What should an ideal portfolio, focused on manufacturing, look like?
Axis Mutual Fund's Shreyash Devalkar speaks to Niraj Shah on 'The Porfolio Manager'. #NDTVProfitLive
Guest List:
Shreyash Devalkar, Head-Equity, Axis Mutual Fund
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Axis Mutual Fund's Shreyash Devalkar speaks to Niraj Shah on 'The Porfolio Manager'. #NDTVProfitLive
Guest List:
Shreyash Devalkar, Head-Equity, Axis Mutual Fund
_______________________________________________________
For more videos subscribe to our channel: https://www.youtube.com/@NDTVProfitIndia
Visit NDTV Profit for more news: https://www.ndtvprofit.com/
Don't enter the stock market unaware. Read all Research Reports here: https://www.ndtvprofit.com/research-reports
Follow NDTV Profit here
Twitter: https://twitter.com/NDTVProfitIndia , https://twitter.com/NDTVProfit
LinkedIn: https://www.linkedin.com/company/ndtvprofit
#ndtvprofit #stockmarket #news #ndtv #business #finance #mutualfunds #sharemarket
Share Market News | NDTV Profit LIVE | NDTV Profit LIVE News | Business News LIVE | Finance News | Mutual Funds | Stocks To Buy | Stock Market LIVE News | Stock Market Latest Updates | Sensex Nifty LIVE | Nifty Sensex LIVE
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TVTranscript
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02:23 Thanks for tuning into the Portfolio Manager.
02:25 I'm your host, Neeraj Shah.
02:27 We try and talk about what an ideal portfolio
02:30 within the equity landscape or a bond landscape could look like.
02:33 In today's case, we're making an exception.
02:35 We're choosing a particular theme.
02:37 It's a very wide theme, but we're choosing a particular theme
02:40 that is manufacturing, and we'll try and understand
02:43 from our guest how does he believe an ideal manufacturing-led
02:49 portfolio could look like, and why is it that manufacturing
02:53 could be a multi-year theme.
02:56 Shreyas Devalkar, who's the head of Equity and Access Mutual Fund,
02:59 joins us right now on the show to talk about that.
03:02 Great, Shreyas.
03:03 Thanks so much for taking the time out.
03:05 Just trying to understand about this particular fund
03:10 that you guys launched and you garnered money for.
03:13 The timing was interesting because it's not like manufacturing
03:17 hasn't had a good run, but it's also not like the run has come
03:20 to an end because the theme seems to be slightly longer term
03:22 in nature.
03:25 Sure.
03:27 So in your opening remark, you mentioned that, yes,
03:29 the theme is not narrow.
03:32 It's a wider theme, and that's where I would like to begin from
03:36 because for that matter, any theme, if it is narrow,
03:39 then obviously it's shelf life, and the way you explained it,
03:42 already three years or two years, stocks have done well,
03:45 and what next for next five, 10 years or so.
03:48 So the shelf life of any theme is more dependent on how wider
03:52 is the theme and what all it encompasses.
03:55 So when it comes to manufacturing as a sector or as a theme,
03:59 if we go by its constituent of its underlying benchmark,
04:03 then the theme actually encompasses various elements of economy.
04:07 It captures consumption part of economy through auto OEMs.
04:13 It captures through consumer durables.
04:16 It captures investment part of economy through, say,
04:20 auto ancillary capital goods, and it captures export part
04:24 of economy via sectors like auto ancillary exports,
04:30 chemical exports, capital goods exports, textile exports.
04:34 So because it actually touches all the three aspects of GDP of country,
04:41 which is consumption, investment, export, it is a wider theme as such,
04:47 and that's where it is expected to continue to for a long time.
04:51 Got it. Now, Shreyas, we know about you, of course, very well, fairly renowned,
04:56 but this scheme is a new one.
04:58 So would you tell us a bit about what this particular fund would entail
05:05 as it tries to perform over the course of the next one, three, five, 10 years?
05:11 Sure. So this theme, as I said, is about manufacturing,
05:17 and generally when we talk about manufacturing,
05:21 the perception is that it is only about the investment part of economy,
05:27 and that's where I started with the first key point here is it is not only
05:31 restricted to one component of economy.
05:35 It is about all consumption, investment, and export part of economy.
05:39 And out of these parts, you must have noticed that some of the parts, actually.
05:45 So let's just start talking about first on the exports.
05:49 So India's exports actually for last entire decade were flattish,
05:53 and this year onwards, this decade onwards, you can talk about decades now,
06:00 you notice that there is an uptick in exports, definitely.
06:05 Even the investment part of economy has started doing well.
06:09 So this theme and these multiple segments of this, sub-segments of this theme,
06:15 are getting its due importance now, and it is getting reflected in the earning growth as well.
06:22 If you just look at only the pad growth of manufacturing segment,
06:26 it is actually better than the consumption segments in last two to three years.
06:33 So what we are noticing is that multiple segments having done well in this,
06:39 this theme is relatively broader in its aspect.
06:45 If you want to see from various multiple years point of view,
06:49 then we need to go sector by sector, and probably we can comment on that in the later part.
06:56 Yeah, no, no, sure. And I'll come to that as well.
06:58 But just trying to understand that when you think of a manufacturing portfolio right now,
07:04 and typically when a house thinks of coming out of the thematic fund,
07:08 the belief is that it will have an ability to perform much better than what
07:12 a normal flexi cap or a multi cap fund might do, right?
07:16 So how strong is the tailwind for manufacturing to be able to perform and for how long?
07:23 I mean, do you reckon that this is something that has got legs for the next three to five years?
07:29 And does it have a potential to give much higher double digit returns as an aggregate
07:33 over the course of the next three to five years?
07:36 So your question is very much valid in the sense that how one should position it
07:43 in their own portfolio as an individual investor.
07:46 In my opinion, this theme should be looked at as a complementary to a large cap oriented portfolio,
07:55 any large cap oriented portfolio. The reason being any large cap or probably some part of flexi cap funds as well,
08:02 which are broadly large cap oriented, if you see any large cap indices,
08:06 the bulk of large cap indices up to 60 percent or more is actually about consumption as a theme
08:13 and representation of the non-consumption sector is less in any large cap or flexi cap portfolios,
08:21 which are large cap oriented. And that's why this theme is, I would call it as a more complementary
08:27 to your large cap oriented theme. So since you started comparing it with flexi cap or multi cap,
08:35 I would rather position it as a complementary to the large cap oriented and more because
08:41 the large cap oriented schemes or large cap oriented benchmarks are more tilted towards consumption oriented theme.
08:49 Now, when it comes to its representation, again, what you will notice that most of the manufacturing sector
08:57 oriented stocks are in the mid and small cap and some part in the large cap segment as well.
09:03 So that way, again, it is a complementary to your large cap portfolio.
09:07 Now, when we start looking at it, it's futuristic and how we should think about India's GDP will grow from here on.
09:16 So in the last 10 years, say from FY20 to FY22, nominal GDP of India was around 1.8 trillion dollars then
09:26 and now it is around 3.2 trillion. Now from here, it is expected, actually, as per various estimates,
09:33 to go up to 8 trillion in the next 10 years. But when we are talking about such growth in the future,
09:41 the expectation of what different components of the economy will shape up during this transition,
09:48 that expectation, if one tries to see then, what it comes out as manufacturing share of GDP,
09:56 which was low for last decade, is expected to grow faster. So if the manufacturing sector shares in the GDP grows faster,
10:04 then obviously it's sharing the profit pool and accordingly, it should get reflected in the market caps as well.
10:11 Got it. Now, Shreyas, my reason for comparing it, I mean, I was not strictly comparing,
10:16 but typically I think that when you come out with an investor invests in a thematic fund,
10:21 the idea is that the risk is that much higher and therefore the return should be that much higher.
10:26 I was not strictly comparing it to mid caps and small caps. I mean, maybe your benchmarks are large caps,
10:31 but I just use that as an example to say that the risk and the return in a thematic fund,
10:35 no matter how safe the theme might be, would be higher than a diversified fund per se.
10:39 And hence, I put it out. But here's my question, therefore, within the various facets of manufacturing,
10:47 because it's such a wide bucket, right? What do you believe would have the highest potential for giving returns?
10:56 I understand that you do not have a firm portfolio in place, but if you had to try and tell us,
11:02 where is it that you as a fund manager believe would the highest bang for the buck be in, let's say,
11:09 descending order, the three or four key manufacturing themes that you believe?
11:12 We'll get into why on the other side of the break, but can you just have, what are these themes?
11:18 See, manufacturing is actually, it touches various aspects of the underlying sectors,
11:25 the way we look at from the sector classification point of view.
11:29 And when you look at from that point of view, you will notice that the largest sectors,
11:34 and see, sectors which are large for a reason, for a reason why they have become and gone to that level.
11:41 And there are sectors which are emerging in this. So, if I want to choose from these sectors,
11:48 and then if you also go through the underlying NIFTY India manufacturing index as a benchmark,
11:54 then clearly what you will observe that the large sectors here in that benchmark are auto components,
12:01 capital goods, healthcare, that is a pharmaceutical, and metal mining.
12:07 After that, chemical is one of the largest. So, you see a diverse nature of these businesses across subsegments.
12:14 And you must have seen not only in the last two years, so some sectors like say chemical has been doing well since 2016,
12:23 2015 chemical started doing well. Some of the sectors like healthcare has shown patchy performances,
12:30 while capital goods have started doing well in the last two, three years. In auto and auto component,
12:36 in auto OEMs, some segments like two wheeler have done recently well, four wheelers, SUV has started doing well in the last four, five years.
12:44 So, it's not about only one, because generally when we think about manufacturing,
12:51 only one thing which comes out in mind is capital goods, but then it's much more than that.
12:57 So, these are the established large sectors. Then there are emerging smaller sectors,
13:01 which can be the themes in the EMS industry. There are multiple such industries which are growing,
13:10 the suppliers to that and the ancillaries to that. So, there are multiple such industries are coming up.
13:15 So, one need to look at from both point of view, the established industries which are there with the experience level,
13:23 which is already available in the industry for last three, four decades. That is one set of industry.
13:28 And the other emerging where the experience is emerging. So, it is just four, five years old as such,
13:35 and the promoters also don't have too much experience operating in that industry and taking it to bigger scale.
13:40 So, that is the second bucket. So, I would more look at it and try to balance it among these two.
13:46 Interesting, but we will talk about these as well because while it may be a new bucket,
13:52 not a promise really, but the commentary that is coming in from some of these companies about
13:59 what could happen to this sector three, five, ten years out is very, very promising.
14:04 So, we would love to understand how you think about it in detail, but stay on Shreyas,
14:07 so much more to talk about. We will just take a very quick break. On the other side of the break,
14:11 we will try and delve deeper into some of the components of an ideal manufacturing portfolio.
14:17 Stay tuned to The Portfolio Manager.
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17:26 Back with The Portfolio Manager on Indutv Profit in conversations with Shreyas Develkar,
17:30 Head of Equity at Access Mutual Fund. Shreyas, in the first segment, you spoke about some of the
17:38 components of an ideal manufacturing portfolio. I would like to probe some of these in more detail with you.
17:44 Let's start with auto and auto ancillaries. Now, they've had a decent run and there is a wide bucket out there to choose from.
17:55 I would love to understand when you think about autos, let's start with autos. How do you think about what should be a part of the portfolio?
18:04 Because it's just too wide a bucket. I've not even come to auto ancillaries, just autos to start off with.
18:10 Yes, sure. So, when we start with auto, auto obviously has multiple components in 81 auto VMs.
18:19 It comprises of four wheelers, two wheelers, tractors, and CB cycle. And most of them are not, the cycles don't obviously superimpose exactly.
18:34 And their behavior is different. In that context, what you must have observed that it's not, you can't paint everything with one brush.
18:47 In this case, if you notice that in the four wheeler, the SUV part of industry has done extremely well.
18:55 While headline level of EV industry's growth, volume growth may not be superior while the SUV part has done well.
19:04 So, one need to focus on the segments or sub-segments which are doing well and wanted to try to find out beneficiary of that.
19:14 And that beneficiary may be through the OEM or it may be through auto ancillary as it may not always be through OEM itself.
19:22 So, in two wheelers, two wheelers, again, what we have observed is the cycle has improved recently.
19:30 And their numbers are coming out to be good. So, that segment has multiple options in your large caps, mid caps, through auto ancillaries, and so on.
19:43 So, that's where one part of, and then there is obviously CV cycle, which is to be played.
19:50 And in CV cycle, we have seen that there are multiple, again, both auto and auto ancillary.
19:57 So, when we look at auto, the way I look at it is the way it is touching, the way I actually started explaining about this theme,
20:05 how it touches all consumption, investment, and export part of economy.
20:08 So, auto OEMs touch the consumption part of economy and there you can find your winners.
20:13 Then auto ancillaries mostly, and some of the auto OEMs also, but mostly the auto ancillary touches the export part of economy.
20:21 And in that export part, what we have observed is because of multiple reasons.
20:26 It may be because of the non-availability of labor, or it can be because of energy crisis in some part of the world.
20:38 There are multiple reasons because of which there is a clear cut demand for some of the auto ancillaries we are getting manufactured.
20:47 Either it can be forged component or casting, or it can be machine component as well.
20:54 So, there is a demand for that to be shifted to the countries like India.
20:59 And here I am not yet talking about China plus one as such because actually in auto ancillary, not many segments are about China plus one.
21:08 It is on its own, this industry has done very well and there is a demand for such a shift to any emerging countries.
21:17 So, that is one of the reasons why this segment, if you look at the underlying benchmark index, this is one of the large segments of the underlying benchmark index.
21:28 But Atreya sir, what about rural hurting and does that mean that it is better to stay clear of rural exposed auto names or auto OEMs or auto ancillaries as well?
21:38 The tractor companies, maybe some two-wheeler companies?
21:41 So, again, if you look at tractors, since you used that as an example, when the rural tractor has had a really good cycle for the last multiple years.
21:53 And during that time, some of the other segments of the market like FMCG, who has a very high exposure to rural for growth, those segments have hurt.
22:04 So, some of these things have not really played out in sync when it comes to multiple sectors.
22:11 So, FMCG, definitely multiple companies and managements comment about slower growth because of rural.
22:19 On the other hand, tractor growth has been good.
22:22 Again, some of these tractors also has gone into construction as an industry.
22:27 So, there are multiple themes which are into play in this.
22:31 So, just to bifurcate something based on rural, urban and all that sometimes becomes too simplistic when it gets down to three levels.
22:41 We will try to find out what are the real triggers for it and whether the demand is good for it or not.
22:48 And when it comes to rural versus urban, there is also a segment which you actually talk about consumption.
22:54 The consumption, there has been a K-shape recovery and in the upper part of K, lower part of K.
22:59 The real estate has been doing well, which caters to the upper part of K.
23:03 And SUVs also is actually the outcome of the same.
23:08 So, there is a different way to look at it.
23:11 So, whether it is rural or urban, but this is a different way to look at it, that the consumption patterns are different in different categories for different reasons.
23:23 One question on the EMS space as well, newer sector getting formed, will the company scale or no remains to be seen, but their arguments and their commentary is extremely constructive.
23:37 So, my question Shreyas is, would you include these companies despite the fact, I mean if you had to buy them afresh, right, in your case you will have to, because the valuations are stretched or do you believe the earnings growth will make up for these stretch valuations?
23:51 So, when it comes to, as I said, one need to take a portfolio approach in all these things.
23:58 One is the industries which are established themselves where both manpower and promoter has experience of two to three decades on their side.
24:08 When there are some industries where definitely that experience is not there, or decades of experience is not there.
24:15 And on the other hand, they are promising because there definitely is going to be some sort of first mover advantage.
24:24 Because it may sound as if that, okay, just electronic manufacturing is one of the simplest tasks, but operationally it is not as simple as well.
24:35 Because you must have heard about rejection rates, which when you start in a new industry, the rejection rates are very high.
24:42 And one need to go through this learning curve in any industry.
24:46 And so, these EMS industries also will have to go through that learning curve.
24:50 So, the companies which will end up going through that learning curve faster, so that whenever in the next round of the scale up, will be with those companies.
25:03 Because handling that kind of manpower with less rejection rate, etc., those things will be tested and those things will be tested in years to come.
25:14 And the companies which will go through this path, this painful path, sooner probably will be the winner of these things.
25:23 So, one need to keep all these things in mind.
25:27 And one more important aspect of it definitely is that if you see large established EMS companies in the region, especially in the Southeast Asia,
25:38 if you look at their financials, once they are established, they may not be very attractive also.
25:43 So, there are two, three things in play here.
25:46 So, what we try to do is try to find out companies first, which can show that scalability.
25:54 Second is, if there is and how much is totally a dependence on subsidy or dependence on some sort of protection because of the duties,
26:11 and whether the companies can break through these protections so that they become sustainable.
26:18 So, all these angles we tend to look at when we try to add anything of such thing in the portfolio.
26:27 And definitely, as you are highlighting, valuation is the very important parameter which we need to keep in mind.
26:33 And I'm sure all the more analysis is being done around this.
26:37 Great insights. Well, I would have loved to talk more, but we are out of time completely.
26:41 But keep in mind that next time that we talk to Shreyas, we'll talk to him about healthcare chemicals as well,
26:46 because that's something that he had said could be in focus too.
26:49 But Shreyas, take a moment to thank you for joining in today and giving us your insights.
26:52 Lovely talking to you.
26:54 Thank you very much.
26:55 And viewers, thanks for tuning into this leg of the Portfolio Manager.
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