It has been 14 years since Anoop Bhaskar starting managing a public fund. Over the years, he has had several hits and some misses. But he has taken everything in his stride and picked up valuable lessons from his mistakes. For instance, Bhaskar is now focusing on emerging themes within the financial space as he doesn’t want to repeat the mistake of missing out on housing finance companies when they were being discovered by the market. He has taken bets on small finance banks, newly-listed banks, insurance companies and expects asset management companies to also do well. Over the past 10 years, Bhaskar has been among the top fund managers in the country. He has built an enviable track record by finding opportunities in sectors and stocks that others have overlooked. Over his long journey as a fund manager, the market has seen several changes and Bhaskar has been equally nimble, which has helped his fund consistently outperform. Currently managing assets worth Rs.9,960 crore at IDFC AMC, Bhaskar shares the secret sauce behind his consistent track record.
Over the last 10 years, how has your investing style evolved?
The stock market is cyclical in nature. You can’t stick to one style and continue to do well. Over the years, I have realised that it is important to understand which segment of the market — large-cap, mid-cap or small-cap — is going to give you higher return. For example in 2007, when I was with UTI Equity Fund, we decided that 70-90% of the fund should be invested in large-caps and the balance in mid-and small-cap. In 2012, we had 91% allocation to large-caps and less than 9% in small-caps. This was the reason we were able to do well. We had exited most of the small-caps we had. I am trying to devise a checklist where we can take investment decisions without meeting management. For instance, if a decent-sized business, not a micro-cap, was available at 1x its retained earnings and had a consistent track-record of paying dividends with decent topline, which doesn’t make it a dark horse but a relevant player in its sector, why wouldn’t you buy it?
What were the most unyielding times for you and what were your key learnings?
I try not to remember such things. In 2003, I was able to spot opportunities in the sugar sector and made money investing in Balrampur Chini and Bajaj Hindusthan, but by 2009-2010 I didn’t want to invest in the sugar sector and therefore I missed the rally in 2015 and 2016. I had lost a lot of money in Shree Renuka Sugars in 2010 and then I decided to stay away from the sector. The experience taught me a thing or two about the commodities space. The right time to buy a commodity-based company is when it repels you the most.
How long do you stay the course with an under-performing company before deciding to exit?
If you have bought something based on a hypothesis which you feel will get validated in the quarterly results, then probably two quarters is a fair enough time for you to corroborate whether your hypothesis is right or wrong. If the quarterly numbers don’t support the thesis, then we usually speak with the management to find out why is the company not able to deliver, before taking the final call on our investments.
Can you recall an investment that hurt your performance but you held on due to your conviction?
In 2010 when I was in UTI, Hero and Honda had parted ways and the stock had corrected to Rs.1,600. We bought it at that level and the stock further corrected to Rs.1,400. For a good time, it remained at that level and as a result for two years we under-performed our peers as most people were bullish on Bajaj. We didn’t add to our position but we held on to the stock which later moved to Rs.3,000by the end of 2014.
The market has run-up quite a bit, how does a fund manager still generate alpha?
By being cognisant about which segment of the market is likely to do well. Between 2009 and 2013, the large-caps did better than mid- and small-caps. Post September 2013, the mid- and small-caps have done better than large-caps. Since 2013, about 50% of small-cap stocks have delivered 3x return. You don’t need that much skill in picking up small-caps and the alpha there is also much higher. Meanwhile, in large-caps it has been difficult to generate alpha as just 5-10 stocks out of 100 large-caps would have delivered great return in the recent past. Over the past 18 months, we have also shifted our focus towards mid-sized companies and even within large-caps we are not focusing on mega-caps, but on the next tier of large-caps.
How do you deal with management risks in small-caps?
Within small-caps you cannot rule out that risk. Therefore, one cannot take to heart if something goes wrong in your small-cap investments. However, you can do thorough homework before making investments. Understand the sector in which the business is operating. You can check with the company’s peers for their feedback on the company. You can talk to their vendors. Generally, we prefer companies which have a market cap of at least Rs.1,000-crore, as such companies would have seen at least one or two business cycles. That gives you the comfort that the company has come through some trying times to be where they are today.
While focusing on mid- and small-caps in your portfolio, how do you de-risk your portfolio?
Mid-caps are of two varieties. There are those which are leaders in smaller sectors which are not part of the Nifty, like tyres and textiles. They have all the attributes of a leader. Their growth rates are lower than the smaller-sized players, but they make profits which are stable and not volatile. Then you look at challengers in sectors which are part of Nifty. For instance, within banking, names like RBL Bank or City Union Bank will account for the challengers. These companies are large in size and pretty relevant in a certain area or region in which they operate. Both the two varieties will ideally have a low beta because they have reached a certain scale. These companies will have all the attributes of quasi large-caps. Then, there is a third variety of companies which fall in the category of emerging businesses where the growth rate is very high. The management is not well-known and they are making a lot of changes in the business. A company like Minda Industries, which was our big pick last year, would be a good example. The management decided to make the structure more investor friendly and merged a lot of good group companies into Minda Industries to make it a holding company. We spotted the opportunity early and therefore benefited from it. We have also taken a position in Future Retail where the management is trying to make a lot of changes with the aim of improving operating performance. With this strategy, one part of your portfolio could grow at a very fast pace and in some cases you will make mistakes. In the other part, you will have the stability of leaders and challengers which are well-known businesses and if we time our investments with their growth phase, they could also deliver good return.
You are betting on the insurance space across life and general insurance. What makes you bullish?
In the financial sector, our observation is that segments which are lesser known have given the highest return in the first two years after getting listed. The fact that these are fairly large-sized businesses is also a source of comfort. Financialisation of savings should benefit this sector. Just like how housing finance did well in 2016 and 2017, we believe that insurance could do well in 2018 and 2019.
How does one assess valuation in a newly-listed space such as insurance?
We are still grappling with that issue. For now, we are playing on the top-line growth rather than being fixated on valuation. As long as top-line grows at a fairly healthy clip compared with the previous three years, these stocks will do well over time. As our understanding of the sector evolves, we would be able to come up with a much more sophisticated way of valuing it. Right now, probably we are paying excess.
Within the financial space, AMCs are also expected to come out with their own IPOs. What is your view on this space?
It is a good business. It is one of the few businesses that loves inflation. The flows are sticky. As more savings make their way into mainstream financial assets, the size of asset management business will grow dramatically over the next few years. Even the not so great companies will probably double or triple their AUMs in five to seven years. It is a high cash flow generating business. After a certain level, expenses don’t go up and so the margins are also quite high.
Principally, how do you decide which IPO is worth subscribing to?
Ideally, I would like to avoid any IPO where there is an exit of private equity. Given that they are also financial investors, they would probably be exiting at valuations which would leave very little on the table. Our first preference is for companies where there is no PE investment, which restricts our universe to a few. We tend to avoid companies where PE investors have got majority stake and continue to own majority stake after the IPO. If PE investors hold sizeable stake post-IPO, we do not know how things will play out as there will be constant pressure of paper from them which could limit your return. If you invest in a company where the PE investor still owns 45-50% of equity, who will they sell it to? Can a company with a Rs.3,000-Rs.4,000 crore market cap and high float really absorb that kind of supply? Dr Lal Pathlabs is a example where there has been a fairly good supply of paper.
What are the sectors that you would prefer to stay away from?
Telecom is one sector we are still trying to grapple with. Except for two to three years when they delivered double-digit RoCE, it is a sub-par business. The government has taken away all the juice. If government starts to price iron ore and coal, the way they have priced spectrum, no steel company would be able to survive. Apart from this there are certain industrial groups and companies that we would try and avoid.
What is your outlook for the next year?
The stage is set for the economy to revive. The basis of this optimism stems from low-base effect, formalisation of the economy due to GST and stable rural growth. If affordable housing picks up, along with infrastructure spending; these could be key drivers for employment generation. We expect BSE-200 earnings to increase by 12%-14% for FY19, setting the stage for a much stronger growth in FY20. This would be primarily driven by NPA resolution, which should lead to lower provisioning from second half of FY19 along with a low-teen growth in credit cycle. Infrastructure, consumer discretionary and auto ancillaries are the sectors which should report a strong turnaround in earnings growth.