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“Established moat, large target addressable market (TAM), healthy ROCE, healthy cash flows and importantly management which is investing the cash flows for strong growth are key ingredients to make a compounding machine,” says Madanagopal Ramu, Fund Manager and Head – Equity, Sundaram Alternate Assets. In an interview with ETMarkets, Ramu said: “In India too we feel given the current favourable economic tailwinds, growth in manufacturing & service sectors, segments like retailing, financial services, manufacturing and digital market can create a few excellent compounding machines ,” Edited excerpts: Thanks for taking the time out. What an impressive performance of Sundaram India Secular Opportunities Portfolio (SISOP PMS) in September against the benchmark.
What was your strategy? It’s not just last month, the strategy has seen a good turnaround in performance in the last 6 months and in the last 6 years, it has created high single-digit alpha over the Nifty50 index. During the last 6 months, impressive earnings growth in our compounding machines like Trent , Zomato , M&M and Home first contributed part of the recovery. Stock Trading Introduction to Technical Analysis & Candlestick Theory By - Dinesh Nagpal, Full Time Trader, Ichimoku & Trading Psychology Expert View Program Stock Trading Dow Theory Made Easy By - Vishal Mehta, Independent Systematic Trader View Program Stock Trading Options Trading Course For Beginners By - Chetan Panchamia, Options Trader View Program Stock Trading Stock Investing Made Easy: Beginner's Stock Market Investment Course By - elearnmarkets, Financial Education by StockEdge View Program Stock Trading Cryptocurrency Made Easy: Cryptocurrency Course By - elearnmarkets, Financial Education by StockEdge View Program Stock Trading Ichimoku Trading Unlocked: Expert Analysis and Strategy By - Dinesh Nagpal, Full Time Trader, Ichimoku & Trading Psychology Expert View Program Stock Trading Macroeconomics Made Easy: Online Certification Course By - Anirudh Saraf, Founder- Saraf A & Associates, Chartered Accountant View Program Stock Trading Mastering Options Selling: Advanced Strategies for Success By - CA Manish Singh, Chartered Accountant, Professional Equity and Derivative Trader View Program Stock Trading ROC Made Easy: Master Course for ROC Stock Indicator By - Souradeep Dey, Equity and Commodity Trader, Trainer View Program Stock Trading Markets 102: Mastering Sentiment Indicators for Swing and Positional Trading By - Rohit Srivastava, Founder- Indiacharts.
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SISOP as a strategy predominantly invests in high growth compounding machines and few cyclical bets, a balanced approach is working well. How do you pick stocks for SISOP PMS fund? I need to elaborate it a bit. Predominantly SISOP’s strategy is to invest in high growth compounding machines.
Now, how do you identify these high growth compounders. Established moat, large target addressable market (TAM), healthy ROCE, healthy cash flows and importantly management which is investing the cash flows for strong growth are key ingredients to make a compounding machine. Moat is a key ingredient for sustaining a high growth over the long term.
If you look at US, a market which has created high quality growth compounders over long term, majority of these ideas have come from sectors like consumer retailing or Technology. Cost advantage moat in retailing, like what Costco exhibited in the past and Amazon recently are great examples of high growth compounding machines in US. Technology sector companies like Google, Apple, Meta are other examples of how technology as a moat has helped these businesses sustain high growth compared to other sectors.
In India too we feel given the current favourable economic tailwinds, growth in manufacturing & service sectors, segments like retailing, financial services, manufacturing and digital market can create a few excellent compounding machines. Our Trent & Titan call in retailing, Bajaj Finance and Chola finance in retail credit penetration, Dixon and PI industries in manufacturing, Zomato in ecommerce are few excellent high growth compounding machines we identified in last 6 years based on the framework discussed. Mistakes which we try to avoid while searching compounding stories are - 1.
We don’t want to confuse between defensive slow growth companies with high growth compounding machines, 2. Early exit from some of these ideas after making a decent return by underestimating the high growth potential, and 3. Not making the right allocation to such ideas.
Successful investors have made majority of their wealth from few such ideas, and they hold on to them for long period and also make very high allocation in the portfolio. The SISOP is more than 14 years old, and you have seen all the market cycles. Where do we stand in 2024 – are we in the euphoria stage or accumulation stage? Over the long term, few emerging sectors will replace a few traditional sectors in market indices due to sustained high growth in earnings, it has happened in the last decade and it will happen over the next decade as well.
If investors can invest in those few emerging high growth sectors and avoid a few slow growth traditional sectors, they will make meaningful alpha over Nifty50 index. This is what is called Value migration. Post Covid and particularly last 2 years; due to flows, markets generally favoured turnarounds, value and momentum ideas.
But now the market has started to accept the short-term nature of such cycles and is now ready to reward quality growth ideas. As Mr. Buffet says, “time is the friend of the wonderful company, the enemy of the mediocre.
” Over the next 5 years we expect the SISOP strategy to benefit from both the India economic growth cycle as well as favourable market cycle. Any themes which you feel is in nascent stage but could produce multibaggers of the future? Energy Transition the idea of the decade. The price of solar cells and Lithium -ion battery cells have fallen significantly and have made transition to electric vehicle and clean energy a possibility, without government subsidy, after decades of investment.
India too given the high energy demand will look to diversify its energy mix and therefore add significant solar capacity in power and allow higher penetration of electric vehicles in mobility. Investing in a few equipment makers and component suppliers to play the energy transition story will be a good addition to your portfolio. We expect some oil and gas companies in Index to get replaced by new energy companies over the next decade due to value migration.
The fund is concentrated more towards largecap followed by mid & smallcap. What is your strategy for FY25 – have you made any tweaks to the strategy amid valuation discomfort seen in various sectors of the market? It's well balanced. Most of the emerging high growth opportunities come from mid-cap space.
Some large caps due to the right areas of investment in the last few years are reaping the benefits, so we play them and there are these niche small cap companies doing excellent work in specific sectors and are in high growth trajectory. I would say the portfolio is well balanced across cap curve, slightly tilted toward large caps. In terms of sectors – where are you overweight and underweight on? We are overweight in high growth sectors like NBFCs, retailing, power, auto and ecommerce.
Again, it’s not about the entire sector many times, it's about choosing the right company within the sector. Investing in Trent instead of ABFRL, M&M instead of Maruti , PI instead of Aarti Industries , Titan instead of HUL , Bajaj Finance instead of SBI are sorts of calls which will accelerate the velocity of returns significantly. In the same time you might get a good turnaround opportunity in sectors we are generally underweight like FMCG, IT, Pharma and PSUs.
We also have BHEL , which is a good turnaround bet on power sector investment. It has nothing to do with compounding, value migration etc, it's done to balance the exposures. How do you manage risk in the fund? We have a periodic review of underperforming stocks.
We strive to hit the right balance in capcurve and sectoral mix. But we do have sectors where we have nil exposures, because they don’t meet our growth expectations. Stock-wise we trim stocks where we see valuations are unjustifiable in the short term and redirect to a new idea or an existing idea where we see value on the table still.
Who should invest in the fund? What is the kind of time horizon that one should have? Investors who are looking to grow their portfolio on the back of allocating to high quality growth businesses which compound their earnings by 20% should consider SISOP, which in our opinion will create the best optimum outcome over the long term. What we will not do is to invest in mediocre business in the name of value and not buy momentum during market peaks, these are periods / segments where we might stay away to avoid big mistakes. (Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own.
These do not represent the views of the Economic Times) US Election 2024 Another American Civil War if Trump loses election? What Trump victory would mean for US & the world (You can now subscribe to our ETMarkets WhatsApp channel ).
