- How to navigate volatility in broader markets?
- What are LGT Wealth's three investment parameters?
Rajesh Cheruvu discusses portfolio management strategies with Niraj Shah on 'Portfolio Manager.'
- What are LGT Wealth's three investment parameters?
Rajesh Cheruvu discusses portfolio management strategies with Niraj Shah on 'Portfolio Manager.'
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TVTranscript
00:00Thanks for tuning in to The Portfolio Manager. I'm your host, Neeraj Shah. Our guest today
00:13is Rajesh Cheru, MD and CEO of LGT Wealth India. They run an overall AUM of close to
00:18800-odd crores. We talk about a subset within that based on the kind of allocation that
00:25they have done. And very interestingly, they have a fairly decent-sized exposure to mid-caps
00:31and large-caps, such as that they are looking at bottom-up stories and not necessarily phased
00:35or too phased by what the commentary around mid-caps and large-caps or mid-caps and small-caps
00:41is. Our guest is Rajesh Cheru, as I said, MD and CEO of the fund. Rajesh, good having
00:46you. Thanks for taking the time out. At the outset, can you tell us a bit about your approach?
00:50I mean, are you bottom-up value investors? Do you guys believe in growth? What's the
00:54investment style? Yeah, just if I need to start with my investment philosophy and investment
01:01approach, Neeraj, we are predominantly growth-oriented investors. And in terms of the construct of
01:09the portfolios, we do it more of a bottom-up basis. In terms of philosophy, what we philosophy
01:16and objective of this particular strategy is focused towards investors who are having
01:23medium to longer-term horizon. And our objective is to generate returns superior to nominal GDP
01:33growth over three years plus period of time. How do we do that? I think primarily focusing on
01:39structurally compounding businesses and keeping volatility in stock level as well as portfolio
01:45level under check. So this is how we actually focus in terms of designing and constructing portfolios.
01:52Interesting that you're not shying away from having more than a 55% exposure to this mid-space,
01:58Rajesh, while you talk about wanting to control volatility. So how is this exposure coming
02:04through? I'm not saying it can't be done, but it's interesting at the current time. So tell
02:07us a bit about this exposure to large-mid versus small. So this is largely in terms of stock
02:16selection. That's where we, while doing the stock selection itself, we do the, whatever actually the
02:25in terms of the quality of the, our investment approach has about a four factor. That is a
02:30four factor. The four pillar, it is built on four pillar. There is a QSGBA approach, we call it is
02:37framework. Quality, secular growth, and this thing, secular growth, valuations, and active
02:46management. So these are the four pillars we use in terms of while constructing portfolios.
02:52Quality is I think in terms of quality of the business, quality of balance sheet, and quality
02:55of the management. So this, when we are actually focusing on quality of the business and quality
03:00of the balance sheet, that's where I think just we could, able to identify certain actually the
03:06names which are actually transforming from, I think from, benefiting from the transformation
03:11from informal to formal and whatever actually keeps going on in the marketplace, whether it
03:16is a consumption or whether it is formalization or indigenization. So that's where I think we
03:21tend to actually identify certain mid and small cap names. So that's where I think it is coming
03:25in from. Since we are actually doing in-depth analysis of corporate balance sheets for about
03:3220 years plus data, we actually scrutinize it. This, we do it every year, year-over-year basis,
03:38we do it. And we categorize companies into three types. One is crown jewels, warhorses,
03:45and treasure hunters. So this particular strategy is largely built around warhorses and
03:51predominantly around warhorses. Warhorses are companies which are offering superior growth
03:56with the objective to actually gain the market share from the market leaders. So that's the kind
04:03of actually businesses, they bring in P multiple rating plus earnings growth. So that's where you
04:08see more mid and small cap orientation in this, but there's not a fixated one that actually changes
04:16with time to time. So offline actually just we are actually being, the portfolio what you are
04:22looking at is 31st March. I think as time passed by actually we have been increasing large cap
04:29because we are seeing certain opportunities in large cap, especially cap goods space.
04:33We are actually adding certain cap goods names in the ongoing correction.
04:38Okay, you are adding some large caps in the cap goods space and the ongoing correction. Okay.
04:44Here's the deal, here's the question then. Financials form 31% of your portfolio as of
04:4931st March. Materials about 9%, industrials about 9%. Would cap goods fall within this bucket and
04:56therefore has this overall exposure of either industrials or materials gone up from the 9% or?
05:02This industrials space actually just we are increasing it further.
05:05You are increasing it further. We see, yeah, because we are actually seeing
05:09a reasonable amount of activity there in terms of private capex is actually picking up. So we
05:14have been waiting for the right opportunity to add. As I mentioned, part of our four pillars,
05:20margin of safety and valuations are quite important. Despite companies having great
05:24quality balance sheet or great quality business, valuations should also actually
05:29augur well for that particular business. So we are seeing Nifty has given about 3% or 4%
05:35at index level, but individual stocks we have seen certain opportunities and we have started building.
05:41Okay. One more question really. I mean, when I look at industrials or cap goods,
05:45the blue chip names, the MNC ones are all to some people priced to perfection,
05:50even if not to perfection, certainly priced high, right? There was a downgrade
05:54by Nomida on ABB, I think on Thursday, so on and so forth. So when you are buying into large cap,
06:02cap good names, where you might see value, is it value in growth or are you actually buying
06:09the non blue chip names because their valuation multiples might be lower?
06:15Just trying to understand. These names might not be non blue chip names.
06:19They could be, but build to book ratio in terms of quality of balance sheet and quality of
06:24business are quite robust, but there might not be blue chip names or MNC parentage. They might
06:30not be having MNC parentage, but build to book ratios of these businesses are quite good,
06:34but valuations were not earlier, were not comfortable. But now with whatever business
06:39updates been released of late, it's nothing we have seen two to three years perspective.
06:44These businesses are offering reasonable amount of growth in terms of runway to growth plus
06:51valuations also 18 months to two years forward basis, these companies are looking attractive.
06:57So we started actually using this algorithm correction.
07:00Got it. We have some interesting focus to consumers as well by this fund. So consumer
07:06discretionary is 24 percent, consumer staples is 6.7 percent. Now before I ask Rajesh about what
07:11the pockets out there, let me get in my colleague Mahima to give us some sense of what's expected
07:16in the quarter from some of the consumption names. Mahima, give us a brief piece of what the
07:23brokerages are thinking about the consumer space for this quarter.
07:26Right Neeraj. So I will start with how the demand will pan out to be well in terms of
07:30demand, we are expecting a subdued performance. Well, we will see some kind of gradual recovery.
07:35However, a quick rebound is not expected in terms of demand. Now in terms of volume growth,
07:40we will see some kind of divergence in terms of volume and value growth because volumes are
07:46expected to come back to a normal stage where they will grow in an average mid single digit level.
07:53In terms of margin expansion, well, the commodity inflation is kind of easing.
07:58So the margins will sustain at the same levels as they have been in the past quarters. However,
08:04gross margin expansion will likely be slow because a lot of FMCGs are now making,
08:10reinvesting the profits that they are earning into product innovation, distribution expansion
08:15and marketing spends. And lastly in terms of rural recovery, what you can see is that rural
08:20recovery might be a bit dented because the high inflation has really hit the income levels of
08:27the people in the rural area. And so rural recovery will basically depend on easing of
08:32inflation, one thing, strong festive season and higher government spending ahead of the elections.
08:38So this is the overall view of the consumer sector. Thanks for that Mahima. Interesting
08:44break up there Rajesh. I mean staples 6.7 percent, I would reckon it is not exactly overweight.
08:51Would you be kind of circumspect there? And part two of my question is consumer discretionary,
09:00that is a very aggressive 24 percent weightage there. Yeah. So consumer discretionary, I think
09:06we are quite optimistic for next four to six quarters basis. There actually were segments,
09:14if you look at the consumer discretionary is a headline index industry sector. But if you look
09:20at the subsegments like EMS or the hospitality, so these segments are the high value consumption
09:28names. If you see, I think the slower volumes, volume pickup or volume growth is happening
09:36in a low value segment, whereas in high value consumption, still volumes, still holding robust,
09:42including jewellery, hospitality, et cetera. So we are actually just optimistic in that space.
09:48And EMS is another area which is actually getting benefited out of ongoing indigenisation
09:54spree. And whatever heatwave I think they expected to actually rise even further,
10:01temperatures are likely to rise even further. So with that, I think manufacturers of air
10:05conditioners or EMS manufacturers supplying to these air conditioners. So this space actually
10:12we think this quarter as well next quarter will actually offer well for these companies.
10:18Is EMS within that pocket the strongest bet or is there something else? QSRs,
10:23the online players, what is the strongest bet? Yeah. QSR, we have some nominal exposure,
10:30but we think that is at least two quarters away in terms of recovery there. We have very nominal
10:36exposure. Predominantly, I think EMS and hospitality are actually. EMS and hospitality.
10:42And by hospitality, you mean hotels predominantly? Hotels. Yeah. Hotels predominantly. Okay.
10:46Some more upsides there, where viewers, there was a Kotak note which said that
10:49Feb rates tariffs have moved up to average of 9,000 EBITDA revisions being done for FY25.
10:55And here we have Rajesh talking about how they are very constructive on hotels
10:59from amongst the consumer discretionary in addition to EMS, which is the back-end
11:05manufacturers of electronics, the likes of Dixon, Amber, etc. They need not necessarily be the
11:10stocks in his portfolio, but I am just giving you a nature of what the EMS players could be like.
11:14Rajesh, I do not want you to comment on specific stocks, but I am using them as an example. Yes.
11:19So in your top allocations, there is a Varun Beverages, there is an Astral. I mean,
11:24significant weightage is there. They are not exactly cheap in terms of headline valuations.
11:30So is there merit in growth that you are seeing? I mean,
11:33do these form a part of consumer discretionary per se for you as well?
11:38Not necessarily, Neeraj. These names, in terms of our portfolio construct, actually,
11:43if you see the way how we construct portfolios, as I mentioned, four pillars of my investment
11:50approach, fourth pillar is active management. We segregate portfolio into three parts, core,
11:55tactical, and satellite. There are certain names actually form part of my core allocation. There,
12:00I think, if there is an opportunity, I add additional tactical allocation to those
12:06core names, which these names, we tend to hold three to five years kind of horizon.
12:12And there is a price opportunity in terms of a short span of time. Fundamentally,
12:17stock prices move ahead of fundamentals. We release some amount of capital from those names.
12:23That's how we play tactical in and out in those names. Whereas satellite is companies which are
12:29actually showing some amount of fundamental improvement or change of management or overall,
12:34I think, business fundamentals are improving, et cetera. So we actually start as a satellite
12:39allocation. And if they give good price opportunity, just will actually seep into the portfolio gains.
12:46And eventually, I think it is from near-term fundamental improvements, I think they become
12:53more secular and they turn out to be secular and steady growth companies. Then eventually,
12:57they could become core allocation. That's how I think our approach for our portfolio
13:02construct approach. So the names, whatever you have shown, most of them are actually my core
13:06allocations at this point of time. From there, actually, I don't find any, actually, other than
13:12Varun, I don't have any consumer names there. So most of them are actually, whether it is part of
13:17the industrial allocations or BFS allocations. Varun is actually part of our consumer staples
13:25allocation. Discretionary side, we don't have any names from this. Got it. A fair call. Yes. And you
13:32could argue that Varun Beverages, in some sense, it's consumer staples valuation certainly, but the
13:37growth numbers for Varun have been anything but how staples growth numbers have been like. But
13:43point well taken, Rajesh. Financials, you mentioned that. 31.4 would mean slightly
13:50underweight. I just wanted to know the breakup there. Are you into lending financials like banks
13:56predominantly? I see a bank or two here, like Axis, etc. Or is it NBFC lenders? Again, I see
14:01a Bajaj Finance. Or have you moved, I mean, do you also have a larger sprinkling of non-lending
14:07financials? Our BFSI exposure in this portfolio dominated by lending businesses. We have two
14:18housing finance names also, which are actually just below these top 10 allocations. You'll find
14:24it. Two housing finance names, predominantly affordable housing names. There we are actually
14:30seeing growth is quite good and return ratios have been good. And there are actually stress
14:35in book is also in quite controlled manner. They've been managing it. Good quality business
14:41and good quality management. So we have two housing finance names. And this NBFC, as you have
14:46shown, that is also part of our portfolio. And banks, we have two banks. This one has one PSU
14:52banks, India's largest PSU bank also there in the portfolio. But PSU banks actually just we believe
14:58more or less big gains are behind us from here onwards. I think their returns should
15:05track their earnings growth because provision reversals are actually the water of multiple
15:10trading is more or less done for now. So we are actually just easing gradually the PSU banks.
15:17Got it. Rajesh, just one curious question. A lot of these names are large and I still see a 50%
15:23allocation to mid caps and small caps, even if you started buying into large cap goods, right?
15:28So where is this 50% hiding? What sectors, what teams, where is the bottom of idea?
15:34So those are all actually like the names I mentioned, affordable housing,
15:38financing, BFSS space. Yeah. Consumer names also you'll find a couple of panel,
15:46one of the panel companies that are part of the portfolio. Yeah. One of the tire actually unique
15:51tire manufacturer, which is actually off highway tire manufacturing companies there, which we used
15:57to have a significantly overweight there, I think around 6%. Given the ongoing, let's see,
16:05logistic challenges and constraints, we have reduced significantly to around 2.3%. We hope,
16:11I think, but profitability wise, this company holds a strong moat and profitability is far
16:16superior compared to another tire manufacturer. Like these kind of actually names where you would
16:21find it. Point well noted. Okay. Well, IT also forms, well, 9.7%. So in some sense,
16:29slightly underweight relative to maybe the indices, but let me first get in my colleague
16:33Rucha to tell us what to expect from IT after the slightly subdued performance by TCS and before that
16:43a month ago by Accenture as well. Rucha, what's happening in that space? What's to be anticipated?
16:50So as you rightly mentioned, Neeraj, the street was expecting something incremental from the TCS
16:55management's commentary, but there was no hope of recovery of demand from the management last Friday.
17:01The uncertain macro environment still prevails, which leads to clients cutting down on their
17:08budgets due to pressure on discretionary spends. Also, there are a number of shorter deals, right?
17:14So there are less number of shorter deals rather than the long-term deals, which have an impact on
17:20the pricing as well, and which can affect the margins of the companies as well. Also, the
17:26hyperscalers are also cutting down on their workforce, which again indicates that there
17:31is no near-term demand visibility like Google did cut down on its workforce less than six hours ago.
17:37As you rightly mentioned, global payers like Accenture as well cut its FY24 guidance
17:43to 1-3%, which is a very small range as compared to the previous range of 2-5%. However,
17:51on the flip side, there can be two positive aspects to this as well. Number one, the EBIT
17:56margins are being sustained as the bench which was created in the last few quarters is now coming
18:02into utilization. And this has led to lower subcontracting costs, which is a major expense
18:08for the IT company, and reduction of the same will help the company support their margins.
18:14Also, attrition is normalized, but there is a hiring freeze across the industry. So there are
18:20mixed views on to where the IT is going. And apparently, I think the clients are just waiting
18:27and waiting for the elections to happen and to figure out where the demand will ultimately go,
18:34because nobody is able to comprehend about the near-term demand as of now.
18:39Okay, well put, well summarized. Mucha, thanks for that. Mucha is referring viewers,
18:44remember to the US elections, because that's a large portion of what IT service companies clientele
18:50factor in when they are taking these decisions. 9.7% in IT, I'm just wondering, is it largely
19:00services even now or do ER&D or product companies also come into the play?
19:06So, Neeraj, actually two parts to it. One is this 9.7% is at about 15-16 days back number.
19:14So now actually, we have increased slightly a bit here, number one. Number two is one of the
19:19top five names of the services company, which we have actually prepared just before
19:25any previews coming in. It's just we have paid a bit and we have actually taken down to 3.4%
19:31because services, we think at least we'll take another two quarters because I think
19:38US Fed has to change its stance. Till that time, you might not see a sentiment turning positive for
19:44IT services as a segment. But we are actually, as you rightly mentioned,
19:48our focus is more towards ER&D as a segment. That particular space has actually very good
19:55growth runway over next three to five years perspective. So that is one segment we are
20:01positive. And another bottom-up name we have actually just been building in the portfolio,
20:06they're one of the secondary IT company where change of management has happened. And historically,
20:13this company has done multiple acquisitions. Now, the new management has been actually just
20:18easing out a couple of those unrelated or actually the longer term strategy segments
20:25that have been easing out. So we expect this particular company will deliver quite strong
20:31set of numbers with the whatever change of strategy and change of leadership is happening
20:35in the business. For next four, six quarters, this company could give quite stupendous returns
20:41as it is currently trading at a significant valuation to most of the IT services company.
20:46So that is one company actually just we are building position in the portfolios. And plus
20:51ER&D, these core IT services actually just we think it is at least another two quarters away
20:58in terms of any recovery. But most of these companies, as you're aware, I think valuations
21:02wise they're trading compared to their historical multiples at a discount. But most of the actually
21:08negative seems to be in price already. And already we have seen TCS has reported strong
21:13set of numbers, whether it is in terms of margins or at least it is the highest in recent times.
21:19So you might see some green shoots or some kind of actually the positive
21:25connotation coming out of these earnings. But we are not yet actually
21:30built forward positions there. But we are focusing more ER&D and this kind of actually
21:36just one of the satellite name we have added in the portfolio as change of management and
21:41change of business model. Okay. Interesting. Strong margins for TCS for sure viewers, but
21:49the commentary may be still some time away, maybe which is why ER&D is the focus and not
21:53IT services necessarily, but certainly a pocket that one should monitor very carefully at some
21:58point of time. If growth returns, then in some stocks, the valuations possibly also
22:05might start to look interesting, but great. It is lovely talking to you, Rajesh. Thank you so much
22:11for taking the time out and being with us and giving us your thoughts and all the best for the
22:14year. Thank you. Thank you very much. Pleasure was ours and viewers, thanks for tuning in to
22:19this leg of the portfolio manager.