S Naganath,CIO, DSP Blackrock
For stock-picking, we do pretty much the same thing that everybody else does – a combination of fundamental analysis, liquidity analysis and macro analysis. I don’t believe that bottom-up stock-picking alone works. The future price of a stock is influenced by a variety of factors. To focus only on the stock’s fundamentals would be to take a very narrow view. So, we have a mix of top-down and bottom-up approaches. If I had to look at one parameter, I would focus more on return on equity (RoE).
Tushar Pradhan, CIO, AIG
I simply look at growth at a price. India is in- herently a growth market. If you are looking for value here, you are likely to underperform for many years. Look at Procter & Gamble. It’s a wonderful business and it doesn’t require any capital. It makes sanitary napkins and it makes Vicks Vaporub. Both are perennial businesses in India. But the stock price just doesn’t move. None of the open-ended mutual funds has the patience to buy this company’s shares. On the other hand, growth can be very dramatic when the cycle is rising. For instance, look at the kind of growth the capital goods sector enjoyed in the past five years. When the cycle turns down, it doesn’t mean that the rate turns negative. The rate of growth goes down for a while before turning up again. So that is my focus – growth at a price, which will give you good returns.
Anoop Bhaskar, CIO (Equity), UTI Mutual Fund
If you are buying a company for growth and you expect it to double in size in three years, it cannot have free cash flow. My only criterion is that its cash from operations should be free. I think, the other thing is experience. You have to keep on meeting companies every week and in their offices and plants so that you know how their offices are and can observe other small things which tell you a lot about how they are managed – whether the guy serving the tea has a stained uniform; whether he greets you properly. Usually, in good companies, the lowest-level guys are very keen to work and keen to help. They are very proud to be in that company. If you didn’t like the tea and didn’t have it, they would notice and ask if they should make it again. All this tells you how the company is managed. This information is not there in the balance sheet.
Meeting companies management gives you a lead. You tend to understand what exactly is happening structurally in the industry. The key is not to have a meeting to discuss the next quarter numbers. The key is to spend time with the promoter and the management team. So I have meetings where I don’t discuss any numbers with them; some of my colleagues are very amazed – how could one have a meeting and come back without asking anything about the numbers? I say, we can call the right brokers and we will get the numbers but the point is we have just 45 minutes and let’s find out from him where he sees we could be three years from now. Is it really going to be different from what it is today? That is the key.
There is one rule (of investing) which is that, if the intensity of the working capital is lower than the sales intensity, then the company is a fraud.
Nilesh Shah, Deputy MD, ICICI Prudential MF
Selecting the right business is taking a call that, if the economy moves in a particular direction, then sector X would do well. Then you have to select the right company. The definition of a right company for us is a company which has a vision, which has an execution plan to back that vision and where promoters will not take the minority shareholders for a ride. The third important factor is to see if the price is right. Here again you try to analyse past trends, global benchmarking, some emerging market experiences and do some future analysis, to figure out if the price is right or not.