Dalal Street Voice: Naveen Chandramohan with over 15 years of experience drills down process on how to pick wealth creators

As investors, one cannot deploy capital in the market and then react to the timing of rates. This would be a futile exercise in the journey of wealth creation, Naveen Chandramohan, Founder & Fund Manager – ITUS Capital – said in an interview with Zeebiz’s Kshitij Anand.

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Chandramohan has had an illustrious career spanning 15 years in the financial services sector having worked across fund management, fundraising, and fundamental research. Prior to setting up Itus, Naveen was the Responsible Officer and Fund manager and Hutchin Hill, a USD 4.5 bn fund where he managed capital out of their Hong Kong office.

Edited excerpts:        

Q) Indian markets cooled off from highs amid weak global cues. What is your view on markets? Is it because D-Street seems to be factoring sooner than expected rate hike?

A) It is important to take a step back here. The Indian benchmark indices have seen a smooth one-way move on the upside over the last 6 quarters.

The human mind is prone to recency bias and we as investors have not faced volatility for a while. It is always healthy for the markets to face periods of uncertainty associated with price volatility.

This is something every equity investor should price in before they deploy capital in their portfolio. With regard to rates, there will be a time in the next 2-3 quarters where we will be faced with a rate hike.

As investors, one cannot deploy capital in the market and then react to the timing of rates. This would be a futile exercise in the journey of wealth creation.

One has to take a more nuanced approach towards this – I believe that even if we get multiple rate hikes over the next few years, this would be on the back of inflation-driven growth, which would beget the fact that equities would be the best risk-adjusted asset class to own.

This would ensure investors do not react to short-term news-driven volatility.  

Q) You have decades of experience under your bets, what is your winning strategy to picking stocks?

A) Behind a stock is an underlying business, which generates cash flows. The ability to buy businesses which are able to grow cash flows over long periods of time has and will lead to sustainable compounding in portfolios.

While the starting and ending points are clear, the journey tests each investor as we are dealing with human behaviour which will always be volatile.

 For us at Itus, we continue to focus on growth, which we know does not come cheap. The ability to buy those businesses where we have a margin of safety will ensure long-term returns that are sustainable.

Finally, it is important to realize that there would be mistakes made in this process – an ability to acknowledge them and exit those will ensure longer-term excess returns in the portfolio.
 
Q) Nykaa made history while Paytm failed to meet the expectations of institutions. What are your views on the long-term potential and why such stark difference in the subscription status?

A) It is important we realize that subscription status is a function of how various investors react, which is not under our control. The more important question is the business model of the two.

Nykaa today operates in a category that has the potential to grow at an annualized rate of 35 per cent over the next 5 years. Alongside, Nykaa has created a platform at scale which is extremely sticky from the consumer (demand) and the brands (supplier) side and a capital structure that is lean (has not required continuous infusion of capital to scale).

More importantly, the competition for Nykaa today is thin.

The following cannot be said about Paytm. The long-term potential of the two businesses are different today which is coming through in terms of the subscription numbers.
 
Q) What are your views on the IPO market for the rest of FY21? The new-age businesses are difficult to interpret and many of these themes will make their debut in the next 3-4 months. What are the key parameters to look at?

A) I would not wholly agree to the fact that the businesses are difficult to interpret. It is important to recognize that many of the businesses have gone after growth at the expense of the bottom line as the balance sheet was optimised for a different set of metrics.

At the core, though, there are 3-4 levers for each business that would drive its future value. As long as the business solves a problem in a category where there is little competition, these businesses would see significant wealth creation in this decade.

In terms of what to look for – I do not believe anything change – the unit economics of the business, the competitive landscape, promoter ownership (skin in the game), ability to generate cash flows would be the core levers that would ensure value creation.
 
Q) What cues are you getting from September quarter results? Do you think that earnings could take a hit in the coming quarters?

A) It is important to realize that the last quarter's earnings saw 2 common themes – the demand growth was robust across businesses which resulted in healthy revenue growth of high teens and above.

However, the supply-side bottlenecks alongside raw material price increase resulted in margins coming off.

I believe that many of the supply side constraints would normalize over the next few quarters (case in point being the container availability and prices normalising over the last 1 month).

Businesses, which have the ability to maintain and increase its pricing will benefit in this environment as demand side inflation picks up.

It is important to start viewing earnings from a longer-term perspective rather than reacting to quarterly numbers.
 
Q) Which themes are making a comeback – the reopening trade?

A) Today, the demand side is robust across multiple industries. You are seeing healthy numbers across airlines, travel, hospitality, cinemas, discretionary spending.

Cyclical businesses are doing well with supply-side constraints continuing to exist. It seems like driving on a highway – the opportunities are abundant, but these are the times, one needs to focus on the fundamentals as the margin of safety is low.
 
Q) What is your call on the auto space?

A) I would be careful of the manufacturing sector, especially in the 4W space. There are interesting trends that I see today, in terms of startups and incumbents investing heavily in the 2W EV segment.

There are significant implications for the ancillary industry alongside the companies that build the infrastructure for the auto manufacturers – eg: power trains, batteries, charging infrastructure etc.

I believe these are interesting opportunities rather than the manufacturing companies/assembling brands themselves.
 
Q) Stock exchanges to start T+1 settlement from Feb 25, 2022. What are your views – is it a step in the right direction? FIIs had some reservation with respect to that. What are the possible impact on D-Street?

A) Sebi has already detailed the reasons for this. India would be one of the first countries to reduce the settlement cycle. It would certainly reduce the margin required and hence directly bring in cost savings for the market participants.

The FIIs would have problems with this initially as they hedge their EOD exposure and this would have an impact on them, as they operate from various time zones. The systems will have to evolve to ensure that this becomes seamless over time.
 
Q) Inflows in equity MFs were the lowest – but SIPs continue to rise and shine. What does the trend suggest?

A) I believe we need to set the context here. The net inflows into MFs (net of redemption) slowed from the previous month. There was a decline in the sale of equity schemes.

There would always be volatility in the monthly numbers, moreover, one needs to understand that we have seen robust inflows into MFs over the last year along with continuous increase in monthly SIP volumes. The trend is extremely positive from a domestic flow perspective.

This also needs to be combined with the number of brokerage accounts open which has seen a robust growth across the board.

The retail participation is strong today, as is expected in a strong market where people are making money trading. History tells you that these are common trends in a strong market environment.
 
(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)