one should switch from Infosys to some other stocks. So, buy-and-hold as a concept looks very good on paper. Investors should reassess their holdings on a regular basis to test one’s assumptions, reality and market perception.
Is it possible to recognise a bear market before it is too late?
Here we have to understand two things – whether the economy doing good and vice versa; and whether the markets doing good and vice versa. It has to be remembered that a good economy does not necessarily ensure good markets. Bear markets and bull markets are a confluence of certain macro-economic factors, money flows and corporate earnings, to name a few. Looking at these factors, one has to take a call on whether a bull or bear run is coming.
Coming to the market perspective, looking at the Q4FY12 earnings, do you feel that the downgrading of earnings has bottomed out?
Well, I am of the opinion that the earnings downgrade has not bottomed out as yet.
Which are the sectors that you are currently betting upon?
At Sundaram, we maintain a bottom-up approach rather than looking at the sector as a whole. We do our research and follow all the steps mentioned earlier before investing in a particular scrip.
What would be the most important advice that you would give to an investor?
At this juncture, one must be patient and follow due diligence, and at the same time, be conservative about investing one’s hard-earned money. So, one has to perform research on a particular company before moving ahead with one’s investment.
Satish Ramanathan
Director & Head, Equities,
Sundaram Mutual Fund
EducationTexas A&M University – Mays Business School
Indian Institute of Technology, Madras
Career
Present:
Director & Head, Equities, Sundaram Mutual Fund
Past:
Vice President, Franklin Templeton AMC
Vice President, ICICI Securities
Senior Research Analyst, Sundaram Newton AMC
Assistant Manager, ICRA