Edelweiss AMC, known for its Bharat Bond and Target Maturity fund offerings, is shifting attention to equity and equity hybrids, given the favourable taxation this segment enjoys. And, the man on the hot seat is Trideep Bhattacharya, CIO – Equities at the fund house. bl.portfolio caught up with him during his recent visit to Chennai.
There are some fund houses which want to have a presence in every category. Some others are very selective about their focus areas. What is your strategy on the equity side?
Our strategy has been to have niche offerings and also have some sort of differentiation in the mainstream offerings, wherever we can. For example, last year we launched a focused fund. While the category is a mainstream one, the way we were positioning the portfolio was based on themes like brands, operating leverage and disruption, rather than just the best 25 or 30 ideas for the portfolio. Over a period, we would like to be present in all the categories as long as we are able to defend it in the context of our bouquet of offerings.
Target Maturity funds were a big part of Edelweiss AMC’s overall portfolio. Given the tax change, is there more focus on the equity side now?
We have been clearly articulating over the last three-four months that our focus area is equity and equity hybrids. Even without the debt tax change, if you see over the last couple of years, our inflows in equity strategies have doubled and equity AUMs recently crossed ₹25,000 crore. So, inflows are coming on at a decent pace and now, the focus on the equity side is also there. Hopefully, this adds up well in the next couple of years.
What is your reading of the markets today from a valuation perspective? Where are the opportunities ?
I would say that the markets are in the fair value zone. At 20 times FY24 and 18 times FY25, it not massively undervalued or overpriced. Our strategy in such circumstances is to rely on our stock-picking skills. We want to focus on pockets of earnings resilience. Having portfolios designed around earnings resilience means that if markets were to go down, these areas should outperform and if markets go up, even then, these stocks should do well. There are five such pockets of earnings resilience that I see. First is the manufacturing upcycle, driven by the private sector capex. Given the fact that India Inc’s capacity utilisation is 75 per cent plus, it is only a matter of time before this happens. We are seeing signs of this and it will probably accelerate after the elections. Second is lending financials – they are going through a Goldilocks moment where growth as well as asset quality are in the right place. Third, indigenisation of defence is a decadal theme. From a medium-term standpoint, their order books and earnings momentum will continue to be strong. Yes, their valuations have gone up, but the runway is long. You will have not only PSUs but a whole bunch of private sector players joining this race via listing over the next two-three years. Fourth is real estate. After going through years of consolidation and regulatory changes like RERA, we are finally at a stage where inventory all across India is at a 12-year low. We are probably in the first two or three years of a seven-year upcycle. Hence, direct and indirect plays on real estate would be another area of earnings resilience. Final area is one which is probably going through its Y2K moment — the EMS space. They lend themselves towards mid- and small-caps, but medium-term runway for that sector is also reasonably long. Seventy per cent of our portfolio is oriented around these areas that we talked about. We think that this orientation will give us the cushion if markets correct and firepower to outperform when markets do well.
How do you approach high valuation names?
We rely less on the static multiples like PE or EV/EBITDA. We use the DCF (discounted cash flow) model, which will look at long-dated cash flows that come in. So, it is 10 years of explicit forecast and then it will normalise to GDP-type levels. Essentially, what this does is that it equates the valuation and growth angle quite nicely. So, over a 10-year time-frame, the cash flows and the growth are well understood to get a feel of whether the stock is expensive just for the heck of it or for a reason. We look at the two-year upside potential. We are not necessarily value, not necessarily growth. We think that stock picking is that holy grail which lies in between.
We are not necessarily value, not necessarily growth (oriented). We think that stock picking is that holy grail which lies in betweenTrideep Bhattacharya Chief Investment Officer – Equities, Edelweiss AMC
From a research perspective, there is information overload and a lot of noise. How do you not get into acting on it?
The intrinsic value anchors us around the fundamental value of a company. In our investment framework called ‘FAIR’, one of the elements is ‘Acceptable price’. So, we don’t buy when there is 20 per cent or less upside. Once we have an intrinsic value, that value is anchored and noted. Let’s say, courtesy all the noise, a stock, instead of fair value of ₹100 appreciates to ₹150. Then it is a good anchor for us to start trimming or selling out. In many ways, having your anchor around what you think the fundamental worth of the business is, is a good way to stay away from the market noise. Secondly, everything that we hear or see, we try to build it back in terms of what it would mean for earnings. When you follow this discipline, a lot of noise gets filtered out.
FY24 Nifty earnings of 15-20 per cent is projected by most forecasters. How do you expect earnings growth to pan out for FY24?
The ‘pockets of earnings resilience’ hypothesis itself means that we are trying to zero in on that part of the market where there is earnings resilience. However, if I have to look at the broader picture for India Inc, overall, I would still say earnings growth is still resilient in the context of weak global macros. Interest rates have gone up in India by 250 basis points (bps) and globally by about 500 bps — I would term that tightening macro situation. In that context, 9 per cent growth in top line in Q1 for the BSE 500, and a 46 per cent growth in earnings is a decent place to be in. In the near term, while there could be some pockets of weakness, in aggregate, the earnings will, by and large, be resilient.
US yields have gone up, China has slowed down. How do you see it affecting the Indian markets?
They are, for sure, headwinds. My view has been that inflation is stickier than what people think. I am still not in the camp that says rates will come down soon. I think a better part of rate increase cycle is done, but rates coming down will take its own time. Hence, what you saw in Jackson Hole or the fact that rate cut expectations have moved to the middle of next year is not a surprise to me. China’s economic recovery has been weaker than expected. Despite the multiple actions taken by the government, overall, the progress has been slower than anticipated. These two factors would be meaningful headwinds from a global demand standpoint. But it will probably create more demand for the Indian paper, with flows being relatively stronger for India vs. other markets. That said, to invest looking at these variables is not easy. You cannot control FIIs or foresee them. The better way to invest is to follow the pockets of earnings resilience.