“In Japan,” says Nobutaka Kitajima, “because the economic growth and interest rate are low, investors are attracted to companies that pay good dividends. Here in India, little emphasis is put on dividends.” While investing money in India as the chief investment officer (equity) of LIC Nomura Mutual Fund, he spends some time examining the management track record. He looks to understand their vision and motivation as well as how well they execute their plans. In an interview with DNA, he talked about other factors that make up his investment approach, his expectations from the government policy and discussed why it is that he likes auto companies. Edited excerpts:
LIC Nomura’s India Vision fund states that its objective is to “pick up undervalued stocks in the ‘mid and small cap segment’ that have potential to grow into large cap segment in the identified sectors”. How do you identify stocks that fit into this objective?
As a first step, we look at various metrics such as dividend yield, RoE (Return on Equity) and others in order to narrow down the universe. At the same time, the investment team has discussions periodically for ideas. The aim of these exercises is to yield a reasonable set of stocks for more in-depth research. During the research process, we look at the management track record, and try as much as we can to gather information on them, study industry structure, and the competitiveness of goods or services that they provide, future financing requirement, and so on. In other words, the process as a whole is similar to large cap research. However, more emphasis has to be given on management and corporate governance, and competitiveness study needs to be more local sometimes.
What should individual investors keep in mind while trying to do the same?
At an individual stock level, my advice is to study where the management comes from – what is their motivation, vision, goal in life, the importance of the share price performance of a listed company. Also, do not listen too much on what they say about future, but watch what they actually do. After forming an idea about a company, allow a couple of quarterly results to see whether your initial view is still valid or not.
Having said so, one should recognise the risk. For those who do not have time and skill, investment through a mutual fund scheme is recommended.
Coming to the current market scenario, which are the sectors that you are bullish on, why?
The banking sector is well geared to long-term structural growth and available at a reasonable valuation. One needs to be careful on asset quality in individual stocks. When industry environment is favourable, stocks in the sector tend to be expensive.
The same is true for sectors currently facing a difficult situation. Good strong companies are never cheap. You can buy them cheap when the environment that the industry operates in, is in a bad shape.
Is there a political risk priced into the market, how would it react to early elections?
There is a lot of political risk – the concern on the stability of the current government and the like are priced in. However, early election is not expected and it will be a surprise.
What are some of the policy announcements that you expect before the Budget in February?
Establishment of the National Investment Board, which facilitates the approval of large-scale infrastructure projects, is expected to come. Also, I am watching how successful the government is in divesting stakes in PSUs (public sector undertakings) since the fiscal deficit is a concern.
The funds have a fair amount of exposure to the auto sector, what are the major drivers for the sector? What could play spoilsport?
The engineering capability of Indian companies is quite good, and auto is one way to capitalise on that strength. The demand level has been elevated for the past couple of years, higher than the trend driven by a high wage growth in rural areas. I am expecting some slowdown in sales growth overall due to high interest rates. But the demand remains still strong, and SUV (sport utility vehicle) sales show that there is an opportunity for premiumisation in auto. Risks include fiscal tightening cut and another oil price spike.
How could recent regulatory moves such as the proposal to cap gas marketing margins affect the outlook for firms in the sector?
The change will be negative for some companies in the sector. Prospective regulation is okay, but retrospective re-pricing will be quite negative to investor sentiment not just to this sector but to the overall market.