This Active Fund Manager Is Playing Long-Term Themes Via ETFs

Ashish Chaturmohta: To give you a perspective, this strategy is what we call Apex PMS strategy. Basically we follow the concept of the FTPM approach, which is nothing but a combination of fundamentals, technicals, market dynamics and psychology. We believe these are four important pillars. This is a flexi-cap strategy, where at all points of time we have a minimum 60% allocation, which goes to NSE 200 names.

So, basically at all points of time, you will see top 200 names having a weight of almost 60% bare minimum, which can increase to a higher side in case we find some serious risk coming into the small and mid-cap basket. And when we find small and mid caps in a comfortable zone, we try to invest around 40% of our allocation into small and mid-cap basket. So this is how the portfolio is positioned.

But more importantly, where we differentiate ourselves is in the approach where we call that 60% of our allocation, of the overall portfolio, is buy and hold approach where the intent is to ride this longer term structural themes which are more aligned to the growth in GDP, which are more aligned to the sector's strength. If we find that the sector is going to grow beyond the GDP numbers, then obviously, if there are market leaders within those sectors, they are going to outperform significantly. But in the 40% allocation, or what we call as a tactical or opportunistic bid.

The intent is not to be really, you know, real band hold but more on tactical allocation, which gives us the flexibility to identify some medium-term trends which are emanating in the market and try to ride those trends, at least in the medium term so that we can maximise the returns.

Ashish Chaturmohta: Yes, you're right. As you see, from an overall weight perspective, 63-65% of the portfolio is at this point of time coming from the large-cap space, which has actually done nothing in the last one-year period.

If you compare Nifty 50’s return versus BSE 500, Nifty 50 has significantly underperformed BSE 500. But in our portfolio, most of the times we are holding 50% allocation to Nifty 50. But despite that, we are able to outperform almost 400 basis points to BSE 500, the reason being the bets that we took on the small and mid caps, which have done phenomenally well.

In a short span of time, a lot of these stocks gave more than 100-200% kind of returns and this really helped us in managing, the drawdowns or underperformance which was coming, typically from our large-cap quality names, which are not performing at this point of time, but we believe that these are the means which we should be holding from a longer term perspective.

So, small and mid caps have really helped us. Also what has helped us in the large cap space are most of these power companies or public sector undertakings, because we entered on a very timely basis. So if you have observed in our portfolio, we had a good chunk of public sector undertakings, including CPSE ETF or PSU bank ETF as a bet to ride this entire trend, which is emanating in the PSU banks as well as the CPSE pack.

Apart from that, we believe that power is one space, which is giving a lot of traction. As we can see the renewable energy capacity, which is currently at 178 gigawatt is going to grow to almost 500 gigawatt in next seven years, which implies that we are going to witness almost 17% CAGR growth in the space. And a company like NTPC is going to create 30-gigawatt capacity addition in the renewable energy. We believe that this could be very, very positive for most of the power-related companies.

As we all know that power is in demand and with rapid industrialisation, real estate, capex and manufacturing are going to grow well. You can't miss out on thermal also. And that's how we bought Coal India at an appropriate time. So this has really helped us even in an outperformance, which came from large-cap names. So stocks like NTPC, Coal India, BPCL, CPSE ETF and PSU banks ETFs were some of the large-cap themes but which really gave us good outperformance in last 6-9 months’ time frame.

Ashish Chaturmohta: That's why we said that in 40% of our allocation, we are very active. So there, we don't hesitate to take an active call. Even if we have to take that call within a month's time, we will not hesitate.

However, when we try to identify some larger themes, and we believe that these themes can do really well, over a long period of time, we try to play those themes even through ETFs. For example, this PSU bank ETF. I've been recommending it since 2019-20 when this ETF was quoting around Rs 20-21. Both, the PSU bank ETF as well as CPSE ETF, which used to quote at Rs 22-23 levels. And today, if you look at these ETFs, they have given almost four times return in the last 3-4 years journey.

The reason that sometimes playing an ETF makes a lot of sense is, in the PSU banking basket, initially, it was very difficult to take a call beyond stocks like State Bank of India or Bank of Baroda for that matter, because there were lot of concerns with regards to their asset quality and the kind of NPA numbers they were throwing.

But one thing was very clear—the way credit growth is going to emanate because of the manufacturing (sector), because of the government capex that the government is trying to put in, a lot of private players will eventually come and will need a lot of credit. And that's how there's going to be a lot of credit growth momentum. Typically, most of these PSU banks try to be more on the corporate credit side rather than on the personal loans or what you call as a retail loan. That's why we believe that if this loan growth momentum is going to be 17-18% kind of credit growth, NPA numbers are going to come down because structurally, this NPA cycle, which we saw in 2011 is going to be behind us and the stress is coming out of the public sector banks.

But we were not sure whether it's going to be tier-II or tier-III players who are going to be bigger leaders. So, rather than taking a bet on individual names, we thought that it's better to play the theme through a public sector ETF and it really helped us. In these nine months also, I think, this ETF must have delivered more than 40% kind of return. Same is the case with the CPSE ETF where you have exposure to power, you have exposure to defence, you have exposure to oil refinery companies.

Typically you would want to avoid oil refinery companies, because you don't know when the government will take some stringent measures, which will lead to margin erosion. That is exactly what happened to ONGC at one point of time, where you put in windfall tax gain.

But one thing was clear—because of the governance level, which is improving in the public sector space, you know, the price to governance, which we call as is a very standard metric to judge that if the governance levels increases, you will start doing a higher P/E multiples and that's how we realised that rather than betting on individual names, it's safe to bet on a public sector ETF to ride this entire trend, which is emanating in the space.

Ashish Chaturmohta: A lot of these large-cap pharma companies have started gaining some amount of price in the U.S. markets and there is some amount of pricing power which is coming back. So at one point of time, we were seeing double-digit price erosion, but that has come to a low, single digit in the last one year's time frame. From a technical perspective, you would have observed 2015 is where Nifty Pharma peaked out. And it is almost 7-8 years. After eight years of consolidation, the pharma index is coming back to its previous zone, which clearly indicates that after 7-8 years of consolidation, if the index is coming out of a consolidation phase, there is a very strong possibility that we might see some relative outperformance which we are going to witness in days to come.

And as I said, the price erosion, which was almost in double digits is coming to a single or low digit. This is also very, very positive for a lot of these pharma companies. And companies like Sun Pharma, which is doing extremely well on the speciality business in the U.S., I think that is also going to be very positive. So, what we realised is that rather than betting again on individual names and since the sector is coming out of a consolidation phase and you don't know who is going to be the leader in the space, at that point of time, we tried to bet initially, first on the ETF. And then, once we got better clarity, that's the time we tried to take a bet individually.

You must have also observed there is one individual bet in the pharma space. —Granules. So we were very comfortable on this API player and that's how we decided to take our individual bet on Granules. And I think in the last 2-3 months, the stock has delivered almost 20-22% kind of return, again outperforming the broader pharma index. So you can compare Granules to how mid-cap IT has been outperforming the broader landscape in the last 6-9 months time frame.

That is the same way I think a lot of mid-cap pharma companies—which are more specialised in a particular segment—are trying to show some strong relative outperformance compared to the broader pharma basket.

Ashish Chaturmohta: If you look at our top holding, it is ICICI Bank in terms of the allocation in the banking and financial basket. And in fact, it might seem that our top holding is HDFC Bank as a position, but from a relative weight perspective, we have a significant underweight position on HDFC Bank. So our current weight in HDFC Bank is close to 3% whereas in Nifty 200 this weight would be around nine to 10%. Our returns which are coming basically from the banking basket are coming from ICICI Bank and the public sector, PSU Bank ETF and SBI. So, I think these are the three names which are actually contributing to our banking rally.

My sense is that ICICI Bank is consistently growing very well. It has managed its NIM expansion and is still quoting a discount to HDFC Bank. So our sense is that ICICI Bank would be a leader in the overall private banking basket and that's the reason we are significantly overweight on ICICI bank. But apart from that, it's the PSU banks, which are actually the significant overweight position in the banking basket.

Ashish Chaturmohta: I think, defence is a very big opportunity. We have to understand that the capital outlay in defence is going to be at 12% CAGR. And I think that this is going to be a Rs 10-lakh-crore kind of opportunity. In that, if you look at, navy itself is going to go through like Rs 3,82,000-crore kind of opportunity, guided missiles could be almost a 1-lakh-crore kind of opportunity size. Fighter jets or jets could be an opportunity of almost Rs 4 lakh crore. So I think this is a very big opportunity. We have to look into the book-to-bill ratios of most of these companies. So they are around 5-10 times. I'll give you an example. A stock like Bharat Dynamics, doing a top line of close to Rs 2,400 crore, are sitting on an order book of almost Rs 24,000 crore. So it gives a book-to-bill ratio of almost 10 times. And the revenue visibility is very, very strong. We believe this can lead to a 15-20% top line growth for at least next coming few years.

With a lot of indigenisation, which is taking place in the defence companies, this is resulting in operating margins going upwards. If you look at at one point of time, Bharat Dynamics used to do 55-60% indigenisation and the rest used to be import. But today if you look at it almost 90% indigenisation. So that is leading to a lot of operating margins upside and that's the reason we are witnessing almost 20-21% operating margins in a public sector defence company. And this will result in a P/E multiple rerating happening for a lot of these, you know defence companies.

Take the example of a company like Cochin Shipyard where it did hydrogen fuel ferry inauguration a couple of days back. And, they are going to come also into electric vessels over a period of time. So, if you look at Europe alone, almost 2,500 vessels are going to get into the EV space. If that happens, then it's a very, very big opportunity for a company like Cochin Shipyard. Globally speaking, India has just 1% market share in the shipbuilding space. And if this number starts to improve, then that's a large opportunity size which exists for players like Cochin shipyard, Garden Reach, or Mazagaon Docks. And that's the reason we believe that defence is a big opportunity.

It's not like what we have seen in railways, where we have seen a massive rally coming into these companies, but the top line is going to grow only 15-20%. So, there was a significant amount of P/E rerating which happened but earnings flow will take a really long period of time to come. This could be possibly because of low float. These stocks have done reasonably good. But in case of defence, we believe the structural opportunity is very, very large and that will result into positive action coming into names like Bharat Dynamics, Hindustan Aeronautics, or Cochin Shipyard to say so.

Ashish Chaturmohta: So that's the reason why we are seeing a significant amount of relative underperformance coming from a large-cap FMCG companies or even consumption names, except for names like Titan or Trent which are actually showing some serious same store sales growth or where we are seeing some significant significant amount of volume growth coming into play. But if you look at most of the QSR players or FMCG companies, they are not seeing very strong trend at this point of time because either the rural consumption is at back foot or we are seeing some significant amount of manufacturing growth, but the multiples are still far, far lesser. Obviously, these are more cyclical, but at this point of time, what markets are going to reward is the earnings growth and that earnings growth part is missing in most of these FMCG companies or consumption companies, whereas the multiples are at significantly higher level. That's the reason we believe this consolidation can continue for consumption companies, but yes, exceptionally we believe companies like Titan, Trend, or in the QSR theme, we think a company like Bector Food, which is a proxy to the QSR theme can be a good play, but in general, we believe that this theme is going to enter into a consolidation phase and it will take reasonable amount of time for them to show some strong earning growth momentum.

Ashish Chaturmohta: We have done our stress testing and we have seen that most of the stocks that we are holding have a very good liquidity. A strong earning growth momentum is there. We also did one more test—that is, what is the percentage allocation into stocks beyond the BSE 500? That's where we find it very comfortable that we don't have a significant amount of allocation into stocks beyond BSE 500. I think, the stocks between 200 to 500, which are part of the small and mid cap, have a very high liquidity, strong capital base, with strong earnings growth. And with a lot of large MFs holding these positions, we are comfortable holding those kinds of names. But yes, maybe 5-10% of the portfolio could be aligned into stocks beyond BSE 500. So there we are always prepared and as I said this is the FTPM approach, where we will take a call if we see some serious trend reversals coming into some of these names. So we will not hesitate to cut our positions, in case we find some dent. But at this point of time, we are very comfortable with most of the stocks we are holding in our portfolio.