Why This Fund Manager Is Betting On Small- And Mid-Cap Real Estate Stocks

Manish Jain: At Centrum we have various products which are linked to equities, there is the TPMs, the conventional PMS strategies that we have which cater to all kinds of investors. It is mid cap, small cap, large cap, flexi cap, micro cap across the board. There are about four different strategies that we run all together totaling into an AUM of roughly about Rs 600-odd crore and then we have the equity advisory which is typically aimed at much bigger ticket sizes, say Rs 2 crore and upwards, typically targeting family offices, Ultra HNIs. These are more customised portfolios; these typically tend to be more client interaction-based, keeping in mind their legacy portfolios, their preferences, the restrictions and everything. tend to be much higher involvement from a fund management perspective and that AUM will be totaling close to a shade over Rs 1,000 crore. So in total, marginally upwards of Rs 1,600 crore of total AUM that we manage in Centrum as a team in our fund management business.

Manish Jain: That's absolutely correct and that's why as investors also we advise people to look at equities as a platform for creating wealth from a long-term perspective. Markets are always going to go through cycles, there is always going to be volatility. The last three or four years are a testament to that. 2020 started on a very tough note, ended on a high, and 2021 started off on a high note and ended very flattish. 2022 was a complete wash out. But 2023 was stupendous and 2024 so far, has basically been anything but volatile. I mean, that's essentially how you've kind of played it. So as a retail investor, it's very easy to get caught in this cycle of greed and fear. It's very easy to become greedy when the markets are kind of going up and to try and outperform and it's always very fearful. 

The largest redemption, for example we've had was in March of 2020, when the index had already fallen from 12,000 to 8,000 and we kept telling people not to do it because it was time to invest. But rarely do people have the wherewithal or the gumption or the guts to come against the tide. So yes, good portfolios are the ones which I believe are going to be able to save money in a bear market. That's typically going to be much much tougher than trying to generate an alpha in a bull market. 

Generating alpha in a bull market by deviating away from the philosophy is very simple. You load up on high beta stocks and you ride the wave and you'll be able to generate alpha. The problem is riding the tiger is easy. Getting off the tiger is much more difficult and that's where most people tend to go wrong, which is that you're able to load onto the cyclical say oil and gas, metals, mining and these kinds of sectors. Rarely have I seen an investor who's able to exit properly timed exit completely correctly, and that's where people tend to go wrong. So it's always better advised to build a portfolio that is more structural that is more long term in nature, which is always going to play through over a period of time, the idea should be to compound money, to create wealth, and unless and until you're multiplying your money, equity as an asset class is not meant for you at all. So it needs patience, it needs time, minimum time frame needs to be about three to five years and that's why the last one year has been particularly tough for PMS managers, which run concentrated strategies. Now if you're running a diversified strategy, like a mutual fund, it's relatively easy, you know, to diversify over a 60-80-100 stock portfolio and kind of outperform the market. But if you're going to be concentrated in 20 to 25 stocks, then generating that alpha is going to be tough, but as investors what we tend to tell people is to look at absolute target return and what you are expecting from the portfolio over a period of time rather than to get caught in these market cycles.

Manish Jain: Our largest overweight position at this moment is real estate. That is one place where we continue to hold massive weight into the portfolio. There are about five or six names particularly in the mid- and small-cap size side that we continue to hold on to and the belief in general is very simple, which is that we are at a stage where leveraged consumption, discretionary consumption is going strong, urban consumption is going strong. 

So overweight on real estate, overweight on discretionary consumption and massively underweight on FMCG. That's the construct of the portfolio that we are holding on to from a 12 to 18-month perspective and another area where we’re incrementally getting a little jittery, a little bearish, is BFSI where we do foresee some bit of an issue coming through in the next six to say nine odd months. There are pockets of value in the large-cap banking space which do tend to exist but at this moment, I don't think this is a place where we want to be invested in from an absolute near term perspective of say 12 to 18 months, much rather look at something like in I.T. or autos where we continue to add weight into the portfolio.

Manish Jain: No. So we're targeting more from a mid- and small-cap perspective. We aren’t looking at large-cap players at this moment in the real estate sector as well and the belief is very simple, which is that you are at the midpoint of the cycle. If you look at the results of the last quarter as well, which is the quarter ended March. Then it was very simple which was basically the fact that you know there is virtually no inventory in the system. Whatever is getting launched is interestingly being lapped up. The average ticket sizes are moving up, the average size of the houses being sold are moving up and as and when the rate cut cycle comes in.

This is going to be one sector which is going to be a beneficiary of that and contrary to popular belief, all the rate hike cycle, the tightening cycle that we've had in the last two odd years has actually not impacted the fortunes of this particular sector at all. So property prices over 2023 continue to move up on a pan India basis by about 5 to 7%. You know, inventories being at an all-time low, discretionary consumption continuing to hold up, retail longer continuing to hold up. I think this is one sector that makes perfect sense for us even at this moment.

Manish Jain: So pockets of value do tend to exist even now in autos, and if you look at two wheeler in itself and look at the top four names, and look at the last three years… performance and you'll see a massive amount of divergence between the way the stocks have kind of played out in the last three odd years. So there are pockets of value that still exist, premiumisation as a story is going to continue to play out in autos, both in four wheelers and two wheelers. Players who are able to capitalise on this premiumization trend on this EV trend which is more like a foot in the door kind of a strategy, doesn't really add up much into the EPS movement at this juncture. 

But still from a customer acquisition perspective, it becomes very, very important and imperative. So if you're able to figure this combination correctly, which is a steady growth sort of a name at a reasonable valuation, then I think you've got a winner over here. That's one of the reasons why we continue to bet on auto so even if unsecured credit was to come under stress because of RBI factors where they are kind of starting to clamp down on it. I think it's going to be more on the side of gold loan, personal loans, unsecured credit and you know discretionary consumption, leverage consumption, urban consumption factors, like for example, real estate and autos should have a little more leeway. Remember autos came out of a very, very long bear cycle almost five to seven years long, much in the same vein as pharma and that's essentially the reason why we do believe that this rally is going to be a little long lasting.

Manish Jain: So you're absolutely right and that’s why it is very important as a portfolio manager that you do two things. One is to maintain a bottom up strategy in terms of stock evaluation rather than having a very top down call at this moment and second is having value orientation into the portfolio. Look at sectors where the potential stress to earnings growth is going to be minimal, for example, I.T. at this juncture where we feel that with the U.S. economy being as stable as they are and you saw in the last quarter, what they have done with cost cutting especially on the employee side, the net additions in the way they have kind of come down, margins have definitely bottomed out. So it has to be a combination of value plus growth kind of a strategy bottom up during that you need to take at this juncture. The overall market purely from a top-down perspective, purely from an index perspective.

Yes, obviously there is a lot of froth which is now starting to get built in in bits and pieces and in pockets when you know mid cap index and small-cap index bottom to top deliver 60-70% sort of return. It's time to be careful and what adds to my concern at this juncture is that you can't take a blanket call because FY ‘25 will still deliver Rs 1,100 plus in EPS for Nifty but it's going to be more back end and then front end. The first couple of quarters are not going to be as good as what we are seeing them right now because of two factors. One is rural consumption, mass market consumption still kind of continues to remain a little iffy.

So you will see margins flattening out particularly in the first half which is a reference to the commodity prices. Also, like you said, and the lack of pricing power in the system. So you're looking at a slightly more downward revision as far as earnings go, probably not learn 50 More closer to 1100 to 1130 sort of thing EPS range as far as nifty Spencer and which basically means 2-3% sort of an earnings cut coming through. That's why this is going to be a more volatile year as far as markets have been identified. 24 is not going to be as smooth sailing as FY23 is going to be and hence my strategy is going to be more driven bottom up, stock specific rather than being sector specific, top down.

Manish Jain: So you're absolutely right. It's a million-dollar question literally, isn't it? I mean, the point basically being that at this juncture, mass market consumption looks to be very, very iffy and that's one of the reasons why I'm going to be continuing to avoid FMCG at all costs at this juncture, at least from the next 12 to 18 months perspective. Looks like this is going to be again the year of Super El Nino which basically means that the rainfall is going to be pretty much like what it was last year, massively uneven and not very timely. 

So the harvesting season, especially from a summer crop perspective, might actually be in a bit of a stress, so it doesn't look like rural growth is going to pick up anytime soon and plus FMCG. stocks traditionally have always been a little more on the expensive side and we have seen what happens to growth oriented stocks with very, very expensive valuations when growth kind of comes under stress. So that is going to be one factor which I'm going to completely avoid at this juncture. But where you do see a lot of money making opportunities, which continues to exist is more on the discretionary consumption side. So apparels, retailing, jewellery, autos. These are the spaces where I think the growth continues to hold up, places like, for example, real estate, which are more leveraged on urban consumption, which kind of plays the premiumisation story which kind of play the India Story, you know, the GDP per capita, rising, that kind of story. I think those are the places where growth is still likely to hold up their great management, great companies, all business leaders in their own segments. Making excellent return ratios, balance sheets not being under stress, and that's where I think even if you have to pay a slight bit of a premium from a risk reward perspective, it still kind of adds up.

Manish Jain: So that's what we have been doing in the last two weeks or so. We were prepared for this kind of a pullback that came through in the last couple of weeks. We were ready with our portfolio valuation strategy and wherever you know, all that we are doing at this moment is to rebalance our portfolio, wherever we made money and there are specific stocks where we've made between 2 to 10x also, we’re kind of taking a little bit of money off the table from there and wherever we feel that you know, the risk reward still kind of adds up. For example, hospitals, hotels, autos, particularly on the two-wheeler side, real estate, where you still find pockets of valuation still kind of exist and you still have money making opportunities. Large cap I.T. being another one, those are the places where we are kind of redeploying that cash out. 

So if and when the market continues to remain volatile, if and when the stocks continue to pull back, we continue to build positions from a long-term perspective. Remember, it's not what the absolute price that you pay. It's more about the growth surprise and as long as the growth doesn't surprise on the negative side I think the stocks will continue to do well. So all you need to do is to do your homework well on the growth side of it rather than on the valuation side.

Manish Jain: So, there are two sectors that continue to baffle me a little bit. One is pharma, which you very rightly said another one is chemicals. Both these pieces have not done well, at all for some long time to come, pharma has been in the doldrums for almost six or seven years now. It's really starting to come out now and they have faced massive headwinds structurally, from a U.S. genetics pricing perspective from U.S. safety perspective. 

The growth has really been under stress for a long time now. Chemicals again has been more of a global geopolitical influence. The China angle that you want to call it doesn't seem to be completely bottomed out over here. But my sense over here is that if you have a three-year view, and if you're ready to wait out a little bit of the volatility in these couple of sectors, then it's time to go shopping now. You need to be a little patient. It's not going to be as easy or as immediate as I.T. might be or as real estate might be. But then there's still a lot of money making opportunities, particularly in these two sectors. So I would go shopping and I'd be patient with it.

Manish Jain: I think the time to invest in I.T. is for sure it's now. 100% accurate, not totally sure because see, what is one of the biggest concerns in I.T. is that you had a big impact on the U.S. economy, on the growth of these companies over here, the delay in large projects. From an execution perspective, and that seems to be now out of the way, the U.S. economy seems to be absolutely stable. So at least there's no downside from that perspective. The second is margins.. Now we saw in the last quarter how the average headcount has continued to come down, and how these companies have kind of cut back on net additions and how the employee cost has been brought under control and how the utilisation levels have gone up. 

That basically means that the margin pressure is now history, that's something that they have actively taken care of and plus in the large cap it sides, if you look at the top four, or the top five names over there, and then in terms of valuations between 20 to 25x, for the kind of growth that you're looking at from a long term perspective, and the kind of return issues that these companies are generating. I think it's a fair value zone to start building up a position over here. Remember, you will never be able to catch the absolute bottom or the absolute peak. So it's not about trying to time the market perfectly. It's about trying to get as close to the bottom as you can and swim against the tide when everybody seems to be despondent when everybody seems to have given up. That's usually when I figured out that there is a gap between perception and value and that's where you kind of make the money and that's when you kind of get it. So I think I.T. the time to get in is absolutely now.