"Be cautious on companies with poor balance sheets, very high debt levels, very high capital requirements and those trading at extremely high valuations." - P V K Mohan
9/6/2012 9:00 PM Thursday
Beginning his career as an equity research analyst in the year 1993, P V K Mohan, Head Equity at Principal PNB AMC has an experience of over 20 years in the Indian capital markets, having worked along the entire value chain of the fund management industry in India. In an interview with Saikat Mitra, he shares his investment philosophy and his take on the Indian markets going forward.
How did you begin your journey in the capital market?
I joined the industry in 1993 after completing my MBA. My first job was at IL&FS, as part of the proprietary fund as an analyst and later as part of the team that advised the Oppenheimer India Fund, an offshore fund focussed on India. In 2004, I moved to DSP Blackrock for five years, where I was handling the investments for the Portfolio Management Services (PMS) division, which besides HNI client portfolios, also advised insurance companies on their equity portfolios. After a year in ICICI Prudential PMS, in 2010, I moved to Principal PNB Asset Management.Can you describe your investment philosophy for us?
The major emphasis is on fundamentals. The idea is to pick a sector or a company with good growth prospects over a two-three year period. The preference is for companies with a dominant presence in their respective sectors, with a good track record and financial stability. Finally, companies must be available at attractive valuations, where the risk-reward profile is favourable. It is important that the conviction level is high, with reasonable clarity on earnings expectations, more often based on our internal analysis.
What was your fi rst big investment idea, and how did you develop it?
Well, it was a long time ago, when I was working as an auto analyst in IL&FS. I picked Punjab Tractors, which is now a part of Mahindra & Mahindra. It was a well-run company with strong financials, a rising market share by virtue of its product profile and the best-in-class margins with growth outpacing that of the industry.
What are the most crucial signals, according to you, which would determine the entry and exit points for stocks?
The first part is to identify the right sectors and companies and develop a strong conviction. Based on the earnings expectations, we would have an approximate price target, and hence, the potential upside. If the potential upside is good and the risk-reward is favourable, we would look to add it to the portfolio. We would then monitor it on a regular basis to revalidate and update the investment hypothesis. The sell decision is trickier and needs more discipline, which evolves over a period of time. We definitely have a target price in our mind, so selling becomes an automatic decision when it nears the target price. Selling is also induced by a change in fundamentals in a particular stock or sector, even if the price is nowhere near the target price we had, especially if we believe that the outlook is not as per our expectations. Sometimes, selling is based upon redemptions and the need to raise cash and at other times due to the emergence of a stock with an even better risk-reward profile.
Do you meet company managements, and do you constantly remain in touch with them till the idea is a part of your portfolio?
Yes, very much so, typically at least once a quarter. If it is a new stock idea, then it is imperative that we interact with the management before we buy. This is an absolute prerequisite with no compromise.
Don’t you think that the management will share only a rosy picture with you? How, then, does meeting the management really help?
We do our reading on the company and the sector before meeting the management. When we meet the management, we try to build an outlook for the sector and the company for the next two-three years. Companies may typically convey only the positives, but we try to revalidate them by interacting with the entire value chain – suppliers, customers, distributors, competitors, employees, etc. Based upon all this, we try to build our own earnings estimates and have an approximate price target.
Having said that, there is certainly more maturity today in the way companies communicate with investors, with several of them also highlighting the challenges.
How do you cope with any investment idea that goes wrong?
I think the most difficult part is to accept that you are going wrong. Once that is done, it is easy to implement decisions on the portfolio. The challenge is, not to be emotional and to be as objective and rational as possible. This comes with maturity and being in the markets for a period of time and after having seen cycles of boom and bust. In order to institutionalise it, we discuss and debate these decisions with the full team; this makes it a lot easier.
How important is the selection of a correct sector for a stock’s performance?
It is very important and is the focus of our investment process. In some sectors, say in pharmaceuticals, you cannot take a macro view as the business models could vary widely. In such cases, stock selection is even more important. Barring a few exceptions like these, most companies are driven by the outlook for their sector. A disciplined investment process that focusses on buying at the right valuations and that has the ability to react to market volatility and corrections enhances the importance of stock selection as a way of improving portfolio performance.
Buy-and-hold, as a concept, is widely preached and followed by fund houses. Is this concept completely foolproof, according to you?
We do that honestly. When we buy a stock, we tend to have a view on the target price that we are looking forward to. If there is no change in the fundamentals and the stock has reached near its target price, we sell it off. So, what we do is that we buy and hold the stock till it reaches its target price, and if it does not see any upgradation, we move out of it. In developed markets, institutional investors are very active in protecting the interests of minority shareholders.
What has the Indian experience been like, and how active are you on this front? India is not being as active on this front as it is in other parts of the world. I think it is clearly at a very nascent stage here. We are no exceptions, and we do not take for or against any decision. But it will change with the passage of time.
Is it possible to recognise a bear market before it is too late?
Recognising a bear market is possible if you can identify the underlying forces that may cause the bear to rise. In 2008, it started with the sub-prime crisis, and that point people stopped believing each other and raising capital became a problem. As a matter of fact, you may not get it in the peak but can always get that on the top. However, you can certainly gauge that you are venturing into unchartered territory and maintain caution.
What is your take on the overall current macroeconomic scenario of India?
The scenario is very challenging both on the Indian and the global fronts. As far as India goes, the concerns are on slowing growth, rising deficits and sticky inflation. But unlike the western world, where the problems are structural, the Indian slowdown yet seems more cyclical with the possibility of improvement in case policy decision-making speeds up and there is a concerted attempt to attract investment locally and through FDIs.
What is your take on the financial performance of India Inc. for the fi rst quarter, and how do you expect it to pan out in FY13?
The Q1FY13 results were not as disastrous as expected. Earnings growth was in single digits, but this was anticipated. The near-term outlook remains challenging, and we expect the FY13 earnings growth to remain in the low single digits.
What are the triggers that you are looking forward to with regard to the markets?
On the domestic front, it would be steps to rein the fiscal deficit, which, if not done, raises the risk of a rating downgrade. This, in turn, would have an impact on the funding costs and also on the ability to raise funds overseas. Given that India is a capital-starved nation, it could have a more pronounced impact on the slowdown.
Besides the overall global environment, local factors that would have a bearing on the sentiment in the near-to-medium term are stability in the political environment, a pick-up in policy decision making to stimulate investments and FDI.
What are the sectors that you are currently betting on, and in which areas should investors be cautious?
We are currently overweight on pharmaceuticals, IT and media, as these have reasonable growth visibility and valuations, and that compared to the broad market are still okay. Our focus now is more on bottom-up stock picking, with a focus on companies with good growth visibility, stability in their balance sheet and those that are available at reasonable valuations. We would be cautious on companies with poor balance sheets, very high debt levels, very high capital requirements and those trading at extremely high valuations.
What would be the most important advice that you would like to give to retail investors?
I think that from a long-term point of view, asset allocation based upon investor objectives should drive equity exposure at any point of time. It is important that investors approach the equity market from a long-term perspective and not be swayed by near-term news flows. The India growth story remains intact from a long-term point of view, and relative to the global woes which are structural, India is relatively better placed and in the midst of only a cyclical slowdown, which would pass in a few quarters.
P V K Mohan
Principal PNB AMC
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