PMS AIF WORLD Engagement with Mr. Rahul Rathi, Chairman and Fund Manager, Purnartha Investment Advisors
Believing in the principle of “vasudeva kutumbakam” that means what is good for me and my family is good for my clients and with own discovery of deploying family savings with the horizon of 20 years, Rahul, started his journey. Being a mathematician, he always had this basic understanding that 26% CAGR for 10 years makes a portfolio 10 x, but in 20 years makes it 100 x. So, the idea was to build an investment philosophy that works to generate such high returns, in long term. With this in mind, such companies were studied that had delivered 100 times in 20 years and 1000 times in 32-33 years. After an extensive research, three parameter were identified which were common to all such companies.
1) 10% Y-o-Y volume growth. This demonstrated rising demand for companies products and services over years.
2) Debt free balance-sheet. This demonstrated the product pricing power.
3) 20% operating cash flow growth. This is the outcome of consistent rise in demand and pricing power.
Answers to common questions :
Broad based Rally – At present, markets are at all-time highs, it’s based on a few concentrated stocks. And, going forward, stock market is going to be driven by corporate earning numbers, and so concentrated stock specific movements should continue. We need to wait for the broad based rally.
Mid Cap Vs Large Cap – One needs to wait and gradually enter in Mid-Caps as under-valued could become deeply under-valued if numbers do not support. Because of lack of funding for the smaller guys, and because of lack of bankers’ confidence to be able to fund grey areas, large caps may continue to keep getting more flows over mid-caps and small caps. So, if ones divides the listed universe in 3 parts of high growth companies, low growth companies, and hope based companies, in next few months, data driven companies, especially the ones that will continue to show expansion of EBIDTA margin should continue to do well as it has been in last 1 year. Secondly, in next 100 days, markets will decide its course basis the announcement of key people in the new govt and the policies. Markets will closely watch and differentiate between economic and non-economic measures. Thirdly, extremely imp is to see what steps RBI takes to instill confidence in the banking sector. All these aspects are important for mid-cap and small cap companies to become attractive.
Valuations – Expectation on valuation depend upon whether there will be global cuts on interest rates or not. This will further depend upon what happens between US and China. If RBI further cuts rates in the favor of growth, we can see re-rating of some of the businesses and will help markets. This is expected. But, along with this global factors also matter.
NBFC Sector – In India, it is not only about lending but more about the ability to collect amount. This is what differentiates the big boys from the small ones. Any good NBFC which has the capability to collect money will be able to sustain.
Infrastructure and Construction Sector – The government’s strategy in its first 100 days will lead the course of markets and this sector. The expectation set by PM Modi in his speech and the focus of first 100 days will define the momentum. Personally, Purnartha invests only in debt free companies. Infrastructure sector companies have lot of debt, hence won’t be able to comment much on the specifics.
Consumer Discretionary Sector – Valuations are not expected to taper. Every year, India adds around 4 cr consumers to the economy. As per capita income increases, some get educated and come into the job market. These consumers will create demand in the economy sooner or later. You can expect good benefits and continue to hold good names in this sector despite higher valuations.
Auto Sector – Auto sector is going to suffer the crisis in banking sector. 80% of the vehicles are bought on debt. The fact that NBFCs are not lending because of given challenges reflects the problem with Auto sector. Today, no NBFC is willing to take a business risk which they used to take. Currently, the auto sales growth will be muted. Only when the confidence in lending will be back, then you will see revival in Auto sector.
Risks like US-CHINA trade war or Crude Oil – India is actually in a sweet spot with regards to these risks. Real risks are increasing prices for countries and some consumer products becoming expensive. Everybody’s confidence will be shaken and they will become more conservative. The reason we should benefit is because we are the only consumer related economy that continues to add consumers. Global growth will slowdown. And with companies which are levered up will be forced to enter India at terms and conditions favorable to India. Upon being asked , whether one should wait to Enter in Equity Markets right away or wait for some more time?
Wait or One Can Invest Right Away– Market timing really is an emotional aspect and one should believe that Time in the Market is more important than Timing the Market. Investment decisions should be driven by rationality and not emotions.
Mr. Rahul Rathi’s Words : – I would personally wait for a week or so to find out about this govt’s focus. Euphoria will shed and realities will come out and there could be certain bargains available then. But also, if I find something attractive today, I will enter right away.
Remember two more principles :
1 – Investing in stock market is not just applying of a logic as stated above, but also managing emotions of greed and fear.
2 – Besides objective analysis of financials across what is also important is visionary management and solid execution team in the company