AMC Speak 20th Sep 2012
Value investing works in India - just like it does the world over
S. Naren, CIO, ICICI Prudential MF


Naren believes that while there is positive news on the domestic reforms front and international liquidity front, the market breaking out of its 3 year old range will crucially depend on how oil prices play out. It is a good time to be a value investor, he believes. There are lots of value plays available across many sectors. Alpha is also generated by thinking contra - and one contra theme that comes to his mind now is telecom ICICI Prudential Discovery Fund - which focusses on value themes and contra ideas is an ideal fund for current market conditions, avers Naren. The fact that value investing is very under owned in India makes it a very interesting theme to invest in.

WF: We would like your perspective on the road ahead for Indian markets. We are at the top end of a four year long range in terms of the Sensex and have got a lot of reform oriented announcements domestically and a lot of liquidity oriented announcements internationally. Many advisors would specifically want your view on whether these policy actions are helping the market move and finally break out of this four year long range or are we likely to remain in the same broad range for the next several months?

Naren: We have seen that India was getting sizeable FII inflows in the last few months, even before these recent measures. The key reason for this is that we are still attractively positioned relative to a market like China as we seem to have problems which are clearer and have easier solutions. Now, in the last few days, we have seen an effort to solve these problems.

We think this situation makes it pretty attractive to a foreign investor and therefore in the absence of a roll back, we are likely to see inflows on a continuing basis. Now my own view is whether the market breaks out of a range or not is going to be determined by how crude oil prices play out. So if crude oil prices match the market upmove then at some stage it is difficult to break out of that range which we have seen post 2009. But if crude oil prices correct due to some reasons then a combination of flows would actually make it more attractive for the Indian market and then the market could break out of the range. Basically whether the market breaks out of range or not is going to be determined by the crude oil prices.

WF: So therefore would you counsel advisors to continue to be neutral weight on equity and ensure that they are neutral rather than going overweight at this stage?

Naren: Yes, but the problem is that most investors who advisors counsel are not neutral but underweight. If someone has over invested in equity, I would not recommend him/her to invest into this rally but unfortunately number of people who have invested heavily in equity is very few and the number of people who are under invested is huge. This is quite a challenge, I cannot recommend going overweight on equity but at the same time people are quite underweight in equity especially if you include real estate and gold holdings.

But what is more interesting in the market is that we need to be aware that we have had a rally in FMCG, Pharma, some banks and a few tech companies in the last two years. In the rally which happens now we may see a fair amount of underperformance of these companies and companies which have been at low levels for the last two years are likely to do better even if their fundamentals don't appear to be improving to the same extent because the valuation dispersion was quite significant.

WF: One of the things that you have been very passionate votary of is the concept of value investing and your Discovery Fund is an eloquent testimony of the whole concept of value investing. Today is value a relevant theme in the Indian market - when many fund managers are preferring to stick to the more expensive defensives to be better aligned with the market? To what extent is value investing relevant in today's market?

Naren: Value investing is absolutely relevant. Even today if you see, value investing does not mean investing in specific sectors like FMCG, Pharma or quality bank stocks but looking at some sources of value. Value investing is a long term tool which is quite attractive. Value investing didn't work only on two occasions - which were both extreme conditions - in 2000 and 2007. But, over a market cycle, it has always performed. Today, when we have large valuation gaps in the market, value investing is very well positioned.

WF: Which are the some of the sectors where you see it playing out right now?

Naren: We can see it in telecom, metals, some select infrastructure companies, textiles and some manufacturing companies. We are not including necessarily the high leveraged companies because the experience of value investing in highly leveraged companies has not been good enough.

WF: Is going contrarian worthwhile today? Would oil marketing companies constitute contra in your view?

Naren: Oil marketing companies are regulated so it is very difficult to call it a contra investment option. So in my view they are not as straight forward as many of the other companies.

WF: So what would be good contra bets in your view now?

Naren: I think the best contra bet at this point of time is telecom. In telecom even the market leader is in trouble. In our opinion when you have the leader in trouble it is normally a good sector to buy in. Across the sector, when the leader is in trouble and when you have all the companies in trouble, it is a very interesting contra buy.

WF: That's because you foresee that some form of consolidation is inevitable?

Naren: Yes, because no industry can afford to survive if the leader and all companies are in trouble. You go a year back and can see that it played out in aviation. A year back, the leader and all the other companies in aviation were in trouble. If you had bought some stocks in aviation at that point of time, you would have made money. If you go about four months back the entire refining sector was in trouble and if you had bought the leader then you would have made money. At that point of time people did not know that refining margins would go up. The key point is that if you buy cheap and you buy an industry or company which cannot go bankrupt, it is a comfortable investment. When you see risk which is a function of valuation and valuation is cheap, you are value investing and it always gives very good returns in the long run. This has been proved right in a growth market like India over the last eight years.

WF: There are also some skeptics who say that value investing in India will always get you slaughtered and therefore one should stick to growth, because India is a growth market. How do you react to that?

Naren: One should just look at the eight years returns of value investing. In these eight years there have been different phases - extreme growth; phases when growth has fallen off and then taken off and again fallen. The skeptics are there but they have been proved wrong. In fact in my opinion in a country like India that people perceive as a growth market, value funds are very less as they do not constitute even 10% of the market. Therefore value investors tend to be in an extremely attractive position as the quantum of money in value is very low.

WF: And if you were to look at value investing and contra themes, would you say that the ICICI Prudential Discovery Fund is perhaps the right vehicle for an investor?

Naren: Yes, of course and even though SEBI asks us to indicate that past performance is not an indicator of future, value investing theoretically has proved to be a great investing model globally for over 70-80 years, since Benjamin Graham discovered it.

WF: Is it equally applicable to the so called growth markets like India?

Naren: If you see value investing experiences all across the world, there were two phases when it failed - in 1999-2000 and in 2007. Apart from these, it has been a big success. We will have a very cautious investment process for a highly leveraged company and we will not be skewed towards particular sectors and have one sector to be a predominant part of the fund. This is done mainly to manage risks as per the lessons learnt in 2008 globally.

WF: Value investing it appears makes sense especially at a time when opinions are still divided whether we are actually going to get that break out or not - I suppose it is prudent to stick to the comfort of buying value.

Naren: Exactly.

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