Quality at a Price Works Better than Cheaper Valuations: Experts
timesinternet.in ETMarkets.com: Should you chase stocks quoting cheaper valuations or buy quality stocks even if they are quoting higher valuations? This is the foremost question every investor faces while going for value investing. Market experts such as Rajiv Thakkar, director at PPFAS Mutual Fund, believe it is the second case that works well in the domestic market. Recent investment decisions of top mutual fund houses prove this.
Some top mutual fund houses selectively exited infrastructure stocks such as Reliance Infrastructure, GMR Infra, Jindal Steel, Torrent Power and NTPC in March even when on the face of it, their valuations looked cheap.
On the other hand, many of these fund houses were seen selectively adding stocks such as the HDFC duo, Cipla and Lupin, which command decent valuations, a monthly report by Edelweiss Securities suggested.
“In the Indian context, it is the War r e n Buf f e t t a n d Charl i e Munger approach of buying quality businesses at a fair price that scores over the Grahamian approach of buying stocks at rock bot- tom valuations,” Thakkar said. Thakkar said the Graham approach to investing works out well in a market with activist investors and high M&A activity, since investors stand to gain for the asset value/excess cash getting unlocked.
Quality always comes at a valuation premium, said Manishi Raychaudhuri, MD, BNP Paribas. Mahesh Patil, Co-CIO, Birla Sunlife MF, believes that domestic cyclical companies, where earnings growth has been depressed and valuations are slightly higher than long-term averages, but where the earnings growth could surprise positively, holds the real potential. At present, the premium of MSCI India vis-a-vis MSCI Asia has been at 25% against a ten-year average premium of 34%.