For the Defence sector, despite the extraordinary returns, we believe many companies remain significantly undervalued compared to their intrinsic values. We think the outlook remains positive as many have now become midcaps and will come on the radar of more institutional investors, says Dr. Vikas Gupta, smallcase Manager and CEO, Chief Investment Strategist, OmniScience Capital in an interview with MintGenie. He also talked about the US market, inflation, GDP and interest rates.
Edited excerpts:
When did you start investing or trading in the equity market? What inspired you to enter into equities?
I had been exposed to equity markets and started to learn about them from 1990-91 onwards. Those days, one of our professors at IIT offered a course on stock markets. I had registered for that course in my final year and that started the journey.
Later on, during the 90s, while in New York at Columbia University, I kept learning more about derivatives etc. Then the whole dotcom boom started and I kept observing from afar what was going on, but learning more and more. Luckily I missed the dotcom bust. Finally, I started investing in the equity markets starting 2003-04 by when I was completely soaked in the folklore of Warren Buffett, his guru Benjamin Graham and Peter Lynch.
From then on I started committing larger and larger capital and started the trial-by-fire learning experiences. The greatest learning was to find well-known, well-tracked stocks such as Hero Honda (now Hero), HUL, Emami and Godrej consumer products at huge discounts to their intrinsic values at the peak of the 2007-2008 bull run.
Mr. Market was chasing other exciting stocks in real estate and infrastructure and was giving away such great companies. That reinforced the concept of a disciplined and scientific approach to investing which focuses on discount to intrinsic value and that one can benefit from Mr. Market’s mistakes.
Despite the global equities not performing well, India has managed to outperform the other emerging markets. Your views on it?
Global companies, especially the US companies, have been doing quite well fundamentally but the stock price has been moving in the opposite direction for the last one year from the time the Fed announced that it will start increasing interest rates. What should have impacted the stock prices of no-profit, no-cash flow, high-growth companies, impacted the stock prices of all the companies; even those with large positive cash flows of $50+ billion annually.
Currently, the S&P 500 and Nasdaq-100 are both down from their peaks by around 20% and 30% respectively. However, it is equally likely that as the interest rate cycles peak, there will be a large recovery and it could overshoot previous highs since the companies might have much larger revenues and cash flows in 2023-24.
Coming to Indian markets, the inflation and interest rate impact domestically was much less. While the FIIs had left during the first half of 2022 which caused the Indian markets to fall, the retail flows kept the Indian market relatively less impacted compared to the US markets.
Also, there is no fear of India entering into recession. The worst growth figures on an annual basis are still 6%+ real GDP growth rates. With strong fundamentals and being one of the only large emerging markets with clarity on the growth front, it is likely to be chased by FIIs more and more. With US interest rates likely close to peak, the FIIs have started coming back over the last few months and this could continue throughout 2023.
It is likely that India gains more and more in relation to the largest emerging market which is China. India is likely to become an “asset class” which institutional investors have to allocate to within the next couple of years, thus attracting more global capital.
Your favourite sector of the year and what returns have this sector delivered in 2022?
Our favourite sector for the year was Defence. Our Omni Bharat Defence smallcase is the best performing smallcase on the platform for 2022. When we launched it on 7th Jan 2021, Defence was not a sector which most investors even recognized as an investable one. Even today there is hardly any other vehicle across mutual funds, PMS, AIFs or smallcases, to take exposure to the Defence sector.
This is a favourite because it was a classic growth vector in Mr. Market’s Blindspot. Such market anomalies are our favourite at OmniScience Capital. The companies had persistent competitive advantages (near monopolies), strong balance sheets, had high growth rates and visibility and the whole sector was at an inflection point from the viewpoint of large exports and the Defence procurement plans of the Government of India. And the whole basket of stocks was available at large discounts to intrinsic values, with most companies trading at single digit PEs.
What is the sectoral outlook for next year?
We are positive on Railway Infrastructure (Omni Bullet Train), Power (Omni Power), Defence (Omni Bharat Defence), capital raising infrastructure including stock exchanges, credit rating agencies, banks and infrastructure finance companies (Omni Capital Enablers), FinTech & payments (Omni FinTech, Digital Payments & Banking), IT (Omni DX) among others. We are also optimistic about the Amrit Kaal vision and related sectors which are likely to be impacted (Omni Bharat Amrit Kaal).
Specifically, for the Defence sector, despite the extraordinary returns, we believe many companies remain significantly undervalued compared to their intrinsic values. We think the outlook remains positive as many have now become midcaps and will come on the radar of more institutional investors.
At some point, of course, the expected returns will become similar to the market returns, meaning they become fairly valued and eventually overvalued as they come into Mr. Market’s Mirage or bubble territory. Way before that point we at OmniScience will lose interest and will be looking at new growth vectors which are still in Mr. Market’s Blindspot.
Which stock has outperformed/underperformed in this sector?
The stocks to watch out for in the smallcase are Mazagon Dock Shipbuilders which has significantly outperformed. Bharat Electronics which has also outperformed most of the indices and generated extraordinary returns, is probably one of the relative underperformers within the Omni Bharat Defence smallcase.
However, please understand that mentioning the names of sectors or stocks is not to be taken as investment advice. One should take advice from their financial planner before investing in equities which are a risky asset class.
Which stock would you recommend/ do you expect will perform well?
We would not like to comment on any specific stocks since we believe that the best way to allocate is to NOT pick and invest in individual stocks, since that is risky, but invest in a curated portfolio of stocks, smallcases, since these are diversified relative to a single stock while maintaining the high potential returns from the investment. In short, OmniScience small cases have a better risk-return profile as compared to individual stocks.
What new year resolution should new and young investors adopt to bring investing discipline in themselves?
First they need to decide to be wealthy over the long term and promise themselves to not get lured by get-rich-quick schemes. They need to understand that as the Indian economy grows to become a developed economy ($30-50 trillion) over Bharat’s Amrit Kaal—the next 25 years—they have an opportunity to grow their wealth in tandem. They will earn more in terms of salaries and income due to the strong pulling force of the economy. What they have to do themselves is to save a higher percentage and invest it in long-term investment opportunities, such as, Omni Bharat Amrit Kaal. Of course, even an allocation to a Nifty or Sensex ETF will help them grow wealth over the long term.
They should promise to themselves that they will allocate whatever surplus cash they have beyond their contingency funds or other specific near-term liabilities to such investments. This is a gift they are making to their future self. So they should contribute not less than 10% and as high as 50% of their salaries/incomes to this. Every time they get a bonus or a raise they should also raise the allocation of the SIP further.
They should actively learn from Buffett, Graham, Lynch etc. and learn to develop higher risk tolerance in the form of being able to allocate even more, rather than fret about portfolio values being down, when markets are down. If they are able to do these two things, save more and allocate systematically, as well as, opportunistically when markets are down, then over a period of time they should be able to create quite a large corpus which will most likely put them in the wealthy category or the top 1% during Bharat’s Amrit Kaal which could also become their personal Amrit Kaal.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.
