I’ve Sel­dom Felt As Pos­i­tive on In­dian Econ­omy As I Feel To­day’

The Economic Times - - Companies: Pursuit Of Profit -

Fo­cus on in­trin­sic value, buy busi­nesses with sound fun­da­men­tals trad­ing at rea­son­able val­u­a­tions or be­low fair value. That’s the Prashant Jain in­vest­ment phi­los­o­phy. In a wide rang­ing in­ter­ac­tion with ET, Jain talks about how his meth­ods have yielded suc­cess and how the out­look for the econ­omy and cor­po­rate earn­ings is get­ting brighter. Edited ex­cerpts:

What is your in­vest­ment phi­los­o­phy? HDFC Mu­tual Fund’s in­vest­ment phi­los­o­phy has been to stick to rea­son­able qual­ity. By rea­son­able qual­ity I mean busi­nesses that are sus­tain­able and are man­aged by peo­ple with at least rea­son­able com­pe­tence and in­tegrity. By and large, we have avoided busi­nesses be­low a cer­tain thresh­old of qual­ity. Be­sides, we bring in the el­e­ment of price. If any rea­son­able busi­ness is avail­able be­low a cer­tain price from a long-term per­spec­tive, there is an op­por­tu­nity to make ex­tra money.

There are two broad ways to make re­turns from stocks. One is to buy a grow­ing busi­ness and make re­turns in line with its growth, with the as­sump­tion that the PE mul­ti­ples are steady. The sec­ond is you buy busi­nesses which are pass­ing through a pe­riod of pain and hence they are avail­able cheap. At such times, op­ti­cally the mul­ti­ples may look high. For ex­am­ple, let’s say a busi­ness is mak­ing a loss. At any price, the P/E is in­fi­nite. This is be­cause there is no profit. But if one thinks that in three years, mar­gins will be back to nor­mal, then even if you buy at 40x PE, you may ac­tu­ally be buy­ing 10x PE three years for­ward. The re­verse of this is also true when a busi­ness is en­joy­ing un­sus­tain­able mar­gins and is prob­a­bly ex­pen­sive de­spite low P/E.

An­other ex­am­ple is the pharma sec­tor. We try and es­ti­mate medium- to long-term prospects of var­i­ous sec­tors and were of the opin­ion that growth and mar­gins of the pharma sec­tor in gen­eral will come un­der pres­sure. This was driven by our view on generic pric­ing, cur­rency etc. Though it took some time, but by and large the re­sults in this sec­tor and also the stock prices of sev­eral com­pa­nies now val­i­date this view.

Our re­search ef­fort is fo­cused on un­der­stand­ing key driv­ers of a busi­ness, the key vari­ables, and on the sus­tain­abil­ity of cur­rent mar­gins — low or high. Fund man­agers then take a view of how a busi­ness is val­ued rel­a­tive to what one be­lieves are sus­tain­able prof­its. Pharma, we thought, was over­val­ued rel­a­tive to sus­tain­able prof­its; and bank­ing, we thought, was un­der­val­ued rel­a­tive to sus­tain­able prof­its.

What is your in­ter­est rate out­look? In pe­ri­ods when in In­dia FDI has been more than the cur­rent ac­count deficit (CAD), ru­pee has ap­pre­ci­ated. So from 2001 to 2008, FDI was more than CAD and ru­pee ap­pre­ci­ated. We are in a sim­i­lar sit­u­a­tion now. If the ru­pee keeps on ap­pre­ci­at­ing or at least does not de­pre­ci­ate, it means in­fla­tion will re­main low, it means the in­ter­est rates will re­main low. Also, the for­eign in­vestors’ con­fi­dence on In­dia will rise lead­ing to higher cap­i­tal flows. In­dia is in a sweet spot to­day. I have sel­dom felt as pos­i­tive on In­dian econ­omy as I feel to­day. Also oil prices are low, which is pos­i­tive for In­dia. Given the above I feel there is still some room for in­ter­est rates to move lower.

What are the down­side risks to the mar­ket? Over the next few months or quar­ters, the sup­ply of stocks is large — NFOs, gov­ern­ment di­vest­ment pro­gram etc.

Any global risks? When global mar­kets have cor­rected sharply, there has been a lim­ited and short term im­pact here. These cor­rec­tions have ac­tu­ally pro­vided good op­por­tu­ni­ties to buy.

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