Sonam Udasi is the fund manager of Tata Value Fund Series 2, a close ended fund which is currently in New Fund Offer (NFO) stage. He also manages Series 1 of Tata Value Fund along with open-ended funds like Tata PE Fund, Tata Banking and Financial Services Fund and Tata India Consumer Fund. He speaks to RupeeIQ about value investing and his outlook on Indian markets.
Indian markets are only beginning to correct after a five-year long rally. Small and Midcaps have corrected the most but arguably they too have a long way to go. Can a Value Fund outperform in such a scenario?
Point to point if you see, the market is just 8% higher than the last 52 week high made four years back. The Value Fund does not look at the market cap. Wherever there is value visible, it will focus on that. In my experience, if you can figure out what’s compounding in any sector, your holdings will become more valuable over a period of time.
Globally all equity markets are near 52-week highs, whether it’s the US or whether its Pakistan. India is at a 52 week high on the Sensex but not mid and small cap stocks. Within the global context, India has been under-performing in the past 1.5 years. Foreigners have been net sellers in the past one year. They don’t want to take a view on the political outcome. They will come back if there are continuity and progress but they have other countries to invest in.
From my perspective, FIIs can do what they want. They have gone in and out over the past 21 years that I’ve tracked this market. I don’t focus on that or on today’s or tomorrow’s trend. I focus on what the P&L, cash flow and balance sheet are going to look like and whether it makes sense for me to buy at the prevailing price. There are 6,000 stocks listed. I can find 30-40 stocks within that universe to create alpha.
What strategies will the fund use to find value stocks?
Relative valuation, PE, PB, EV/EBITDA, turnaround etc are good starting points to find the universe that is looking cheap. But India is a growth market as well. Over the next 3-5 years, what are the categories that are going to grow faster? Take the consumer space. There is almost 100% penetration in soaps and 94-95% in oral care. However, in fridges or ACs, it is only about 10%. Affordability is on the rise. People on the margin are getting richer, per capita income is on the rise. Infrastructure is better available now and the villages are getting electricity. Whichever government comes to power, this market penetration of fridges is going to rise substantially. Whether it rises to 18% or 24% it depends on the government we will get, but the trend is up.
As India becomes wealthier, people will have a wealth effect in their mind and they will have more savings. I will be looking at pockets like asset managers, insurance companies, brokers and wealth managers. Point to point, this is where growth will come. With GST, a lot of logistics companies will do well. Staffing solutions companies are also coming up. If there is a category that’s growing fast, the traditional PE or EV/EBITDA approach may not work.
This fund is starting off at a point when the market is weak or selling off, so it’s a good starting point. Any investor tends to make more alpha or money when he is starting out at a time when no one wants to buy.
How do you distinguish this fund from Tata PE fund which is also, broadly speaking, a value fund? Aren’t investors better off in Tata PE with its established record?
The PE fund looks at only a specific data point – Price to Earnings and decides the universe, based on that logic. This strategy has worked well for it and it has stood the test of time. However, the Value Fund will also look PB, EV/EBITDA etc. Also, any fund in existence has a certain legacy – it has been created over a period of time, across economic cycles. The Value Fund will start with a clean slate, it will have no baggage.
The PE fund is open ended, while the Value Fund has a three-year mandate. The way I will look at it will be slightly different.
If I think a sector looks good over the long term – both funds will participate but names might be different. However, I’m presuming that Value fund will be small in size compared to the PE fund. Hence, there are companies and market caps I can focus on in the Value Fund but not in the PE fund.
What will the market cap bias of this fund? You’ve adopted the S&P BSE 200 as a benchmark. Does this indicate a large-cap tilt?
I always have 50% large cap in any fund I manage, whichever economic cycle we are in. I prefer, to have 50% large cap simply because it gives me flexibility. It allows me to accept my mistakes and restructure my portfolio quickly. If I have 100% tilt towards large cap, the risk is that I underperform. If I do 100% midcap, I might still underperform given situations like the current market. A healthy blend of market caps will tend to do ok.
In this market, I don’t have to go very low in the quality spectrum to create a portfolio because the market is cheaper than where it was 6 months ago. I can very well buy a good quality portfolio and create alpha without compromising on the quality. This is important to me as a fund manager because I can sleep well at night.
The fund has a tenure of roughly three years. Is three years too short a time period for value investing to show results?
This can be the case if there are extreme environments. Therefore, we have given the option to investors to switch to the PE fund after three years. Also, people who have come to the fund want me to figure out how to create relatively better returns over the next three years. They have given me a specific mandate.
What sectors are you particularly optimistic about?
Consumer durables, financials, GST related beneficiaries like logistics, and companies that will do well from the unorganised to organised sector transition. Govt companies (other than PSU banks) like infra or defence companies are facing pressure simply because it’s an election year. I will also look at them.