India safer than in '08; like auto: Franklin Templeton
It is important to look for companies that have growth potential, that are slightly underutilised in their current capacity, says Anand Radhakrishnan, CIO, Franklin Templeton. In that context, he likes sectors such as automobiles, select auto ancillaries and banks — including some of the public sector banks, he says.
At the moment, he says the world is a little awash with liquidity. "Clearly, there is a risk to global equity markets, but when it comes to India, the risks are much less today than what it was in 2008," he adds.
Below is the verbatim transcript of Anand Radhakrishnan's interview with Ramesh Damani on CNBC-TV18.
Q: You have been now 20 years in the market, what were your early influence in the stock market?
A: It was after I did my graduation and post graduation in management. It was quite by accident I took up a career in fund management. I joined SBI Funds Management Limited out of campus, IIM-A, and started a career in equity research.
Q: That time management consulting or FMCG were the favoured career jobs.
A: Predominantly people use to go for big consulting firms and IT was not a big thing and Lever and P&G were very sought after. Investment banking within that merchant banking was preferred than investment management. So, SBI and UTI were the only lone of recruiters in the campus at that time. People did not think of it as a big career at that point of time. So only two of us joined from IIM-A out of which I continued to pursue the career, the other person eventually moved on to IT.
Q: What peaked your interest ?
A: I think once I joined the company and the first couple of years were pretty heavy in terms of the experience. Markets were at all time highs and lot of things were happening in the economy. We had Dr Manmohan Singh as the finance minister, liberalisation in India was going through some fantastic growth opportunities. Lot of sectors were opening up and we got to meet lot of companies. SBI is one place where there was lot of freedom. It was the second largest firm in terms of AUM at that time. So, companies always used to give us appointments whenever we wanted to meet them. So, within 2-2.5 years I could kind of meet like 100 plus companies, visit their factories and learn different industries. I have been to automobile companies, textile companies, some of the consumer staples. So, the spectrum of opportunities, the breadth of it and the exposure I got was very interesting.
Q: Sensex was stagnant during that time.
A: It was a very challenging phase. Since we were into research we were supposed to kind of predict where the Sensex would be in a years time or two years time much like what is happening now. We were all very young and inexperienced and we did this thing of projecting the 30 companies earnings, attaching a multiple and based on that when we did that Sensex was about 4200 and we said that in a years time it would be something like 5100 and we thought we were being very conservative and we never saw that number for the next six years. So, it was a kind of rude shock for us because we thought we are very good in projecting things and we could kind of foresee what was going to happen but economy went totally the other way. For six years the Sensex earnings was growing at 1 percent kind of CAGR and then IT boom happened which kind of made the pain more bearable but if you had participated in the boom it was a bit of a pleasure but if you hadn’t the pain continues.
Q: When did you get into active fund management though? From research when did you move into fund management?
A: In 1997 when I switched jobs and I joined Sundaram I started managing a small fund, it was called Sundaram Growth Fund. We also had a tax fund, these were the two funds which I started managing actively.
Q: Growth fund, that is the key to your investing style, growth?
A: Yes.
Q: Give me an example?
A: Growth can be looked at in multiple manner. For example it can be an existing industry or a space in which a new player is coming with either innovative product or services or a disruptive approach to doing that business.
Q: Would Uber qualify as that?
A: Uber is definitely a good example of that. Taxis have been in existence for a very long period of time and when someone comes and takes market share. So, that is one way of doing it and those days outsourcing was a very big thing. Not IT outsourcing alone, anything that is not very core to the company were getting outsourced. So, the effort was always to find what is the next growth idea, what is the next opportunity. It can be either an existing big opportunity in which you are a new player or a new opportunity itself in which one is an early entrant.
For example in India when some of the private banks got into banking space banking space was very well established but these companies came with better products and better services and for example, the introduction of technology into banking happened aggressively through private banks and because of that they had gained dramatic market share and we saw that very early and some of our large investments in the private bank space whether it is IndusInd Bank, Kotak Bank, HDFC Bank all these things happened with the view that it is an established space but these companies are doing innovative things and products and services and gaining market share.
Q: So you want growth. That is your DNA that you want to find growth almost at all cost?
A: Most of the time, predominantly we would like to go after growth. Occasionally we don't mind playing a contrarian bet but nothing like identifying - because people come to invest in India, whether Indians investing in India or overseas investors in India they don't come to buy value stocks out here. Because India is a growing economy. So, we think that growth - because there is economic growth being pretty good and companies overlay their business on top of this economic growth. By and large if you are invested in good compounding growth ideas you are fine as long as the company is run well, they don't make dramatic capital allocation mistakes and they reinvest in the business for growth. Large part of investment problem is solved.
Q: Clearly, and promoters have sky high ambitions. They want to bet the balance sheets on, especially if it is borrowed money, on a number of projects. How do you distinguish the wheat from the chaff?
A: It is tough. We have made our share of mistakes. It is good to be very early in the game because in 1990s we were allowed to make mistakes. So, we did realise it is more like baptism by fire, learning on the job but unfortunately today people do not have that luxury. People cannot afford to make one mistake in the current scenario.
Q: Underperform, you lose your job.
A: Yes, the risks are pretty high. On those days the risks were not so high and that kind of helped us to learn out of our mistakes and there were enough examples were also abound. Overambitious promoters, excessive leverage, betting too much with equity or betting too much with debt. So, all kinds of mistakes or unrelated diversifications doing too many things at the same time. So, all kinds of mistakes happen.
Q: And you have to guard yourself against them?
A: Yes.
Q: We went into the break saying growth, that is what you like. The fun that you are now CIO of Franklin Templeton, Templeton was a different kind of investor, wasn't he?
A: Yes.
Q: Tell us about him.
A: Sir John Templeton is a very well known value picker and he is more behavioural based value picker, as in his basic tenet is to buy stocks when others are afraid to buy.
Q: When there is blood on the street I was told.
A: Yes. So, he strongly believes in the tenet that bull markets are founded on depth of despair, pessimism. They grow on scepticism, they mature on optimism and they die on euphoria, this was his words. And he strongly believes on playing on the behavioural aspects of the market. That is one way of making money which is to buy when others are throwing out the best stocks and to sell when others are greedy for their money. But when Templeton took over Pioneer they took the theme which was essentially growth oriented stock pickers. They were buying ideas which were growing very well.
Franklin Templeton has this philosophy of when they make an acquisition they continue to allow the teams to follow their approach. They don't try to fit you into their existing culture while the firm takes a lot of steps to sensitise investment, investment managers on the bigger philosophy they are also allowed to follow their own style.
Q: The 2013 bull market, what is it rewarding this time around?
A: The market has significantly rewarded the quality companies. Quality has been the most sought after aspect of the current market rally and quality in terms of business, in terms of financial parameters, low leverage, high cash flows and repeatable cash flows, low volatility of earnings.
Q: But to ridiculous level?
A: Like it always happens at every cycle. In 2003 the old economy, the traditional industries were excessively undervalued. By the peak of the market the consumer staples and pharma companies were excessively undervalued. By 2014-15 in some way the pendulum has swung the other way.
Q: We run thousands of crores. How do you fish in these seas?
A: These are very challenging time especially when we know when the market pendulum has swung one way and then to make choices and position your portfolio not necessarily for the next six months or one year but looking through that into next two or three years is a very tough proposition.
Q: So, give me a check list of how do you do find companies now?
A: Currently we are looking at more than current growth. I would say we are looking at the growth potential of that company. For example a company who may not be growing pretty well but doesn't require too much of capital to grow their business because they already might be sitting on excess capacity, underutilised capacities, reasonably less - not excessively leveraged balance sheet, but we don't mind a bit of a leverage because we think that both operational leverage and the financial leverage essentially can - if think grow better into the future you will get good growth, we don't want excessive leverage in that.
So, you are looking for, therefore, companies which are slightly underutilised in their current capacity, balance sheet may not be pristine clean because pristine clean balance sheets are anyway overrated or that pendulum swing has taken their valuations to a very high level, but it should be reasonably clean.
Q: I could be wrong but it almost seems like you are suggesting commodity stocks?
A: Commodities might be like a really deep value. They are going to be stressed for some quarters at least if not for some years going by the way things are now.
Q: Which sectors? Tell me which sectors.
A: One is automobiles, both four-wheelers and two-wheelers. Some of the auto ancillaries definitely qualify for taking a very pro-cyclical kind of a bet into next three, four years. There is definite value, they are not overvalued compared to the broader market. Similarly, we are seeing opportunities in cement. We are seeing opportunities in banks. Even if you are cyclical investors, even one may find value in some of the public sector undertaking (PSU) banks also while I would still put a lot of my money in high worth private sector banks. We can find value in some of the good utility names at this point of time.
Q: Are you scared that if a global meltdown takes place that a repeat of 2008 will happen?
A: The world is a little bit awash with liquidity. Clearly, there is a risk to global equity markets. When it comes to India, the risks are much less today than what it was in 2008. 2007 we were at cyclically peak earnings. Commodities were at all time high, economic growth was at all time high, Sensex was roaring, valuations were at all time high.
Today if you look at it commodities were at all time low because of high inflation of interest rates are at very high level. So, we are nowhere near the kind of real interest rates that were prevailing in 2007. So, in whichever way I cut and dice the risks are lot less today from a global contagion to affect us because what we saw then was a very synchronised expansion across the globe and therefore a synchronised fall.
Q: One of the disciplines as a fund manager you need is when to sell, what is your selling strategy?
A: When one invests in the market we have to leave some money on the table for the next buyer. So, one of the thing which we always try to believe is that, you don't try to catch a top in terms of a sharp rise or its valuation. So, once we have that approach, we may be little bit early selling into a stock but we will never be late.
Q: Does it cause angst within you when the stock keeps climbing? Like you could have sold Eicher say at Rs 10000 and it kept going up after that.
A: We have sold Eicher from Rs 5000 level onwards right up to Rs 20000 levels, that has been a good performer for us. When you look back probably we could have held back some of the positions but this is discipline. It might not work in one place but on an average this works fantastically and it also prevents your portfolio from getting overloaded with winners. So, doing top slicing is a discipline which you follow.
Q: What is your discipline in terms of stock not working out? Suppose you buy a stock and it is down 10 percent, when do you throw in the towel?
A: When your thesis is totally wrong you have to relook at it. If your underlying assumption have not changed dramatically and only our initial purchase price was wrong, and at this level probably it is worth a buy, continuing to hold on to a stock is equivalent to buying that stock afresh. So, we would like to hold on. However if the underlying thesis itself has unravelled and has not played out the way we would have imagined it to be playing then we gulp it and sell it.
Q: If it goes down and your thesis holds, would you average down?
A: We will average down.
Q: You are willing to put your cheque book there?
A: We will put the cheque book there.
Q: What is then your overall arching philosophy, you told you like growth, you like discipline, you have investment hypothesis, 20 years into your career if I asked you what is your style, can you give me a summary?
A: If we believe that the company is better than what people are thinking it to be that I think is the big opportunity. The whole idea is to in your understanding is it coming out to be better than what the markets understanding of that company is. Even if it is a good company, market may be thinking it to be a good company but if you think it is a superlative company and therefore it warrants a big bet, so we go out and bet that. That is the kind of style. That is where I think lot of money is made. Wherever there is a deviant view there is a opportunity.
Q: Does it surprise you that how many times markets do get it wrong?
A: It surprises me enormously because I would like to believe that over a period of time market becomes less responsive to the high frequency data points and more behaves like a weighing machine. It surprises me to see that even today or even during the current time also more often than not in the shorter term markets behave like voting machines.
Q: Who do you admire, which fund manager do you admire?
A: 20 years you have seen all kinds of cycles. I think even domestically we have had quite a bit of fund managers who have done pretty well. So, even my own firm, my predecessors have done a fantastic job. Some of my other peers have also done a brilliant job of delivering consistent returns over long terms. So, they have to be admired.
Q: To the new batch at IIM from where you graduated if you have to suggest to them what they need to do to prepare for career in fund management, what would they need to do?
A: They have lots of body of knowledge and material right in their finger tips today than what we had 20 years back, which is the internet. It almost like all the theories of investment management, all the styles are reasonably documented and available to individuals.
Q: On a practical level can you do anything to make yourself better?
A: Practically they can go and invest on their own. That is probably the best and it is better than reading books.
Q: Losing money helps a lot?
A: Yes provided the parents give them some money.
Q: That is how you started your career right? You invested in IPOs?
A: My first few months salary after my engineering degree I went and stood in a queue in Surat and applied for an IPO. That company no longer exists but nevertheless I am very proud to say that I went and stood in a queue there. So, investing on your own definitely helps.
Q: You had a brilliant career on Dalal Street from Chennai, being away from Mumbai, does that help you in your career?
A: Distance brings objectivity and also reduces noise. Being in a quiet environment helps you to focus on reading the financial statements better and also think in a slightly different manner.
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