With economic growth at a six-year-low, India is entering Samvat 2076 with far more realism than the fantasy that accompanied the beginning of last year.
That's according to wealth managers Nilesh Shah of Envision Capital Management Inc. and Marcellus Investment Managers' founder Saurabh Mukherjea.
But economy is one thing, and investing is another, Shah said. “You could find value when the economy is totally bad and you may not find value when the economy is firing on all cylinders... What India really needs is a pick-up in demand.”
Investors, according to Shah and Mukherjea, need to go back to the basics—look out for companies that play in the essentials space with a high barrier for entry—rather than get influenced by how companies are valued.
“Look for a company that is doing something that others can't—assess moats, assess competitive advantages. Look out for (potential) monopoly franchises,” Mukherjea said, adding that valuations don't matter as they are mere labels. Dr. Lal Pathlabs Ltd. (midcap), HDFC Bank Ltd. and Asian Paints Ltd. (large cap) and Relaxo Footwears Ltd. (small cap) have all given 30-35 percent return on capital over the past few years, he said. “Look out for companies that have clean accounting, clean governance.”
Agreed Shah. “Growth, capital efficiency and governance are the three broad pillars on which any investment needs to stand on,” he said.
Shah expects the listed mutual fund space as the one to watch out for over the longer term. But, according to Mukherjea, there is no “moating” in the wealth management space. “If you don't build barriers to entry, you will still get growth but you'll not make money,” he said.
The Longetivity Question
Over the next 5-10 years, it is very much possible to build a mega franchise in sectors that dominate our lives, Mukherjea said. “I reckon there is considerable scope in India—post goods and services tax, post the corporate tax cut—to build moated B2C enterprises in a range of industries—from FMCG to high-end manufacturing.”
Shah, however, expects upcoming economic reforms—in land and labour as well as a likely cut in income tax rates—as holding the key to the future.
“One or two leading market players will reinforce their dominance because they will have the free cash flow to reinvest and avail of the new reforms,” he said. “Look for companies at the pole position.”
Watch | Envision's Nilesh Shah, Marcellus' Saurabh Mukherjea on investing in Samvat 2076
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