Detailed research, long investment horizon, conviction, patience, discipline and diversification are few key elements of investing in equities, Pradeep Gupta, Co-Founder & Vice Chairman, Anand Rathi Group – said in an interview with Zeebiz’s Kshitij Anand.

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With over two decades of rich experience in financial markets, he has played a pivotal role in laying the foundation of the Institutional Broking and Investment Services arm of the group.

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) Equity market by nature is volatile, and it is extremely difficult to predict the short-term movements of the market and 5-10% market corrections are rules rather than exceptions.  

Such corrections can happen any time including in the near future. This possibility, however, does not change my positive view about the Indian market in the medium to long run. Inflation has become a global concern.

Apart from inflation, the RBI is likely to tighten both liquidity and policy rates from the current extremely accommodative positions. We expect that to happen soon and it is possible that the equity market is factoring in the same.

Q) Nykaa made history while Patym 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) While both the companies have certain similarities there are significant differences as well including business model, market segment, growth prospects, return ratios, regulatory risks, valuation, and so on.

Present state of subscription status of various companies also depends on investor and market sentiments, brand or promoter image of any company.

History suggests that subscription status at IPO is not necessarily a good indicator of subsequent performance and investor interest on companies. So, I would not like to draw much inference from the subscription status of these two companies.

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

A) Detailed research, long investment horizon, conviction, patience, discipline and diversification are few key elements of investing in equities.

While picking stocks, one needs to be very attentive to look at the consistency of growth, corporate governance, low debt, and confidence in the capabilities of the promoters and management team.

It is important to understand that even the best of investors in their lifetime do not pick all stocks with extraordinary returns. So, one needs to have realistic expectations while picking a stock.

The power of compounding works only when one remains invested over a long period. The key differentiating parameter is conviction in specific stock idea, consistently till one can sense the trend reversal in any of the key parameters I mentioned earlier.

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) Buoyant secondary market almost always results in a flurry of primary equity capital raise. This time is no exception.

We know that there is a major line-up of issuance, so I would expect strong primary mobilisation to continue.

Valuing companies – new or old world – ultimately has to be based on the stream of expected future income. So, for the new generation companies, one needs to consider prospective industry/segment growth, likely competitive intensity, entry barriers, market share, prospects for cross-sales, image of the promoter and the management team, etc.

The current revenue or earnings have little relevance for these companies, hence valuing these companies only on sales or earnings multiples (not only past/current but also even two-three year forward) may not be the ideal way to value those.

Q) What cues are you getting from September quarter results? Do you think that earnings could take a hit in the coming quarters?

A) The Nifty50 earnings growth is currently 80-90%. Obviously, this is not sustainable. A CAGR of 18-22% in the next couple of years is more likely trajectory of earnings growth.

There is some evidence that consumption is slowing both for staples and discretionary categories. Raw material, fuel, and power, and manpower costs are rising.

So, there can be both sales and margin pressures, at least in the next couple of quarters.

Q) Which themes are making a comeback – the reopening trade?

A) Certain services including retailing, logistics, advertising, media, etc. are benefitting from opening up trade. From a thematic perspective, we like investment themes over consumption and domestic cyclical over defensive.

Q) What is your call on the auto space?

A) It really depends on the investment horizon. In the near term, we are negative on the sector and expect underperformance.

Globally the sector is going through huge disruption. Companies, which can adjust to the emerging trends can give disproportionate returns in the longer term.

Q) Inflows in equity MFs were the lowest – but SIPs continue to rise and shine. What does the trend suggest?

A) Since the markets have appreciated and rallied a lot and with valuations at substantial levels, we are witnessing individuals continue their MF exposure via SIP, which allows investors to get a benefit via law of averages during the entry point in equities.

I feel that for most retail investors, majority of equity exposure should be through MF. Better still if it is in the form of SIP because that gives predictability to MFs.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)