We are getting into the virtuous cycle. It is just a matter of two or three quarters and the confidence level will come back and the animal spirits will come back, says Sachin Shah, Fund Manager, Emkay Investment Managers.
Which are the areas which are doing well in your portfolio? Which are the bets you got right in 2020?
2020 has been one hell of a ride if you see what where we were in March and what we are today. But strictly speaking, calendar year 2020 has been almost like a change of trends. In CY2018 and CY2019, the largecaps did well and within largecaps, only a handful of selected stocks. The midcaps and the smallcaps were significantly down, whereas in CY2020, the smallcaps have outperformed the midcaps and the midcaps have outperformed the largecaps, and with a decent margin. Smallcaps are up about 30% plus, midcaps are up about 20% and largecaps are up about 15% plus. That has been one big change in trend.
The other thing has been sectoral changes. In CY2018 and CY2019, we saw banking and real estate as a sector doing quite well whereas in CY2020, pharma and IT have done extremely well. Both the sectors are up almost 60%.
Coming to our own portfolio, it has been a very good year for us and we keep our fingers crossed. In our Emkay Emerging Stars Fund, we delivered nearly 30% outperformance and the most important thing is that the CRAM (Contract Research and Manufacturing ) space both in the pharma and the pharma API/specialty chemicals — that sector has done very well for us and we have had a fairly good allocation over there in the range of 25% plus or up to 30%, including some of the healthcare sector. That has helped us quite a bit. Some of the technology names have also done very well for us. 2020 had a good ending for us I would say.
Which are the areas which you are researching to be added as flows continue in your schemes?
We continue to believe that the business momentum is going to be very strong in the CRAM space for at least the next couple of years. The China plus one strategy followed by MNCs is a potential for many sectors. But it is already culminating in the CRAM space. The businesses are already getting orders and inquiries from a lot of the new customers who were sourcing a lot from China and are looking at alternate sources.
This is one sector which has already established its credibility because they have been with these customers or global partners and they have the wherewithal to get the scalability. Only scaling up of the business is needed so that is one sector we believe will do well. Hospitals as a sector also should do much better as things have now opened up. We also believe that autos and auto ancillaries should do much better because we expect export-oriented opportunities to come up significantly. After almost three years, we had seen the domestic volumes nearly stagnating, particularly in the passenger vehicles and commercial vehicles were also significantly down.
We are seeing a decent amount of momentum coming back in the auto space. Both autos and auto ancillaries should do well over the period of next two to three years and we have been investing in some of those businesses.
How is the two-year forward earning picture looking like for your portfolio? I am assuming it would be a mix of midcap, smallcap and large caps? Is 20% earnings growth visible?
I would like to believe yes. If I take up to FY23 and if I take a base of say even FY19 closing or FY20 closing to FY23, on that three-year basis, at a portfolio level, most of the good corporates should deliver 15-20% range of compounded earnings growth. We believe Covid has played the role of a catalyst as the companies have turned cost efficient.
The cost structures have been rationalised to a large extent and played a role of catalyst because that is improving the margins and the profitability of a lot of these companies. So there is a slight uptake or a tailwind, for which the green shoots are already visible in the economy. If the aggregate demand goes up, the kind of operating leverage that we will see in some of these companies is going to be quite significant and that should really drive the earnings growth over a period of next two years.
We are quite optimistic that the earnings growth that we all have been waiting for the last five years will now play out in the next two to three years.
How much of this is actually factored in the stock prices — be it market at large or maybe your own portfolio?
Maybe FY22 first half, probably a large part of it is already getting built in. If I go back to 2003-2004, at that time the earnings cycle had picked up quite significantly after three or four bad years from 1999 to 2002-2003. The earnings story which started from end 2002 or beginning of 2003 and lasted till almost 2008. More often than not, in many companies the earnings really surprised big time on the upside because of two reasons: once you get into the positive cycle, you enter the virtuous cycle of the demand. One leads to another positivity and the demand can actually overshoot most of the peoples’ imagination, that is point number one.
Two, the cost efficiencies have played out that will get a humongous amount of operating leverage.
Three, we are seeing a lot of positive actions from the government side to capitalise on this opportunity which the world markets are offering us. For example, the PLI scheme. Most of the industries are very upbeat about it. They strongly believe that this is the need of the hour and if that kicks in over the next two, three years, those numbers are not factored in at all.
Nobody has the imagination of the kind of business that can come to India. For example, in the CRAMS business, China has about 30% global market share and India has about 10%. Now if even half of China business moves here, it is a 100% growth for India. So those kind of opportunities are so humongous that we can all be positively surprised. We are already seeing some green shoots, sins that we are getting into that virtuous cycle. It is just a matter of two or three quarters and the confidence level will come back, the animal spirits will come back and most of these business houses will start investing in a big way.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
