- Identifying high growth stocks and sectors
- Importance of portfolio diversification
Sajeet Manghat in conversation with Sundaram Alternate Assets’ Madanagopal Ramu on 'The Portfolio Manager'. #NDTVProfitLive
- Importance of portfolio diversification
Sajeet Manghat in conversation with Sundaram Alternate Assets’ Madanagopal Ramu on 'The Portfolio Manager'. #NDTVProfitLive
Category
📺
TVTranscript
00:00 You know, you have a diverse portfolio which has focused on primarily large cap as well
00:09 as some of the emerging companies.
00:10 If I look at some of the funds that you have, you know, the Sundaram India Secular Opportunities
00:15 Fund, it has sector allocation of 39% on financial services, chemicals 16%, automobiles on 10%,
00:27 consumer services 10%.
00:29 Give me a sense of how you go about selecting your sectors and why you continue to be very
00:35 bullish on financial services with 39% allocation.
00:39 Sure.
00:40 Thank you, Sajith.
00:41 And thanks NDTV for giving this opportunity to interact with you, with you guys.
00:47 So let me just step back and take you through on the investment philosophy of Sundaram Alternates.
00:53 And then I link it to certain sector specific calls that we have taken in the last, say,
00:59 in the last, over the last five years or so.
01:02 So first thing is, if you look at, we fall into this bucket of investing into high growth
01:10 stocks at a reasonable valuation sort of a style.
01:14 So that's the investment style that we have.
01:16 We target actually returns closer to 15 to 17%.
01:21 In a simple way to put it, we target to double the money for investors in a four to five
01:26 year time period.
01:27 And if investors stay put with us for a longer period, then actually they see almost a 4%
01:32 to 5% sort of a jump in the amount of AEM that they've invested with us.
01:37 If you look at our portfolios from inception, they've almost given eight times return in
01:42 the last 11 year time period, which is a phenomenal compounding effect that we have brought into
01:47 the investors AEM.
01:49 Now, coming into how do you really identify high growth stocks?
01:53 That is where the entire crux of the-- if you talk about compounding, a lot of people
01:59 talk about compounding, but they end up investing into large caps, only large caps.
02:04 We completely differentiate from there.
02:07 We invest into large cap, mid cap, small cap, wherever there is an opportunity and we are
02:12 able to find out a stock which is growing, which has a high growth potential.
02:17 We take a five year view minimum.
02:19 We look at companies where the growth potential for the next five years is substantially higher
02:24 than the overall market growth rate.
02:27 If you look at Nifty's earnings growth rate, it is closer to 10%.
02:30 Pre-COVID, right now, we are talking about 12% sort of earnings growth rate.
02:35 So our target is, can we identify 20% growth stocks, which is a high growth stock?
02:40 So that is where the entire effort starts.
02:43 And even if one or two stocks don't go well, you still end up creating a 17% sort of CAGR
02:47 return for the-- 17% to 18% sort of a CAGR return for the investors.
02:51 So that is how the framework is created.
02:53 Now, if you look at in a country where we are seeing a real GDP growth rate of around
03:00 6% to 7%, not many stocks will keep on delivering more than 15% sort of a CAGR return.
03:07 And not many stocks will deliver more than 20% CAGR return.
03:10 If you look at last 10 years, companies which have delivered more than 20% CAGR return are
03:16 hardly 32 stocks.
03:17 And companies which have delivered more than 15% CAGR growth, I'm referring to earnings
03:23 growth, not the returns, 15% earnings growth.
03:26 Only 74 stocks have given this kind of an earnings growth.
03:30 So that brings the pool very-- becomes very narrow for you to invest, right, in that sense?
03:36 Exactly.
03:37 So that is where the role of a fund manager to identify these high growth stocks comes
03:41 into picture.
03:42 So give me a sense of financial services.
03:46 You know, 39% of your portfolio, you've invested in financial services.
03:51 Which area of financial services is more lucrative and giving you that kind of CAGR return of
03:57 15% or 20% over the last 10 years in terms of earnings?
04:01 Correct.
04:02 So let me link it to this very statement that I made, that you need to identify these high
04:07 growth stocks.
04:08 You have to then invest into growth cyclicals.
04:11 Like, for example, if India will grow at 6% to 7%, the normal GDP growth rate will be
04:17 closer to 10% to 11%.
04:19 Financials, if you look at, are always a play on growth.
04:22 If the growth in a country is very strong, then generally, financial sector grows much
04:27 higher than the growth of the country.
04:29 So if you take any country like China in the last 15 years, if you look at the growth of
04:37 financial space, it's substantially higher than the overall GDP growth rate of China.
04:41 Why does this happen?
04:43 Because as the income level increases, the household debt to GDP increases tremendously.
04:48 In China, if you look at household debt to GDP, it is 100%.
04:52 In India, it is 19%.
04:54 Over the next, say, 10 years, this number can easily move to 60%, 70% in India.
04:59 So as the per capita income increases, more people become bankable in India.
05:04 Just imagine, right now, today, we are talking about a nominal GDP of close to 240 lacrosse,
05:10 or in dollars, it is $3 trillion.
05:14 And we have just 19% of that as the household debt.
05:20 If you, for a moment, assume that over the next 80 time period, as we move closer to
05:25 2030, if this number of 19% moves to 50%, 60%, we are talking about-- and the GDP also
05:33 will move from $3 trillion to closer to someone like $6.5 to $7 trillion by that time.
05:39 On a $7 trillion, and then a 50% household debt to GDP, we are talking about a phenomenal
05:47 growth.
05:48 Almost 20% compounded growth in financial space, and particularly in retail credit.
05:54 This has happened in the last 10 years also.
05:55 While the corporate credit has suffered, the retail credit in India has grown at a cag
06:02 of more than 17%, 18% in India in the last 10 years.
06:05 So that is what will happen in the next 10 years.
06:07 So, Madan, if I look at your top bets, the top four or five bets which I look at, BHEL,
06:13 Navin Florin, Mahindra and Mahindra, Sapphire Foods, and then fifth one is a Home First
06:18 Finance which comes in.
06:21 If the 20% argument is holding, why don't you have the top bet as a banking and financial
06:27 stock?
06:28 Correct.
06:29 So I'll come to it.
06:30 So rather, right now, the portfolio is much more evenly weighted.
06:33 But we only have, if you take SESOP, we only have 15 stocks.
06:38 Among the top 15 stocks will form almost 80% of the portfolio.
06:43 And in that 15 stocks, you will have almost six stocks where we are playing the story.
06:49 We have Bajaj Finance, we have Home First, we have Five Star, we have AU Small Finance
06:53 Bank, and we have Chola Pandalam.
06:55 I'll give you a brief of each of these buckets, and you asked me about why we are playing
06:59 this, right?
07:00 So overall, put together, we have almost 39%, as you highlighted, but it is split into six
07:06 stocks.
07:07 They are not shown in the top, but they're almost 39% of our portfolio.
07:12 But the 39% weight to this particular space is a big call, right?
07:16 And importantly, all of them are NBFCs, if you look at this point of time.
07:20 While we have played banks in the past, but right now, we are betting on NBFCs.
07:24 Why we are betting on NBFCs?
07:27 If India were to grow, as I highlighted, around 10% nominal GDP, a lot of non-bankable clients
07:33 will become bankable.
07:35 And first leg they will approach is NBFCs.
07:38 And over the next, say, 10-year time period, we feel that this informal lending will convert
07:44 into formal lending.
07:45 I'll give you examples of two stocks that we have in our portfolio, Home First and Five
07:50 Star.
07:51 If you look at Home First, it lends money to affordable housing category to clients,
07:58 where probably banks will not enter for the next, say, 5 to 10-year time period also.
08:03 Because these are people with income which are much lesser, but sufficient for taking
08:10 a loan up to 10 lakh.
08:12 And the income of the family is important, not a single person in this kind of category.
08:18 And Home First as a branch sort of an approach, and they reach out to these clients.
08:23 This cannot be lent on an online platform.
08:26 This has to be lent through a branch network.
08:28 And you need to visit the customer's place to estimate their income at the household
08:33 level and take a call on whether to lend a 10 lakh sort of housing loan to them.
08:39 So these kind of customers have been using informal source at a very high cost of finance.
08:48 So this change is going to happen in the next, say, 10-year period, where a lot of these
08:53 customers will be first accessing an NBFC.
08:58 If you look at Home First, it has been growing at about 40% CAGR in terms of loan.
09:04 And next 10 years, I think it can keep growing at least 25% plus, in our opinion.
09:09 So if you put a 25% growth sort of a number for the next 5 years, and then, say, estimate
09:15 their numbers, you can easily make a 20% CAGR return on this portfolio, even if you assume
09:20 that the valuations can come down at some point of time.
09:23 But still, we feel that current valuations are reasonable, and there is a scope for improvement
09:29 there also.
09:30 But just imagine a 25% growth in the asset growth, translating into earnings.
09:36 That will take care of the compounding effect for investors who come in and stay invested.
09:41 20% sort of compounding effect is phenomenal, in our opinion.
09:45 And to achieve it, we need to identify such high-growth stocks.
09:48 And financials offer them.
09:49 And given the informal lending to formal lending sort of a shift that is happening.
09:53 So one is this one first same thing with Five Star also.
09:56 Five Star lends to small businesses.
09:58 And the ticket sizes are around 2 to 3 lakhs.
10:02 This is a space where banks, again, will not enter for a long period to come.
10:06 Again, assessing their income level, income of these stores, you need to have a branch
10:12 and visit the customer's place.
10:14 So we have three, four stocks where the informal lending to formal lending shift is happening
10:20 in an accelerated way, which is One First and Five Star.
10:25 And we have stocks like Bajaj Finance also, where a lot of banks are trying to compete.
10:30 But Bajaj Finance was the first to enter into consumer-development financing, a very flexible
10:34 sort of personal loans, lending to segments where the proof of income is still very difficult
10:40 to establish, but they are very credible sort of businesses.
10:44 And so that's what helped Bajaj Finance to grow over the last 10 years.
10:50 And I think the growth might be a little slower going forward, but still can be higher than
10:55 25 percent even for the business.
10:58 So just look at the numbers, right.
10:59 Bajaj Finance is a 2 lakh crore AEM company, while the total retail credit in India is
11:06 closer to 50 lakh crores.
11:09 Give me a sense of Madan, BHEL is a PSU and very rarely we have seen someone having such
11:15 a big bet on a PSU in the capital goods sector.
11:19 BHEL has a good order book, but it is slow in execution as well.
11:25 So how do you see that company?
11:28 So when I was an analyst, when I joined Sundaram, I used to track power sector and capital goods
11:34 sector.
11:35 And for the last 10 years, I've been negative on capital goods, particularly power sector
11:40 related capital goods companies, primarily because India stopped adding significantly
11:44 say coal-based thermal power plants.
11:48 So literally India looked away from coal for a long period.
11:53 But what has happened interestingly is the power demand kept increasing.
11:57 And during the COVID period, it was not visible because a majority of the offices were shut
12:03 and we were operating some of the periods, even manufacturing and retail outlets were
12:08 shut.
12:09 So the power demand was not visible.
12:11 But last two years, suddenly you can see that the power demand has come back really strong.
12:16 When I refer to power demand, I'm referring to the peak demand.
12:19 Now people argue we can meet it through renewable energy.
12:22 It's impossible because peak demand has to be met by guaranteed power.
12:27 And guaranteed power comes from coal.
12:31 The peak demand generally happens in the night, around 7 to 9.
12:36 In that period, you cannot expect solar.
12:38 So solar cannot be a source of supplying the peak demand.
12:42 And wind also, it's not fully guaranteed.
12:45 Unless we enter into a situation where we have a backup storage, which is at least five
12:50 to six years away, you cannot be having a lower...
12:55 Your peak demand has to be met by coal demand, coal power plants.
12:58 So we think there will be an urgency in the government unless if they quickly in the next
13:05 three years place closer to 60,000 or 60 gigawatt to 70 gigawatt sort of orders, then we will
13:12 have a very tough time in 2018, 2028, 2030 period.
13:17 So we expect that to happen.
13:18 And that is the reason after 10 years, we have turned positive on power plants, particularly
13:24 coal based power plants.
13:25 Let's take this discussion after the break.
13:28 We're entering into a short break.
13:30 And when we come back, we'll also discuss about this emerging leadership fund, which
13:34 has some interesting picks and some interesting sector allocations.
13:37 Stay tuned to the portfolio manager.
13:40 We'll be back after a short break.
13:48 (upbeat music)
13:50 (upbeat music)
13:54 (upbeat music)
13:56 (upbeat music)
13:59 (upbeat music)
14:02 (upbeat music)
14:04 (upbeat music)
14:07 (upbeat music)
14:09 (upbeat music)
14:17 (upbeat music)
14:35 (upbeat music)
14:37 (upbeat music)
14:40 (upbeat music)
14:56 (upbeat music)
14:59 (upbeat music)
15:12 (upbeat music)
15:23 (upbeat music)
15:26 (upbeat music)
15:40 (upbeat music)
15:42 (upbeat music)
16:00 (upbeat music)
16:03 - Welcome back.
16:07 You're watching The Portfolio Manager
16:09 and with me is Madan Gopal Ramu,
16:10 who is the Fund Manager at Sundaram Alternate Assets.
16:13 Madan, let's talk about some of the emerging leaders
16:17 that you're betting on.
16:19 That's a fund which you are looking at very closely
16:24 and it has roughly about 800 odd crores
16:26 of asset under management
16:27 and interesting picks that you have there in that.
16:30 Consumer services is something which you are betting on.
16:34 You have some of the other capital goods is one of them.
16:39 Chemicals is one where you're doing it.
16:42 So give me a sense of what's a team like here
16:47 because Zomato seems to be the big team for you.
16:49 - Sure.
16:52 Again, this comes under our 3Q framework,
16:57 which is how we pick up
16:59 our long-term growth opportunity stocks.
17:02 In self, what we do is we mix
17:04 between this long-term compounding stocks,
17:06 as well as we try to pick some short-term opportunistic
17:10 from a one-year to two-year perspective also.
17:12 So we play some cyclicals also in self.
17:15 So you have certain stocks,
17:16 but they will be mostly in the lower end of the portfolio.
17:20 But if you look at the top picks,
17:22 a lot of them have to do with how we pick
17:25 the compounding stocks over the last, say,
17:27 who have potential to grow in the next 10 years or so.
17:31 From that perspective, consumer discretionary
17:33 is a very important sector that we bet.
17:36 We actually have one thematic portfolio
17:39 dedicated only for consumer discretionary.
17:41 And why we are doing this,
17:42 and this portfolio invests only
17:46 into consumer discretionary sector like retail,
17:48 in the space like QSRs,
17:52 it invests into consumer stocks related to healthcare.
17:58 So what is the bet here?
18:00 The bet is simply this,
18:01 that as the income level increases,
18:03 again, as we highlighted in the case of financial space,
18:06 which is a growth cyclical,
18:08 the other sector which will benefit tremendously
18:10 as the per capita income increases
18:12 and household income increases
18:14 is how people spend in the urban centers.
18:16 If you look at any country which has gone through
18:19 phenomenal growth in per capita income,
18:21 the sector, other than financial, which has benefited,
18:25 is the consumer discretionary space.
18:28 So people, when the urban people,
18:30 their income level keeps going up,
18:33 what they spend?
18:33 They spend on entertainment, health, education,
18:36 traveling, dining out, and all these areas.
18:39 And that is what the team is all about.
18:41 And that is how we pick up stocks here.
18:44 In the last, say, in the last five years or so,
18:47 if you look at Trent,
18:49 which is a franchisee owner of Westside,
18:52 that has given us phenomenal return in this portfolio.
18:55 Same thing right now, if you sit today
18:57 and look at next, say, five years or so,
19:00 we think a name like a Sapphire Foods,
19:02 which is there in our portfolio,
19:03 has a potential to deliver good returns to the investors.
19:07 Because the call is very simple,
19:09 that the penetration level of many of these products
19:12 are much, much lower.
19:14 And as the income level increases,
19:15 the spending pattern is going to shift
19:17 from FMCG to consumer discretionary.
19:20 And if you are betting on India growth story,
19:23 it is always better to play consumer discretionary
19:26 rather than FMCG,
19:27 because even from valuation perspective,
19:30 consumer discretionary trades similar
19:32 or even slightly lower than FMCG.
19:34 But from a growth perspective,
19:36 they will offer you almost 20% growth.
19:38 Some of the stocks, specific stocks that we have picked up.
19:41 And compared to FMCG, which is in the nifty,
19:44 capable of delivering not more than 10 to 12%.
19:47 - So give me a sense of Zobato and FSN or Nika.
19:52 - Zobato, Nika, Sapphire,
19:53 all falls into this category
19:55 of high growth consumer discretionary companies.
19:58 For example, why we bet on Zobato?
20:00 Zobato, we did not participate during IPO
20:02 because we were worried about the valuations
20:05 and also profitability perspective,
20:08 the company was just getting into this momentum
20:11 of turning profitable.
20:12 Market was betting too much ahead
20:14 and that was a very completely different scenario
20:19 where we were worried about the valuations also.
20:22 But as they moved forward,
20:24 the stock corrected almost to 50 rupees.
20:26 That's where we started adding to the portfolio.
20:29 When we picked the stock,
20:31 the company was having a number of users
20:36 were closer to one and a half crores.
20:39 If you look at the number of people,
20:42 that in terms of penetration, if you convert it,
20:46 it was less than 3% in India.
20:49 If you look at in US and China,
20:52 the food delivery penetration,
20:54 online food delivery penetration is 30%.
20:57 It's a long way to go for India
20:59 in terms of penetration level.
21:01 As the income level increases,
21:02 you will expect many customers
21:04 getting into online food delivery platforms
21:07 for placing orders.
21:08 - So one of the issues which the new age companies
21:10 about the cash flows, Madan,
21:13 are you confident about the cash flows
21:16 coming back into these operations?
21:19 - I'll come to it.
21:20 Yes, that's exactly the point I was making.
21:22 There are many other opportunities also
21:24 in the e-commerce space,
21:25 but we bet on Zomato primarily
21:28 because we felt that profitability is possible in this space.
21:31 Why profitability was possible
21:33 is if you look at the average delivery value,
21:38 it's around 400 rupees per order.
21:42 And if you look at a restaurant,
21:45 it's a high gross margin business.
21:48 If you look at the restaurant business,
21:50 it's a high gross margin business.
21:51 Almost they make 65 to 70% gross margin.
21:55 Everything else is fixed cost of running a restaurant.
21:58 If the same restaurant gets a delivery order,
22:01 the fixed cost remains same.
22:03 But on that 400 additional order you get,
22:05 you make almost 250 to 80 rupees of profit.
22:09 Now out of it,
22:11 I don't think they will mind sharing 80 to 100 rupees
22:13 to a Zomato or a Swiggy delivery platform
22:16 because after paying that,
22:18 you still end up making 150 to 180 rupees.
22:21 And 150 rupees on a 400 rupees,
22:23 it's still 40% sort of an EBITDA margin
22:27 compared to 15% EBITDA margin
22:28 that most of these restaurants operate.
22:31 So we took this bet that it is possible.
22:35 And given that competition is going to be away
22:38 due to PE funding drying up in the space,
22:41 Swiggy and Zomato will eventually be controlling the market
22:44 for the next five years.
22:45 And therefore, these guys will be slowly, slowly, slowly
22:48 making a case for increasing their take rates.
22:51 So now the take rates are almost increased
22:53 closer to 80, 85 rupees.
22:55 And also they have started charging to the customer.
22:57 Recently also you would have seen,
22:59 they started charging again two rupees extra
23:01 to the customers.
23:02 So from a period where they were not making
23:05 any contribution per order,
23:07 today they're making almost 25 rupees contribution per order,
23:10 which is the growth that we are seeing
23:13 and already turned positive at the EBITDA level.
23:15 The food delivery has already turned positive
23:19 and it's already making EBITDA positive numbers.
23:21 It's only the blanket, which is a business,
23:24 which is in a seeding business,
23:26 that will take another two, three years
23:28 before it turns positive.
23:29 And they will leverage a lot of infrastructure
23:31 which Zomato is offering
23:32 for them to make money in blanket also.
23:36 But if you look at food delivery as such,
23:38 it is already profitable
23:40 and the user base will easily grow
23:42 anywhere between 20, 25%.
23:44 Your order value also will keep increasing
23:48 at least by three to 4% over a five year time period.
23:52 And you will be able to charge both the restaurant
23:57 as well as customer as the service becomes more
24:00 and more people get added to the system.
24:03 So overall, these kinds of companies
24:05 will deliver earnings growth much superior
24:07 than even 20% that we target.
24:09 So that is why the stock also started reacting
24:11 when the company started delivering
24:13 on the profitability trend.
24:16 And that was the bet on Zomato.
24:17 And the same is the case with Sapphire Foods.
24:20 That the stock is yet to deliver good,
24:23 say to the extent that we would like to.
24:26 But next four, five years,
24:27 I think given the kind of KFC store addition,
24:30 even Sapphire has potentially delivered good returns
24:33 to the investors.
24:34 It is trading actually at a discount
24:36 to many of these consumer stocks right now.
24:38 Same thing with FS and e-commerce.
24:41 FS and e-commerce also corrected significantly
24:43 and we started adding at around 130 levels.
24:46 It's actually a profitable e-commerce business.
24:50 If you look at globally, the beauty segment,
24:52 the penetration levels are even higher than other segments.
24:54 It is even closer to 40, 50%.
24:57 It's a segment where online can do well.
25:00 And the user base is still around the one crore in India.
25:03 So a long way to go.
25:04 And predominantly used by urban women.
25:07 And we feel that beauty as a space
25:10 will grow significantly.
25:12 And we have seen similar ideas doing really well
25:15 at the global level.
25:16 So again, all these three stocks play on this
25:21 growth of income and where the customers will spend more.
25:24 They will spend more on dining.
25:25 They will spend more on beauty products.
25:28 They will spend more on traveling.
25:30 So this is the concept that we are betting.
25:31 We have another idea which is called Rainbow Healthcare,
25:34 which was a bet on children healthcare.
25:37 So we are interested in this space
25:39 and whichever stock where the value
25:41 as well as growth is very attractive,
25:43 we tend to invest.
25:44 And we have been very successful
25:45 by investing into retail and QSRs.
25:49 Westlife Development has been a great value generator
25:51 for us.
25:52 Trent, again, Titan.
25:54 All these three stocks.
25:55 In the past, we used to have Jubilant Foods also.
25:57 So all these stocks have delivered good returns
25:59 to us in the past.
26:00 So right now, our picks are FS and e-commerce,
26:03 which is Nika and then Zomato and Sapphire.
26:06 So that's the bet there.
26:09 And these guys have capability of beating
26:12 FMCG companies from an earnings perspective.
26:15 And valuation-wise, also, they are not very, very costly.
26:18 Probably Zomato is slightly higher in terms of valuation.
26:22 But if you look at Sapphire Foods and FS and e-commerce,
26:25 the valuations are at a discount right now
26:28 compared to the FMCG companies,
26:30 but delivering superior earnings growth.
26:32 - It was a pleasure talking to you today
26:35 and understanding your entire investing philosophy,
26:39 especially with respect to consumer discretionary.