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