‘This correction could be an opportunity to boost returns: Sunil Singhania

The capital goods and infrastructure sectors look very promising but stocks in these sectors are somewhat overpriced, so the ongoing correction may present opportunities in these areas, he said while adding, “We generally avoid sectors that are heavily government-dependent”.

Edited excerpts:

What factors do you consider when evaluating a stock for investment?

We are value-focused and approach stock investing as becoming a partner in the business. Our core investment philosophy is straightforward. First, we aim to be investors, not allocators, analyzing whether a stock will generate returns rather than merely adjusting weightage. Second, we are numbers-focused and avoid loss-making companies, prioritizing profitability and its visibility. Third, we don’t mind being the first or sole investor, supported by our large research team. Fourth, we remain flexible, open to any sector as long as the stock meets our criteria. Fifth, we adopt a buy-and-hold approach, investing with a 3–4 year perspective. Lastly, valuations are crucial; the best stock isn’t always the best company or vice versa, especially when priced beyond perfection. Our framework focuses on investing in profit-making companies with a return on capital employed (ROCE) or equity (ROE) of at least 14-15%, and profits ideally doubling in 4-5 years.

What checks and balances do you follow, and what is your minimum return expectation?

Return expectations vary with time. In 2020, we aimed for stocks that could double in two years, then shifted to those doubling in three years. Currently, we’re comfortable with stocks that double in 4-5 years, as markets are no longer as cheap. Expectations must align with the market's valuation stage. Most importantly, one must remain consistent and true to their investment philosophy. Frequently changing perspectives can lead to chasing momentum, prioritizing stories over fundamentals—something we consciously avoid.

At the portfolio level, returns depend on two key factors: buying good companies and minimizing mistakes. Even with great investments, frequent errors can erode returns, much like water draining from a bucket with holes. Our framework is designed to reduce mistakes, though no strategy can eliminate them entirely. Exiting a stock is equally, if not more, challenging than entering, often creating a dilemma about whether to hold or sell. For us, exits are guided by three primary reasons. First, if the original thesis behind buying a stock no longer holds, we exit—for example, during covid, we sold a paper company as demand for newspapers, diaries, and notebooks plummeted. Second, if a stock achieves its expected returns much faster than anticipated (e.g., in 6-12 months instead of 3-4 years) but its fundamentals haven’t kept pace, we lock in profits and exit. Third, with limited capital, we sometimes sell existing stocks to reallocate funds to more attractive opportunities. These principles ensure disciplined decision-making and effective portfolio management.

What is your current assessment of the market? With Nifty around 11% below its all-time high, do you recommend investors take advantage of this dip? What’s your perspective?

No one can accurately predict the best time to buy or sell. Equity investment is about becoming a partner in a business, and in a growing economy like India, businesses are bound to grow. For context, India reached $1 trillion in Gross Domestic Product (GDP) in 2007, the second trillion took 7 years, the third 6 years, and the fourth just 5 years. By next year, we’ll likely be a $4 trillion economy, and this could double to $8 trillion in 7-8 years. If an investor shares this long-term view, returns are inevitable. While it’s uncertain whether the market might dip 2% before rising, for those seeking decent returns and investing with a long-term perspective, any time is a good time to invest. This correction could be an opportunity to boost returns by buying stocks 10-15% cheaper.

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Which sectors do you find most appealing at the moment, and are there any you would prefer to avoid?

Sectors that look promising don’t always perform well in the short term, and vice versa. For example, banking has strong fundamentals but has not performed well, though we remain optimistic. On the other hand, IT results have been disappointing, despite the sector performing well overall, and we maintain an equal weight here. The consumption sector in India has been weak for the past 18 months, with tepid September results. However, we are seeing some recovery signs with factors like government spending, the wedding and festival seasons, a good monsoon, and strong rural demand. Additionally, with government spending on infrastructure and capital expenditure also coming in from the private sector, the multiplier effect should boost growth. While the capital goods and infrastructure sectors look very promising, the stocks are somewhat overpriced, so the ongoing correction may present opportunities in these areas.

We generally avoid sectors that are heavily government-dependent. For instance, we’re not fond of oil and gas, although we like select railway stocks, the valuations are unappealing. Similarly, while we like the defence sector, its valuations are not attractive at the moment. Consumer staples have shown little growth, so we avoid them as well. Auto is another sector we are not particularly positive on, although we do have some exposure to engineering and auto ancillary companies.

Are you tapping into the consumption theme through e-commerce companies?

We are firm in our approach of investing only in profit-making companies, and since very few companies in that space are profitable, we choose to avoid them.

What about logistics companies?

Logistics companies, particularly those focused on e-commerce, are not well-represented in the listed space, which is why we haven't explored that sector. Additionally, it remains a very small segment in the listed space at present.

Factor-based and thematic investing have gained significant traction over the past year. At the same time, there's growing interest in multi-cap and hybrid funds. How do you interpret this shift? Do you believe these multi-cap and hybrid funds will eventually overshadow thematic and factor-based investing in the future?

Thematic funds have gained popularity because mutual funds are limited to launching one fund per segment, like large cap or mid cap. As a result, they turned to thematic funds, but many launched them at the wrong time. From my experience, for most investors, a diversified fund makes more sense unless there's a strong view on a particular sector or theme. Investing in thematic funds just because they’ve performed well in the short term is not advisable. Diversified funds offer better options based on your risk tolerance and ability to handle market volatility. Markets are like a cardiogram—there will always be ups and downs. Large-cap stocks tend to be more stable with lower volatility, while smaller companies may provide better returns for those who can handle more volatility.

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Your mid- and small-cap funds have frequently outperformed multi-cap funds. Given this, do you now find the broader market more appealing than large-cap stocks in terms of preference?

We spend a lot of time analyzing large, mid-, and small-cap stocks, but ultimately, the stocks with strong earnings will perform well, regardless of their size. There are phases where smaller companies attract more interest, and others where larger companies take the spotlight. Smaller companies, being entrepreneur-driven and in emerging sectors, have higher growth potential, but they are also more volatile. Larger companies, like elephants, move slowly but can withstand external events better. In a growing economy like India’s, as it expands from $4 trillion to $8 trillion and beyond, the broader markets may offer higher returns but with greater volatility.

So, you are suggesting that the broader market has more growth-oriented companies. But what about value? Do you see a significant amount of value in that space as well?

Value in smaller companies should be viewed on a stock-specific basis, not from an index perspective. While stocks aren't as cheap as they were in the past, there are still opportunities in certain pockets. But there are still opportunities in India due to the vast number of listed companies and new ones constantly emerging. With thousands of companies to choose from, we only need to find six or seven good stocks each year.

Are there any other asset classes that you think might offer better returns in comparison to equity?

Valuations are higher than two to three years ago, but if you believe the Nifty can grow profits at 15%, the EPS for FY27 is around 14, making it not overly expensive at 17 times. If profit growth is 14-15% then India can still offer low-to-mid-teens returns. No other asset class in India seems likely to deliver double-digit returns. Real estate has already risen, and it’s inefficient. Gold has corrected 10% recently. Fixed income offers only 7% returns, with taxes reducing that further. Even with lower return expectations, equities still appear to be the best asset class.

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Based on where we are today and the events we can foresee, do you expect any big correction or just occasional dips?

I don't foresee a major correction, as large corrections usually happen due to unforeseen events like covid, Russia-Ukraine, or the Credit Suisse default. This is the first 10% correction we've had in a long time, and it was much warranted. While no one likes corrections, they are a natural part of the market. They also make money-making less easy and force investors to focus on fundamentals. With this correction, there's ample opportunity to create alpha. If we don't, active management will struggle to justify its value against passive investments or exchange traded funds (ETFs). India’s growing economy will continue to evolve, and with more companies listing, there will be new opportunities to explore, especially in sectors that didn’t exist a few years ago, like quick commerce.