ETMarkets Fund Manager Talk: This Marwari money manager like these 5 sectors; explains why he is sitting on 8% cash

“I come from a Marwari business family and grew up hearing about the stock market since the early 90’s. My early exposure was more of tracking daily price movements and short-term trading in the markets,” says Pawan Bharaddia, Co-founder, Equitree Capital.

In an interview with ETMarkets, Bharaddia with over 20 years of successful investing experience across private and public markets, said: “Currently, we are sitting on close to 8% in cash,” Edited excerpts:

Markets are about to make history probably before we hit the new year. How has your fund grown as markets probably touch October 2021 highs?
The markets seem to have found their mojo back on the return of FII inflows with the Nifty within striking distance of its all-time high.

However, this has not dissipated to the broader base of the market as can be seen from the -14.4% YTD return of the Nifty Small Cap 100.

Our fund is completely focused on investing in small and micro caps with a private equity approach and given the sentiments in that genre we have done reasonably well with our portfolio still delivering 6% YTD return – outperforming the benchmark index by almost 20%.

Has the fund AUM grown in 2022?
Over the last year our AUM has grown by ~ 75%

What has been your portfolio strategy amid the volatility seen in the past 1 year?
Staggered investing and booking profits in overvalued stocks has been the cornerstone of our investing in the past 1 year.

We generally invest in companies with 3-5 years horizon, however, being deep value investors at the heart we have been booking profits in some of our ideas where the valuations were getting rich and have reinvested the same into other deep value opportunities.

Likewise, while one cannot time the market to perfection, we strive to build our portfolio in a staggered manner which allows us to take advantage of undue short-term corrections in our portfolio companies caused by market volatility.

Fortunately, most of our portfolio companies have been beneficiaries of the macro environment, whether it is the defence spending, the infrastructure demand, the export and china+1 opportunity or the surge in private capex which has also helped in sailing through this volatile period.

Which sectors are you currently bullish on?
We are currently bullish on:

1. The Auto-Ancillary Space – After a stellar festive season, we believe auto-ancillaries should continue to do well as the CV / PV cycle returns.

2. Defence – India has set a target turnover of INR 1.75 lac cr in defence manufacturing. The ‘Make In India’ boost and the large budget of INR 4 lac cr should benefit this sector.

3. Infrastructure – The government push to this segment should see it perform well. The Government has allocated INR 7.5 lac cr in capital expenditure for FY22-23,

4. Engineering and Manufacturing – The private capex cycle is picking up in a big way and initiatives like PLI and PM Gati shakti should boost manufacturing in India.

5. Agriculture & allied activities – we particularly like businesses which lead to improvement in agri productivity.

As SIP cross Rs 13000 cr per month – what does it tell you about the retail investor behaviour? Can we say that they have come of age?
The consistency of the SIP nos over the last year or so amidst the volatile market clearly suggests that there seem to be structural shift in the retail investor behaviour.

We believe that as the Generation Z / Millennials take over from the Baby Boomers / Generation X, there is a new found interest in equity as an asset class – which is reflected in the allocation to equity going up from below 2% to about 5% now.

This new generation seem to be better informed and willing to look beyond the traditional asset classes and we believe what we have seen till now may just be tip of the iceberg.

What is your take on the new-age tech companies? Are you comfortable adding them to the portfolio?
We generally like companies with strong/predictable cash flows, reasonable valuations, and sustainable profits. On the contrary most of the new age, new-age tech companies continue to be cash guzzlers for building up the business.

While I am sure that some of these new-age businesses will change the manner in which business is conducted itself, however, from managing third party funds perspective we find it extremely challenging to commit funds to these cash guzzling businesses.

How does your fund manage risk?
Being a focused small and micro-cap investor – a genre which is considered very volatile, risk mitigation is even more critical to us.

Risk management to us is in both soft and hard aspects – in softer terms, we strictly stick to investing in businesses which we can understand well enough and can use our network for reasonable due diligence on the business and management.

On the harder aspect, we of course fall back on the normal practices of setting disciplined limits on exposure limits etc., following staggered investing to benefit from volatilities instead of being trapped by them.

As they say, proof of the pudding is in the eating – over the last 10 years Equitree has invested in 32 companies with a median holding period of ~4.5x years and a staggering 75% of these stocks have generated a positive return, with a median CAGR return of ~ 37%.

We believe getting our investment calls right 75% of the time is itself a great barometer of our risk management.

If someone plans to put in say Rs 10 lakh now do they follow a staggered approach or a lump sum approach as markets are on verge of hitting highs?
We have always been a big proponent of staggered investing, more so given the volatile environment affecting makets world over.

The Nifty is trading around 19x one-year forward earnings and given the soft Q2 numbers due to margin pressure, we believe that the upside in the Nifty will be challenged.

Likewise, despite the correction in the broader base of the market which makes them look very attractive, short-term volatility may continue to show erratic behaviour in the prices.

While one can never time the market to perfection, however, given such circumstances we believe that staggered investing would give some room to buy on dips instead of putting a lump sum amount upfront.

What is the kind of cash level you are sitting on – to be deployed on dips?
Currently, we are sitting on close to 8% in cash. We think that the recent correction in the small-cap space has given a fantastic opportunity to build upon good businesses from a long-term perspective.

As the impact of cooling commodity prices sets in and we see a resolution of geopolitical issues, a lot of these businesses could surprise with high double-digit growth.

The low base formed of FY23 will only help in amplifying this growth. Our sense is that investors may see a significant front-ended wealth creation by investing in these businesses now.

A little about yourself and how you started your equity journey?
I come from a Marwari business family and grew up hearing about the stock market since the early 90’s. My early exposure was more of tracking daily price movements and short-term trading in the markets.

As luck would have it, got an opportunity to work with Morgan Stanley in early part of my career where I realized there was much more to investing than just the daily momentum.

After a brief stint with Morgan Stanley and ABN Amro Bank, I was once again lucky enough to get an opportunity to do Private Equity investing.

Starting my private equity career in the early 2000s when it was still in its nascent stage gave me phenomenal exposure to understanding of diverse businesses and investing alike.

This class and style of investing is what led me to set up Equitree Capital with a very dear friend of mine in 2012 as a prop investing desk where we experimented with our private equity approach to investing in listed small and micro cap companies – a genre which was not really focused too much on by professional investors.

Having established our systems and processes and after creating a successful track record of building, nurturing and exiting our portfolios twice over with CAGR returns in excess of 37%, we have now started meaningfully accepting third-party funds as a SEBI registered portfolio manager over the last couple of years and are looking to scale up our genre of investing.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)