Personal Finance

‘Consumerism, one of the best themes’

Lokeshwarri SK | Updated on August 26, 2018 Published on August 26, 2018

Sachin Shah, Fund Manager, Emkay Investment Managers

Consumer stocks have delivered fabulous returns to investors, says Sachin Shah

Selecting stocks for the long-term portfolio is not easy. Sachin Shah, Fund Manager, Emkay Investment Managers, shares details, in an e-mail interaction, on the stock selection filters that he has used to deliver healthy returns to his clients.

How does the E-QUAL risk strategy work? How do you select stocks in this strategy?

We like to own businesses with secular growth outlook. We believe that the Indian economy is about growth and the stock market respects growth the most.

From that perspective, we are on the lookout for businesses where we see secular growth for the next three to five years and, if possible, even beyond.

It is equally important that growth is quality-driven and sustainable (business is scalable and inherently profitable as measured by ROCE & ROE) and delivered by good management with execution capability and integrity.

Each of the above parameters can be evaluated objectively, but management quality could bring in subjectivity and, therefore, we have created a proprietary module called E-QUAL RISK (Emkay Qualitative Risk analysis), where we evaluate managements on multiple parameters to make the exercise an objective one.

We have broken down the management quality into five sub-heads — management integrity, management capability, wealth distribution to minority shareholders, information to shareholders and liquidity.

Each of the sub-heads is broken down into further parameters with weights assigned to each of them to arrive at an overall holistic view on the management quality.

The score we get from each of the companies helps us create a matrix to define the relative management strength of each of the companies which, in turn, is also used to plot our risk-reward matrix and then reverse calculate from the target price.

Basically, E-QUAL Risk helps us determine the purchase price (margin of safety) for various companies we like.

Can you share some details about the contours of your portfolio management scheme, the charges, minimum subscription, returns, etc?

Being a SEBI-registered portfolio manager at Emkay PMS, the minimum subscription amount is as per the guidance of the SEBI norm of ₹25 lakh. In terms of management fee, we have various options ranging from fixed fee alone, a combination of lower fixed fee and performance fee, to performance fee alone (no fixed fee). In the last five years, we have delivered nearly 20 per cent CAGR returns for most of our investors.

With fund managers chasing few high-growth stocks, do you think it’s a good idea to chase stocks that have become too rich in valuations as a result?

We are extremely disciplined about our purchase price; we like to own stocks for a longer period of time and, from that perspective, it is even more critical that we avoid buying stocks at high valuations, as minor de-rating of PE multiples in those stocks can destruct significant amount of capital.

Has the correction in mid- and small-cap stocks created value in some sectors? Which are the sectors that appear attractive?

The BSE mid-cap and small-cap indices are nearly down by 15-20 per cent in H1CY18. The fall in headline indices is far more sober in comparison to many individual stocks. On bottoms-up approach, quite a few stocks are doing well in their businesses.

The next few quarters of volatility in equity markets provide an ideal opportunity for long-term investors to enter the segments at a favourable risk-reward valuation. Some of the stocks that we like belong to sectors like CRAMS (contract research and manufacturing services), travel and tourism, rural auto and private sector NBFCs.

Will the consumption theme continue to deliver in Indian markets? What are the drivers here?

Consumerism is one of the best themes for India investing. In the last few years, consumer stocks have delivered fabulous returns to investors. The consumer-facing businesses will continue to do well as India’s demographic profile and growing economy support a huge demand growth.

The only care that needs to be taken is the price being paid to buy the consumer stocks; the fact that these stocks have delivered high returns in the last five to seven years have made them now trading at high PE multiples.

Therefore, selecting stocks with very high moats and waiting to buy them at reasonable valuations will be essential to generate double-digit returns over the next five to 10 years.

What is the return that an investor can expect from Indian stocks over the long term — say, five to 10 years?

Compounding is the eighth wonder of the world, said Einstein. To make that magic work, one should remain invested for 10 years and one can realistically expect 12-15 per cent CAGR returns (3x-4x in 10 years) just by investing in indices.

Published on August 26, 2018

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