MEERA SIVA | September 18, 2016 | The Hindu Business Line
Once invested, don’t look at the portfolio frequently
Property investments in India do not give enough inflation-adjusted return, but Indian equity and bond markets present a lot of opportunities for investors, feels Saurabh Mukherjea, CEO of Institutional Equities, Ambit Capital. Excerpts from an interview with Business Line:
How do you filter companies before you make an investment decision?
I look for good stocks with high return on capital employed and consistent revenue growth. The industry the company operates in should be attractive, that is, it should be growing at over 15 per cent annually and the top players should have sizeable market share so that profits are not eroded in competition.
Some examples are men’s shaving products, trucks and speciality chemicals. Secondly, the management has to be competent and focused on the core business.
Once invested, it is also important not to look at the portfolio too frequently. Patience is central to success in investing and money cannot be made by being hyperactive.
What red flags do you watch out for?
One must be watchful of corrupt and lazy promoters whose core competence is only making great presentations.
Even good brands in booming industries flounder due to promoter issues. Besides, in India, one in two companies has some sort of accounting issue. So we have a detailed checklist to weed out accounting problems.
Only 100-120 companies in the Indian listed universe meet these checks. I think it is best to avoid companies with governance and book keeping issues as value will be destroyed sooner or later.
What returns do you look for in your investments?
While the quoted inflation rate is a lower number, what I look at is the rate of inflation for my basket of consumption.
This is around 12 per cent. So any investment that I make must meet this cut-off for return. I invest only in products that I understand and avoid exotic asset classes and overseas markets.
What are your current investments?
Due to the nature of my job, I cannot own stocks directly. So my equity investments are through mutual funds. I also have debt investments in Government and corporate bonds.
I feel there may be some tough times ahead globally due to the negative interest rate scenario. Due to these potential uncertainties, I have invested in gold through an ETF.
What are your views on real estate as an asset class?
I own the flat we live in, but beyond that I feel property investments in India do not give enough return. I feel real estate is a silent killer in high networth portfolios insofar as such returns do not keep up with inflation experienced. A 12 per cent return, post tax, is my threshold. Rental yields are very low, at 2 per cent. So buying and renting out a residential property makes little sense.
Also, in cities such as Mumbai and New Delhi, prices went up due to huge amounts of black money. With a crackdown on that, returns will be muted.
Would you recommend direct equity investments?
There are many risks in equity investments and it is best left to experts.
So mutual funds should ideally be a good way for the average middle-class investor to get equity exposure.
However, the reality is that there are many schemes and a plethora of choices that are confusing. Investors rarely get to meet fund managers and there are no reliable filters from which one can pick fund managers.
On the other hand, you can build a portfolio of good stocks by using simple filters.
For example, companies that have seen consistent revenue growth of 15 per cent every year and 15 per cent return on capital employed.
It is possible to build a good equity portfolio with 15-20 stocks and hold it over a long-term.
Our analysis shows that the annual return of such sensibly constructed portfolios can average 25 per cent over a decade.
Buying the stocks when there is pessimism in the market is a good strategy.
One can also do systematic investments in stocks.