Beginning early and staying invested with a disciplined approach will make all the difference in the long term and enable you to reap benefits of compounding, says Arvind Kothari, smallcase manager & Founder, Niveshaay in an interview with MintGenie. He also talked about the sectoral outlook for the next year.
When did you start investing or trading in the equity market? What inspired you to enter into equities?
My inclination towards equity runs long back. My great grandfather Mr Indramal Kothari was the cotton king of India during the 60's. In fact, he used to decide the price at which cotton would trade each morning for many years. Despite this, the wealth couldn’t even sustain over two generations, whereas on the other side, corporate houses of Tatas and Birlas grew just bigger and better. This fascinated me as to how even with low capital, equities can make you bigger than what you can even imagine.
Right after becoming a chartered accountant, I started as an industry research analyst at ICICI Bank. More than a decade ago, after working in the finance industry and understanding its nuances, it caught my observation and interest that the wealth management industry was a little complex for investors to understand which induced me to quit my job. Later, I started with advising on wealth management and now building Niveshaay with all heart and passion for the past eight years.
Despite the global equities not performing well, India has managed to outperform the other emerging markets. Your views on it?
Firstly, one should understand that there was a huge amount of fiscal stimulus given globally during the pandemic. Hence, the reaction to such steep actions will be tough to navigate when it leads to difficult macro times. If we talk with respect to India, the stimulus was in the form of government policies rather than just reducing interest rates or injecting liquidity directly. So naturally, the impact shouldn't be as severe as the west. Also, unlike the previous times, Indian corporates balance sheet is healthy.
Secondly, another concerning macro issue is inflation. Basic economics suggests any rise in inflation results in high interest rates. This means higher denominator while valuing a company leading to reduced valuations. Also, higher interest rates mean higher credit growth helping the banking sector to improve profitability on the back of low NPAs. Rupee depreciation is helping to make Indian exports competitive.
Meanwhile, the counteractive policies of the government in the form of imposition of custom duties, PLI scheme, focus on renewable sectors, import substitution policies to revive capex cycle and attract private sector to drive capital formation and increase multiplier effect. The government is very well trying to manage the near-term headwinds to keep up the long-term growth intact. Overall, the outlook for India looks positive.
Your favourite sector of the year and what returns have this sector delivered in 2022?
Capital Goods and Auto Sector (particularly EV) were top sectoral picks in the current year. This sector has delivered 23% and 19% respectively. While, the government actions during the COVID times guided towards gearing up the manufacturing sector. The Budget 2022 reinforced this investment thesis. We took a basket approach and made a concentrated sectoral allocation to the capital goods sector.
If someone has been following Niveshaay since a while will recognize that Green Energy and Electric Vehicle themes have remained our core investable sectors. Our visits to exhibitions, AGMs and interaction with many business managements in this space guide us that this is a long-term structural theme.
What is the sectoral outlook for next year?
It’s hard to predict whether there will be a capex super cycle or not like the previous one in 2003-2008. In the current times, tenure of cycle has become short and industry scenarios have become volatile due to externalities.
Currently, the outlook looks robust as there is strong growth visibility to drive sector performance. Apart from expansions in the core sector like Power, Roads and Metals, the new wave of capex is likely to be (already commenced in some cases) in energy transition (renewables, EVs, decarbonisation), world moving towards ESG Compliance and sustainability, manufacturing set ups driven by China plus one and consolidating vendor base.
For instance, in a lot of sectors after COVID like engineered goods, steel and paper, exports have increased significantly even from the pre-covid levels. This tells us that we’ve got the capability to find a pivotal place in the global value chain too apart from serving the huge Indian market. Thanks to the competitive raw material and favourable factors of production in India.
Hence, for the next year, we continue to remain bullish on this theme. In the past year, we came out with a series named ‘Niveshaay Manufacturing Series’ for our investors and invested in such growing companies.
Which stock has outperformed/underperformed in this sector?
Talking about capital goods, in our basket approach all stocks have out-performed the index in the last one year. Elecon Engineering Ltd. outperformed significantly with a return of 118% from May-2022. The bet was entirely on growth in order book resulting in operating leverage play, restructuring in MHE division and becoming net debt free.
Besides, the company is a leader in industrial gears with 38% market share in India and has the largest SKUs. Another ancillary play on EV, Shivalik Bi-Metals Ltd. gave a return of 67% in the last one year significantly out-performing the auto index. It is a market leader in bi-metallic strips and shunt resistors which has end user applications in electrical equipment and EV. We’ve been tracking the company since 2018 and our confidence in the company strengthened after our AGM-22 visit where we understood the business in great detail from the two stupendous promoters themselves.
Sometimes, it is so surprising and inspiring to see a company from a small district like Solan supplying such niche critical products, competing and having a leading market position in the global world. The management and its capabilities are spot on in developing newer products, scaling them and reap benefits.
Which stock would you recommend/ do you expect will perform well?
Sustainability and ESG compliance is a big theme that we continue to remain invested in. It is a global trend and on the agenda of a large number of corporates/brand owners. One of our top bets for 2023 is Ganesha Ecosphere Ltd. The company is leader in pet bottle recycling in India with 18% market share, manufacturing r-PET chips, recycled polyester staple fibres, RPET yarn: spun yarn products and filament yarn products. The regulatory changes transpiring in the recycling industry is providing a platform for further growth.
The Indian government has announced a recycling policy for rigid plastic packaging effective from FY 24-25 and this limit would be extended by 10% every year till it reaches to 60%, i.e., by FY 2028-29 that brings this business into the mainstream. To capitalise on EPR opportunity and fulfil EPR liability of brand owners and manufacturers consuming plastic packaging for their products, the company is setting up a plant in Kanpur.
The large capex having higher EBITDA margins has just been completed. It is expected to operate at optimal capacity utilisation in FY24. Global companies have set their sustainability targets and have trackers also to monitor if these are being achieved.
For instance, Coca Cola targets to use 50% recycled content by 2030 which is just 9-10% currently. Brands are leaning on the term ‘circular economy’ at a time when they are literally getting premium for their products on account of sustainability quotient. The use of recycled polyester (pet bottle recycling) by leading brands such as Zara and H&M are some of the key aspects of sustainability initiatives in the fashion industry.
Likewise, adoption of this trend has also spread to smaller companies. The green impact of this fabric goes even beyond the recycling benefits. Its manufacturing takes significantly fewer resources. Its production requires almost 60 per cent less energy, and CO2 emissions are reduced by nearly one-third compared to virgin polyester. We expect this company to perform well in the coming years.
What new year resolution should new and young investors adopt to bring investing discipline in themselves?
Mr. Naval Ravikant says ‘we live in the world of infinite leverage’ meaning your actions can be multiplied by a thousand-fold. So, because of that the impact of good decision making is much higher than it used to be. One advice is, in the era of high information availability and social media, use it the right way and make informed investing decisions. We’ve always believed in making investing simple at Niveshaay and not getting bogged down by complex financial models.
Beginning early and staying invested with a disciplined approach will make all the difference in the long term and enable you to reap benefits of compounding. Rakesh Jhunjhunwala entered the market with mere Rs. 5000 at the age of 25 and ended with a net worth of more than Rs. 40,000 crore. This is the power of staying invested and the result of taking strong conviction bets. The journey isn’t going to be a linear one and will be full of hiccups like any other businesses. The key is to ensure capital preservation.
Hence, it is important to learn, unlearn and relearn. Equity markets are all about the Highs, the Lows and the Glows. Spending time in the market is very important to understand the nature of market cycles, nitty gritty of business and industry models. This will make a difference in your wealth creation journey in the longer term.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.