In an interaction with Surjitt Singh Arora, Portfolio Manager, PGIM India Portfolio Management Services

Given the uncertain environment and slowdown in global growth, CY22 could be a challenging year for the markets; opines Surjitt Singh Arora, Portfolio Manager, PGIM India Portfolio Management Services

What is your outlook on the Indian equity markets in the short to medium term? In your view, what are the pertinent risks facing equity markets in H2FY23?   

India has outperformed its peers and over the medium term, we may expect healthy growth and a similar trend to continue. From a three to five-year perspective, we remained constructive on Indian equities, given the fact that the Indian economy would be one of the fastest-growing economies in the world. India’s outperformance is not an aberration, it is well warranted. Given the uncertain environment and slowdown in global growth, CY22 could be a challenging year for the markets. Higher interest rates, both globally as well as in India, could pose a risk to the equity valuation premium enjoyed by the Indian market. Also, within India, food inflation seems to be quite sticky, given the erratic monsoons across the key states. 

With high volatility prevailing in Indian capital markets, what is the current scenario of the portfolio management services (PMS) space? Also, what are the key factors driving the investors towards PMS?   

Given the high volatility prevailing in Indian capital markets, PMS portfolio managers are staggering their investments. A few factors in favour that are driving investors towards PMS are: 

1. Concentrated portfolios – A PMS portfolio, on average, comprises approximately 20 stocks 
2. No institutional imperatives of following the benchmark, it’s predominantly a bottoms-up approach 
3. Lower overlaps with benchmark 
4. Customised and tailor-made portfolios 
5. Relatively easy access to portfolio managers; 

What changes have you made in your equity funds in view of the rising interest rates and high volatility over the last few months? Also, are you currently more skewed towards growth or value stocks?   

If you see our portfolios, the majority of our investment companies are either debt-free or have very low net debt: Equity. We prefer companies that are inward-oriented i.e. mainly domestic demand driven as against those who are predominantly dependent on exports, given the current global environment. At the same time, domestic data is quite encouraging whether it is credit growth, personal loan growth, GST collections, auto sales, and IIP data. In that context, a few sectors where we are positive, given the strong domestic demand are industrials (Capex-oriented sectors), banks, autos, retail, and residential real estate (exposure through the building materials segment). 

We follow the philosophy of growth at a reasonable price (GARP), which is a simple yet effective principle of investing that has been time-tested for many years. While investing in equities is for growth, the price that one pays for growth is equally important. GARP philosophy balances these two tenets of investing; hence, it is an excellent long-term philosophy. Historically, we have seen the markets swing between extremes of optimism and pessimism wherein, we have witnessed approaches like growth at any price or focussing excessively on price-to-book value. GARP thus helps avoid extreme overpricing as well as avoiding value traps.  

Which three major emerging investment trends do you expect to dominate over the next decade?   

The three major emerging investment trends are: 

• Manufacturing (Make in India) - India’s long-awaited Capex cycle finally seems to be gathering momentum after a hiatus of 10 years. While there were false starts in the last decade, we believe that the recent post-COVID pick-up seems sustainable and drivers are in place for multi-year growth. Multiple engines of growth starting to fire together, which would lend stability and visibility to capital outlay in the economy over FY22-26. While to an extent, the government Capex growth would remain a function of tax collections (FY23 expected to be strong), we believe that the private sector Capex is on the cusp of pick-up, aided by a confluence of multiple enablers such as deleveraged corporate balance sheets and healthy profitability, a well-capitalised banking system with NPA cycle over, rising domestic demand as well as mid-cycle capacity utilisation, and interest rates. Private sector Capex has lagged government Capex during FY20-22 but it will now outpace public spending due to increasing Capex across multiple sectors (cement, metals, power, autos, chemicals, and PLI-led Capex).   
• Electric vehicles – Given the investments by auto OEMs as well as start-ups along with incentives by the central and state government electric vehicle as a segment is likely to see good traction over the long term.   
• China+ 1 benefiting chemicals sector - Strong demand for fluorine molecules in pharmaceuticals, agrochemicals, and new high-growth applications, creating around USD 8 billion global demand over FY22-27E; opportunity in contract research & manufacturing services (CRAMS) generating about USD 58 billion demand globally over FY22-27E.   

PGIM India Core Equity Portfolio recently completed nine years with a 15.77 per cent compounded annual return since inception. Can you shed some light on the fund’s investment style that has consistently outperformed the broader markets?   

We invest in structurally-strong companies that are termed as good quality companies. A good quality company is an entity that reached a minimum scale in terms of revenue and has been through at least one downcycle before emerging as a stronger company. It must have consistency in cash flows and a higher return on capital employed over the last ten years. The second aspect has been to always own companies, which are market leaders in a particular domain. We have over a period of time seen that market leaders generally tend to come back stronger with higher market share after the downturn as weaker players usually vanishes in the downturn. While a good track record (quality) of a company is a necessary condition, it is not sufficient to be included in the portfolio. We seek to satisfy ourselves with the following:   

(a) The ability of the company to grow its sales and profits over the next 3-5 years. 

(b) The ability of the company to do this without consistently resorting to additional external funding. 

(c) The track record of the management in capital allocation and in treating minority shareholders fairly.   

Some of the core-equity portfolio attributes are as follows: 

• We focus on owning companies that are market leaders in a particular domain. 
• Concentrated portfolio of 20-25 stocks with a multi-cap approach. 
• Low overlap with benchmark.   

We follow the GARP philosophy. GARP-centric portfolios in the long term should offer superior risk-adjusted returns through their very nature of not overpaying for growth and at the same time, participating in the growth of the investee companies. By combining the best attributes of both value and growth investing, the GARP philosophy should yield superior long-term returns. As part of the investment process, we have filters for including a stock in the investment universe (high RoCE, low leverage, positive operating cashflows, and better governance), etc. We believe that many of these measures would help us avoid big mistakes thereby, contributing to performance.