One shouldn’t get carried away with smallcaps; I did so in 2018 and paid a heavy price: Porinju Veliyath

“One has to be watchful wherever there are any dramatic changes happening, a paradigm shift is happening in the vision and the behaviour of the promoters’ management. All these things are valuable only if the business is valuable, futuristic and future relevant. Otherwise, there is no point in attempting to identify those promoter qualities. The turnaround in management quality will continue to play as a theme. I played it a bit early in 2016-2017 and I had to pay a price,” says Porinju Veliyath, Founder, Equity Intelligence

Where do you see a combination of a disconnect in terms of valuation versus growth or disconnect in terms of management and business perception versus the underlying strength of the business?
The valuation and growth people always balance it and it is based on the growth but in the last two years, when we had this move from the bottom of the 2020 pandemic, valuations for many companies went crazy. They have been wrong and it may take three, four, five years for some of them to reach that valuation again.

These are wonderful companies, they are growing very big, but for everything there is a price. Every fund manager has an individual strategy. These are all very unique strategies but in good and bad times, getting carried away with valuations is one issue and getting carried away with the smallcaps is another issue.

In 2018, I got carried away and I have paid a heavy price for that and the investors who invested with us in 2017 at the peak of that small-midcap strategy are yet to recover fully. So people may make mistakes on the valuations and growth front. It is a very tricky thing that is why equity is such a most dynamic investment avenue, there is no certainty, there are risks and there is reward.

I would say when you are considering exploring equities and understanding businesses and you invest for a longer term with a reasonably diversified portfolio, somebody clearing it see in that aspect for long term investors equity is not risky. I had some highly concentrated bets in not so proven companies and that is why 2018 happened. We have made very significant changes in our investment philosophy but the basic investing philosophy does not change. I am talking about some little repairing here and there and that has really helped us later. Now we have full confidence and are moving ahead very well.

So good to hear that. We have seen a massive rerating in the value end of the market in banks, defence and railway stocks because of rising interest rates and growth stocks getting rerated from a market standpoint. Is that over or do you still feel that there is money to be made in buying small, PSU banks, PSU stocks, railway stocks?
These all are a bit cyclical in my understanding. PSU banks moved some 70% this year. That does not mean that you should go out and buy PSU banks next year. They may be looking very underpriced looking at the past price movement of the last 10-20 years and some of them are still quoting below 10 years-15 years ago valuation or price. So this 70% one year movement should not excite anybody. I am not saying they are bad or good, but this happens across sectors.

Coming to the railway stocks, I burnt my fingers a few years ago looking at Titagarh Wagon and all those kinds of stocks. We are holding Bharat Earth Movers Ltd (BEML) which could see disinvestment. There could be pockets of opportunities in cyclicalities and structural changes and growth stocks. Similarly risk is also there.

Exactly a year ago, the management perception for some of the fintech and the consumer tech stocks was very different. They were considered as entrepreneurs who understood growth and the model of new India; they were called as great incubators with good ideas which will drive the next phase of India’s economic growth. But now the management perception and the market positioning for some of these stocks has changed. Markets are raising concerns about their models, cash burn etc. Is it a good time to buy into some of these stocks?
The biggest challenge in the past has been this management perception. It is true that investors’ fear about promoters or the management action and whether they will accommodate the minority shareholders in creating and sharing the wealth was really serious. But that is significantly changing.

It would be difficult for crooked promoters and management to survive and because the system is so transparent, the regulator is aware about everything and doing the right actions and creating regulations. So the whole landscape is changing for the promoters and management to use the listed companies for creating wealth of their own by cheating and looting investors.

There are still many small and midcap companies which have this issue. We have only a few large bluechip companies. Sometimes there are bad promoters in largecap companies also. We have come across mismanaged companies indulging in various unethical practices without taking care of the minority shareholders. I think in 2023, investors should not ignore the old economy companies just because the promoters may have a history of not managing the company ethically and honestly.

One has to be watchful wherever there is any dramatic changes happening, a paradigm shift is happening in the vision and the behaviour of the promoters’ management, provided all these things are valuable only if the business is valuable, futuristic and future relevant. Otherwise, there is no point in attempting to identify those promoter qualities. So the turnaround in management quality is one theme which will continue to play. I played it a bit early in 2016-2017 and I had to pay a price.