investment strategy: Growth stock can be a value bargain: Tridib Pathak, Avendus Olivo


Arguing that the opposing investing styles of value and growth are not mutually exclusive but complementary in achieving diversification in a portfolio, PMS fund manager Tridib Pathak says a growth stock can be a ‘value’ bargain if the business continues to surprise positively on the growth front. At the same time, a value stock can start delivering on higher growth, says Pathak, Co-head of Equity, Ocean Dial Asset Management India and Fund Manager, Avendus Olivo. Edited excerpts from an interview:

Can you explain what strategies you are adopting in your portfolio right now?
We remain bottom-up stock selectors. Our strategy continues to be a ‘multicap’ one where we focus more on the underlying business rather than the size of the business. Our portfolio strategy is pivoted more towards businesses where we find higher visibility of earnings growth in these uncertain times.

Consumption, banking, financial services and IT services are the spaces where we find a lot of stock opportunities. We are also increasingly focussed on businesses that are benefiting from next generation mega-trends such as ‘mainstreaming of digitalisation’ and ‘China +1 ‘- i.e. diversification of global supply chains’. Within consumption, we prefer consumer discretionary, especially ‘Food Tech’ companies. Within banking, we prefer large private banks and in financial services we like ‘platform’ companies. We also prefer large cap IT services companies. Our whole focus is identifying quality businesses which we believe have capital efficiency with sustainable growth and are available at attractive valuations considering the underlying business.

Do you focus more on growth than value while picking stocks for Avendus Olivo?

We are style agnostic, and we do not differentiate between value or growth style factors. We think value is not a statistical measure. A company’s worth is the present value of its future cashflows. However, it has become popular to use price multiples as a crude approximation of this. We believe that relative valuation measures, whilst useful, need to be interpreted carefully.

The low valuation in a ‘value’ stock could be reflective of an inferior business with a low growth outlook. Thus, a low statistical measure, say in term P/E ratio may not necessarily be reflective of an attractive investment opportunity.

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Similarly, high valuation in a ‘growth’ stock could also be reflective of strong confidence in the growth outlook of a business’s cash flows. Thus, a high statistical measure, say in terms of P/E ratio may not necessarily reflect an unattractive investment opportunity. There is also a thin dividing line. A growth stock can be a ‘value’ bargain if the business continues to surprise positively on the growth front. At the same time, a value stock can start delivering on higher growth. A ‘change’ in business fundamentals is what is required.

For us, value and growth are not mutually exclusive but are complementary in achieving diversification in a portfolio.

Given the current macro environment of fears around recession and rising interest rates, where do you think we are headed in the next few months?

We are quite positive on the Indian market outlook. In these uncertain times, India’s resilience is quite reassuring. This is despite high crude oil prices, continued geopolitical risks, global monetary policy tightening, and record Foreign Portfolio Investors (FPI) outflows. The Indian equity market and the Indian rupee have performed well relatively to most developed and emerging markets. Vast improvement in India’s macro-economic stability over the last few years is helping. Domestic Institutional Investors (DIIs) have maintained their buying trend for 15 consecutive months, completely offsetting FPI outflows. India’s economic expansion continues.

The RBI expects real GDP growth at 7.2% and nominal GDP growth at 13.9% in FY23. Economic activity continues to recover as depicted by high-frequency indicators such as bank credit growth, goods movement, GST collections and passenger travel etc. Corporate earnings results for Q4 FY22 continued to remain healthy, with the Nifty companies reporting a sales growth of 23% and net profit growth of 21%. Interestingly, at an aggregate level, earnings growth expectations for FY23 and FY24 have not yet changed materially, as there have been no major downgrades or upgrades. Risks remain of higher inflation mainly if crude oil price were to rise more from here, pressure on profit margins, and a slowdown in growth as demand gets curtailed if interest rates were to rise sharply (beyond the incremental 100 bps of rate hike which is priced in already).

If there is a recession, we certainly can’t have high inflationary pressure. So, will it end up benefiting Indian stocks by and large?

Absolutely. In fact, India does not even face the risk of a recession, at worst we could see a mild slowdown in growth. A recession in developed markets will surely be self-correcting for inflation. In the case of India, we may have just seen peak inflation. The RBI now projects inflation at 6.7% for FY23 with Q4FY23 projected to exit at 5.8% inside its tolerance band of 2-6%. It is important to note that, unlike developed markets, India’s inflation problem is not a ‘monetary’ phenomenon (printing of money) but is a result of rising global commodity prices and supply chain bottlenecks. Supply chain issues are slowly resolving now and except for crude oil prices, even commodity prices have begun to soften.

In a rising interest rate environment, how should one approach bank stocks?

We like large private banks. Three things will work in their favour: (a) improving credit growth as the economy is recovering back to normal, also inflation is incrementally favourable for credit growth with higher working capital requirements, (b) rising interest rates are incrementally positive for net interest margins as advances gets repriced faster and (c) asset quality issues are behind now and we see credit costs (provision for NPAs) falling fast having peaked out. So, we see a good level of visibility in earnings growth for these banks.

Can you help us understand why energy stocks have outperformed this year? Is it only because of the value factor?

The outperformance of energy stocks, we believe, could be because higher finished product prices i.e. higher crude oil and natural gas prices as well as higher refining margins i.e. expectations of higher earnings growth.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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