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“Over the past 11 years, Emkay Capital Builder has consistently achieved compounded (CAGR) returns of 16.75%. An initial investment of Rs 1 crore made on April 1, 2013, has since flourished to Rs 5.5 crore,” says Sachin Shah, Fund Manager, Emkay Investment Managers Limited.

In an interview with ETMarkets, Shah said: “We are confident that India has reached a pivotal juncture, with a per capita income of $2300 in 2023, poised for a prosperous decade ahead,”. Edited excerpts:

Thanks for being part of the segment. Please take us through the performance of the funds in FY24?
Sachin Shah: FY24 has proven to be an exceptionally strong year for our PMS Strategies. The majority of our PMS strategies, including Emkay Capital Builder, Emkay Pearls, Emkay ENVI, and Emkay GEMS, yielded returns ranging from 40% to 44%.

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If Rs 1 crore was invested in the Emkay Capital Builder portfolio on April 1, 2013, how much would it have returned after 10 years?
Sachin Shah: Over the past 11 years, Emkay Capital Builder has consistently achieved compounded (CAGR) returns of 16.75%. An initial investment of Rs 1 crore made on April 1, 2013, has since flourished to Rs 5.5 crore.

In your report you have talked about ‘India’s Golden Decade’. Give us an overview of the themes for the next 10 years.
Sachin Shah: We are confident that India has reached a pivotal juncture, with a per capita income of $2300 in 2023, poised for a prosperous decade ahead.

We anticipate accelerated growth in five key themes in the coming years, presenting exceptional opportunities for bottom-up stock selection and the creation of winning portfolios.

The outlined themes are as follows:1) Consumption:
With per capita income projected to reach $4500 by FY27, numerous growth opportunities will emerge in consumption. Many of these areas will still be nascent, presenting early opportunities to capitalize on the entire growth cycle.2) Savings intermediation and financialization:
Significant growth prospects are evident across all facets of the financial system, offering a multitude of new opportunities.

3) Artificial Intelligence:

Artificial intelligence, including machine learning and deep learning, represents one of the most significant innovations in information technology since the advent of cloud computing. Many of these emerging companies have the potential to become industry giants as AI becomes increasingly mainstream.

4) Energy Transition:
With a focus on achieving energy security and self-reliance (atma nirbharta), coupled with regulatory advancements, improved technology, and reduced costs, a substantial shift is underway across all aspects of energy—from generation and transmission to distribution and consumption. This transition is expected to give rise to numerous new multibillion-dollar enterprises over the next decade.

5) Atmanirbhar in manufacturing:
Indian corporates have seized the opportunity presented by the COVID-19 crisis to streamline operations. Capacity utilization has rebounded to levels exceeding those before the pandemic, and further increases are anticipated.

The government’s supportive measures, including tax cuts and Production-Linked Incentive (PLI) schemes, are propelling the manufacturing sector’s contribution to GDP growth.

How do you pick stocks for your portfolio?
Sachin Shah: We employ a meticulous bottom-up stock selection process, underpinned by thorough fundamental analysis.

This analysis encompasses an exhaustive examination of historical annual reports and quarterly results, an assessment of management quality and integrity, a review of company outlook, channel checks, and scrutiny of industry and stock research reports.

While the initial determination of the investment universe for certain schemes involves a market capitalization filter, this selection is further refined based on a comprehensive evaluation of the company’s performance over the last 5-10 years.

Key metrics such as Return on Capital Employed, cash flows to EBIDTA, and debt-to-equity ratios play a pivotal role in this filtration process.

Furthermore, all potential investments must undergo scrutiny through our proprietary E-Qual model, even after passing through the aforementioned filters.

We prioritize assessing the company’s historical track record, including its cash flows, balance sheet strength, and profit and loss statements.

Additionally, we closely analyze industry dynamics, including the degree of organization within the sector, potential consolidation among major players, and overall industry growth prospects.

Inherent profitability, measured through metrics such as Return on Capital Employed (ROCE) and Return on Equity (ROE), is considered a crucial determinant of future growth potential, as it serves as the engine for sustained performance.

Management quality is another critical aspect of our evaluation, with a focus on assessing management integrity, strategic acumen, and execution capabilities.

Finally, we exercise discipline in evaluating purchase prices (valuations), ensuring that investments are made at levels that offer favorable risk-adjusted returns.

How do you manage risk in your portfolio?
Sachin Shah: We adhere to strict allocation limits and sector constraints at the individual stock level. When allocating funds, we ensure that no single large-cap stock receives more than 7.5% to 10% of the portfolio.

Similarly, for mid-cap stocks, the allocation is capped at 5% to 7.5%, and for small-cap stocks, it is limited to 2.5% to 5%.

At the sector level, we typically avoid allocating more than 15-20% of the portfolio to any single sector, except for large sectors like BFSI, where index weights may reach as high as 30-35%. Even in such cases, we aim to restrict our allocation to around 25%. These limits apply to initial investments.

However, for overall exposure management, we take additional measures. If a single large-cap stock exceeds 20% of the portfolio’s weight, or if a mid or small-cap stock surpasses 12-15% weight, we trim the exposure accordingly.

Similarly, if a single sector’s weight exceeds 40% in the portfolio, we adjust the allocation to ensure diversification and risk mitigation.

What is your view on the market for FY25?
Sachin Shah: In FY24, we have witnessed a notable PE re-rating across mid and small-cap segments. From this standpoint, companies poised to achieve robust earnings growth in FY25 are likely to sustain their positive price performances.

Furthermore, there is an expectation that with the reinstatement of political stability in the country over the next few months, infrastructure-led investments will gain momentum, potentially stimulating rural economic revival.

From the perspective of global investors, India currently occupies an advantageous position.

Not only is India anticipated to be among the fastest-growing economies, but it might also be the sole nation to exhibit higher growth in CY24 compared to CY23.

Additionally, a diminished inflation rate and a narrowing interest rate differential between India and developed markets such as the USA and the UK are expected to stabilize the currency, thus attracting significant capital inflows, both in equity and debt.

Please take us through the investment methodology of Emkay New Vitalised India (ENVI) strategy.
Sachin Shah: The ENVI strategy revolves around the resurgence of the Indian manufacturing sector following the COVID-19 pandemic. This revival is attributed to three simultaneous factors:

The revitalization of manufacturers’ financial health through a rebound in return on capital, the streamlining of balance sheets, and enhanced cash flow management.
Strong governmental support via appropriate policy measures such as increased government capital expenditure, the introduction of Production Linked Incentive (PLI) schemes, and reductions in direct taxes.

The resurgence of consumerism, is evidenced by a rise in discretionary expenditure.

Furthermore, India’s newfound credibility as a partner within the global supply chain has spurred both domestic and international companies to not only cater to Indian consumption but also manufacture goods for global markets.

ENVI capitalizes on this emerging trend by investing in four key themes:

(a) Companies manufacturing goods for the domestic market.

(b) Companies producing goods to replace products currently imported by India.

(c) Companies manufacturing goods for export markets.

(d) Companies providing services related to the manufacturing sector.

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

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