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    You get a multibagger for your ability to hold a stock, than identify it: Vetri Subramaniam, UTI AMC

    Synopsis

    What the economy has seen over the last one year has been an inventory-led correction in GDP growth. This tends to have a self-healing mechanism in that once the inventory correction gets over, you start to see numbers improve again, says the market veteran.

    Vetri Subramaniam-1200
    We are getting a mixed view on the market and what the Budget means for earnings. There is one section of HNIs, who is disgruntled that FIIs do not have to pay tax but they will have to pay it. There are veteran fund managers like you, who say look we cannot look at the dividend distribution tax from the eye of an HNI. We have to look at what markets value them as. There is a scope for companies to give more dividend and that means PE multiples will get re-rated. So what is the right way to look at this?
    To be fair, I think the complaint is there all around the world, that there is double taxation of dividends because they are taxed in the hands of the recipient. But like it or not, except for one or two geographies, most countries around the world -- including many in the developed world -- do charge the tax in the hands of recipients. As far as India is concerned, remember DDT was introduced many years ago, when they felt even from an administrative point of view that this was an easier thing to do. People may not have been reporting the dividends received and were not paying taxes on them. That is no longer valid today, when everybody has their holdings through demat accounts. It is linked to a PAN number and all the money is transferred digitally. Therefore, it will be hard for anybody to hide that income away. In a way this is a desirable step.

    Also, I would like to point out that increasingly markets get more and more institutionalised and there is public money coming into the equity market, through for example the mutual fund route or for that matter through pension funds, which are non-tax-paying entities. When companies used to pay dividend, the effect of DDT was that our investors and our structure -- which was effectively a non-tax paying structure -- was having the impact of the dividend tax. Now it flows into our hands free of tax. If investors stay invested in the growth option, they do not really incur any tax liability on account of dividends. As markets get institutionalised, the fact that there is public money coming into the market through routes like mutual funds and pension funds, this method of taxation in the hands of the recipients would become very-very desirable.

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    How should one look at coronavirus? Is it something that will have global repercussions? Do you think markets are justified in the way they have reacted, the way how metal prices, Chinese stocks, copper prices, everything has collapsed?
    Whether it is justified or not, markets will do what they want to do, which is first price in the disruption. There are two ways of looking at it: One is that most stocks in the market are trading not just on this year’s earnings, but on the cash flow to be generated over 10-20 years, and maybe the coronavirus does not play a role in that.

    But the fact remains that when we began this year, there were hopes that the global economy would look up, the China-US trade war was behind us and things were starting to look better for the global economy at the margin. What coronavirus has effectively done is put a dent on those hopes. We do not yet have clear visibility. Hopefully just like SARS or like MERS, we will eventually find a solution or cure and things will come back to normal.

    But right now it is inescapable for the markets to price in that disruption. Remember, this is the world’s second largest economy. Recent data suggests fuel demand was down 20% year on year last week, which tells you the extent to which the economy had to go in a complete lockdown quarantine mode. This is a country which is deeply attached to supply chains globally. So there is going to be disruption and markets will take that negatively. That is pretty much what you are seeing. Also, this is not the kind of thing that central bank policies can address. There are many things, including a trade war, where you can ask your central bank to keep the liquidity pump open. But opening liquidity pump in the case of a virus does not really help.

    So what are the green shoots and where are the yellow weeds? Where do you see an opportunity and where do you think we will waste our time trying to invest in that theme or company?
    When you talk about green shoots, one of the things which is very evident is the complete collapse of credit in last 18 months. Clearly, the sense one gets from talking to a lot of companies across sectors, including of course the auto companies, is that there has been a massive rundown of inventories across the board. So, from here on you will start seeing numbers that would look a lot more normalised. What we have seen over the last one year has been an inventory-led correction. It has been an inventory-led correction in GDP growth as well. Therefore that tends to have its own self-healing mechanism in that once the inventory correction gets over, you start to see numbers improve again.

    I do think you will see a gradual improvement, but it is not going to be a dramatic U-shape recovery or a V-shape recovery. I have typically tended to be more fiscally prudent and fiscal hawk, if you will, but I do think this was the one point in time where perhaps the government could not only have looked at the FRBM, but really taken a call to provide some demand side stimulus and use the fiscal deficit in a counter-cyclical manner. Obviously, that comes with the risk, like in 2010, when we kept the fiscal pump open for too long. It was a risk worth taking, but the government in all its wisdom and perhaps prudently -- some would argue -- chose not to do that. This delays the growth recovery a little bit.

    Would you look at increasing exposure to consumer names? A substantial part of your portfolio is already there, against say materials or technology at this point.
    I hate to disappoint you on this. I have been in this profession for 25 years and it has been a very long time when we used to react to the Budget in terms of having to take a view on companies.

    That was a right thing to do 20 years ago, when with one stroke of the pen or a change in customs duty, you could pretty much wipe out or create the fortunes of a company. That does not happen any more in the Budget, and therefore, I do not think there is anything in this Budget which really forces me to go out and restructure my portfolio. I would be happy to have this conversation a month from now, and you can see whether my portfolio has changed. It has been the case for many years now that we have not really seen the Budget as a reason to significantly rebalance or change our portfolios. There was nothing in the Budget that would make me to dramatically re-evaluate my positions either at a company level or at a sector level.

    When you know that exemptions are not going to be there, and nobody knows how much of the insurance inflow was coming because of this tax advantage, would you take a view on insurance based on the fact that exemptions will only decline in the coming years? Is there going to be a structural change?
    At the margin when you take away a tax break, it will put a speed bump in the industry’s growth. Having said that, you have to trust the basic instincts of individuals to do what they think is right for them and the family, rather than presume that people will do the right thing only if you give them a tax carrot and the tax stick. I do not think that is the right way of looking at it. It reflects too much of a status quo mindset where the state has to drive people to do things. Now I understand the concept of nudge, and getting people to do certain things vis-à-vis others, but we must also respect the individual and his income and his right to choose whether to consume or to spend or to invest. People eventually do the right thing.

    Where are you on this debate between smallcap versus largecap?
    That is an interesting one. If I look at the historical data, and I am talking about 20 years of data, midcaps have historically traded at a discount to largecaps. If you look at January, 2018, it was very unusual for the midcap index to trade at a massive premium to the largecap index. For five years ended January 2018, the midcap index outperformed Nifty by an average of 8% per annum. Highly unusual, why? Because the historical outperformance of the midcap index over the largecap index on a rolling basis, or on a five-year basis is about 250 to 270 bps. So this was an unusual five-year performance of massive outperformance of midcaps over largecaps.

    We have seen that go into reverse gear over last two years, massive underperformance by the midcaps, and as a result valuations of midcaps have gone back into what I would call the traditional territory, which means they are back at a discount to largecaps. Now again, you need to take that with a pinch of salt, because when I look at midcaps, I see polarisation there as well. There are some growth stocks and some more stable stocks which trade at pretty expensive valuations and others which are cheap, not too different from largecaps.

    But as a manager what we have done over the last two years, wherever we had flexibility, particularly over the past six months, is raise our allocation to some of those midcaps and smallcaps, because no longer is valuation blinking red, or for that matter, orange. In fact, it is now saying things are back to normal, and back the company that you are comfortable backing. On balance, we have been quite happy to raise our exposure to midcaps and smallcaps in recent times. As far as smallcaps are concerned, historical data suggests it is a very-very volatile asset class and it has not necessarily outperformed midcaps or largecaps over a longer period. Stock picking is far more important in smallcaps. Arguably, it is important everywhere, but in smallcaps picking is a lot more important than just getting the cycle right.

    Which is your next multibagger idea or theme? I know as a fund manager you would say I wish I knew. But my job as a journalist is to keep on insisting on that question?
    I will have to disappoint you with the same answer. The reason we work with an investment process is to identify companies that are most likely to lose us money. As we eliminate those companies from our investment process and from our portfolios, we are left with the ones which are blessed with attributes like strong cash flow generation, reasonably healthy return on capital and somewhere once you have narrowed your focus down to that set of companies from where will arise some names which eventually go on to become multibaggers. But it is very easy to sit here and talk about how this company and this sector was most likely to achieve what it did with the benefit of hindsight. But sometimes you realise is that over five or 10 years, things do change, managements change, their ability to execute changes and, therefore, I actually believe investing is more about exclusion. That is the science of investing, where you exclude certain companies then you are left with a narrow basket. One of them will turn out to be that multibagger.

    The crucial thing over there is your ability to hold on to that stock both through good and bad times. When I look at every multibagger that I have seen in my portfolio, it is not that they always went up during the period they became multibaggers. They also came down 30% in a given year, some of them have come down 50% twice during a 20-year time span. So what really gives you a multibagger is your ability to hold on to the stock rather than your ability to identify it.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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