‘A better part of 2022 is an investment year’: Trideep Bhattacharya of Edelweiss Asset Management

We have a FAIR philosophy that is tethered to four pillars. One is Forensics. This is an extensive framework to check the accounting quality of the company along with other fundamental checks. Two is Acceptable price. We prefer to invest in reasonably-priced businesses that have medium to long-term earnings power. Three is ESG Informed. The businesses in which we invest are also assessed through an Environmental, Social, Governance (ESG) lens. Four is Robust. Businesses that are robust can leverage opportunities to scale, and generate superior returns on capital employed. Over a medium term, we aim to deliver better risk-adjusted returns, keeping these pointers in mind.

Our focus on forensics, or financial cleanliness, and ESG governance is probably a little more pronounced than a lot of our competitors. So much so that we have a dedicated person looking at these particular aspects of stock picking before we get into the stock, particularly relevant in the context of mid and small-cap portfolios. We are looking at financial cleanliness, beyond just financials. We look at how the company has treated the various constituents of stakeholders, such as employees, shareholders, customers and suppliers. So, what we bring to the table is relatively differentiated versus a lot of our competitors. Why is the market mispricing a stock? I think understanding how the company has functioned with regards to various different stakeholders gives us an insight which the P&L, Balance Sheet and Cash Flow analysis sometimes miss.

Our medium-term view, means plus two-three years, is that we see three things happening in India, which in my opinion hasn't happened in the last 10 years. This makes me constructive on Indian equity. First, we think there's a good chance that we see a capex cycle driven by private corporates in India over the next two-three years.

Second, there are concrete signs of bottoming out of the real estate sector. Real estate is usually a seven-year cycle. We will probably be somewhere in the first three years where the inventory bottoms out. We are constructive on real estate. Over the next two-three years, the real estate sector will go through a positive shift that will be genuinely positive for the economy because they are a meaningful employment-generator as well.

Third, for the first time in the last 10-15 years, we are seeing salary hikes in double digits. Mostly over the last 10 years, we have been used to a situation where salary hikes have been in single digits covering inflation. We think while the consumers in the near term are dealing with inflation-related issues over the medium term, consumption spending might actually stand to come back as well.

I think our view has been and continues to be, since the beginning of this year, that CY22 or FY23, by and large, should be seen as a tale of two halves. The first six-nine months, we expect it to be volatile. This is because of three factors. One is the interest rate regime change, which is happening from declining interest rate to rising interest rate. Second, inflation issues which are more supply-driven. Third, geopolitics driven by the Russia-Ukraine war has also come to the fore.

Given that our medium-term view is constructive on equities, we are not advising investors to completely stay away. We have been advising investors basically to invest during the six-nine months in tranches, rather than in lump sum. A better part of 2022 should be seen as an investment year. The return years would probably follow in 2023 or 2024.

Our biggest call is that we are overweight industrials and allied sectors in our portfolio. We are positive on lending financials in our portfolio. We are positive on direct as well as indirect plays on real estate like building materials, etc. We are positive on select bottom-up plays, which are a play on government PLI schemes or China plus-one themes. On consumption, we are probably underweight now. But once we get through the next couple of quarters, where the worst of the commodity prices gets priced in the numbers, we would look at available opportunities to play on.

Digitalisation has been a very big theme, post COVID. This sector is in two parts, one is traditional tech. And second is new tech, which is fintech and variety. So far, we have avoided the newest tech companies, and primarily because in and around the IPO times, they were, in our opinion, coming at high valuations. We didn't have adequate margin of safety. We think that the traditional tech is backed by solid cash flows and will continue to shine, going forward. But we have to be mindful of valuations though. Particularly when it got over-rated about September-December last year; we had lowered our weight. At the moment, we are underweight IT services in our portfolio.

Since October last year, the amount of money that they have taken out as a percentage of market cap is the same that they did in 2008. The only difference between this time and that time is that the market crashed by 60-70 per cent. Whereas here, we are less than 10 per cent away from the peak. The other constituents — other market participants — have come to the party and arrested the fall. I would see that as a sign of resilience brought about by the the earnings of the Indian corporates overall. Domestic investors might be seen to be switching from debt avenues to equity.

I also think this is happening because India is one of those few markets where FIIs have made money over the last 12-15 months. If they have facing redemption pressures, which they are in their home market, the first place that they book profits is where they have made money. Do note that to a certain extent we are being a victim of our own success. The valuations of India, relative to the globe, is looking on the higher side. Hence, to a certain extent, a bit of realignment to lower valuation markets is what the FIIs are doing.

Till the time this dot plot (Fed’s interest rate projection) in the US, keeps on moving upwards, you will probably see the shift keep on happening. The moment the dot plot stabilises, you will see these outflows stabilise as well. I’m talking about dot plot, not necessarily the end of integrating rates.