Mid-caps trading at attractive valuations

In the third and final series of interviews in Smart Portfolios, Kashyap Pujara, fund manager, Enam Direct, shares his current investment strategy, view on mid-caps, small-caps and his advice to investors with Rex Cano. Since the launch of Smart Portfolios on September 1, 2008, the benchmark BSE 200 networth, is now down a little over a per cent, while Kashyap Pujara's portfolio value has appreciated over 22 per cent till date. How has your strategy changed after the sharp rally? Actually, the rally witnessed is largely an outcome of the election results which has led to improvement in investor confidence and expectations of economic recovery. The change in strategy reflects the changed political landscape. The reason is that we could now see reforms being implemented which were earlier met with resistance. A stronger political landscape has ensured greater commitment of funds to equities. KASHYAP PUJARA Fund Manager, ENAM Direct Top Holdings % of assets Cost (Rs) Price Current price (Rs) Value (Rs lakh) Reliance Capital 15.04 855.03 919.00 1.84 SBI 14.11 1,434.69 1,724.35 1.72 Century Textiles 12.90 273.35 394.00 1.58 Aditya Birla Nuvo 10.91 634.36 889.15 1.33 Oriental Bk of Com 7.42 165.43 181.25 0.91 Total investments 91.33 11.16 Cash 8.67 1.06 Net worth 12.22 Returns (%) 22.22 What's good for investments now? Sectors where reforms can happen should be watched. These include insurance, telecom, education and banking. There would be thrust on infrastructure and power which needs investment and hence one can look at this space as well. How should one approach mid-caps and small-caps? This is a potential area to scout for investments. The future value of any investment is dependent on the price we end up paying to acquire it. If we end up paying higher, the future returns would be lower. To put things in perspective, there are yet lot of mid- and small-cap companies that are available at attractive valuations and hence it does make sense to invest bottom up. Though stocks are up considerably from their all time lows, they are yet available at close to book value which can deliver above 20-25 per cent return on equity. If one can gauge the management quality, the consistent performance and sustainability of returns, then such companies could trade at higher multiples to book value in the future. Are we in a bull or bear market? Bull and bear markets are typically a reflection of economic cycles that play out on an ongoing basis. There is an expansion cycle that typically ends with a business peak followed by contractions which typically ends with a recessionary trough. In general, due to greater integration of the world economy we have seen longer expansion cycles and shorter recession cycles. The developed world might yet be going through the contraction cycle which we term as bear market, however, emerging markets especially India, seems to have made a recessionary trough. Leading indicators like cement and auto sales are reflecting this to some extent. Hence my sense is that the worst is behind us and we would turn going forward. However, please bear in mind that the markets discount the future before it has actually panned out and hence we end up seeing higher valuations at bottom of the cycles and cheaper valuations at the tops. How should investors tackle the current market situation? The secret to successful investing is within each investor. As an investor, if you are a critical thinker who evaluates his investment decisions meticulously, invests with conviction, displays patience and defines a time horizon, then one can build a good investment portfolio over the longer term. The markets tend to oscillate between extreme pessimism to extreme optimism. As investors, we need to attempt to be realistic and not let other people's mood swings govern or affect our portfolio decisions. As veteran, Ben Graham has said, in the end, how your investments behave is much less important than how you behave. Hence for starters, define your return expectations, your risk appetite and risk taking ability, as ability to take risk and capacity to take risk differ, and hence set your expectations of return and risk accordingly. Define a time horizon and diversify appropriately so as to eliminate the unsystematic risk from your portfolios. AMAR AMBANI Vice President (Research), India Infoline Top Holdings % of assets Cost (Rs) Price Current price (Rs) Value (Rs lakh) Indiabulls Real 12.37 217.85 198.85 1.67 Reliance Capital 4.08 971.25 919.00 0.55 IDFC 3.93 140.00 132.65 0.53 Texmaco 3.87 110.45 104.45 0.52 IDBI Bank 3.79 108.50 107.65 0.51 Total investments 62.32 8.42 Cash 37.68 5.09 Net worth 13.51 Returns (%) 35.08 SADANAND SHETTY Vice President, Kotak Securities Top Holdings % of assets Cost (Rs) Price Current price (Rs) Value (Rs lakh) McLeod Russel 5.74 100.31 110.15 0.72 GVK Power & Infr 5.35 36.30 40.30 0.68 Reliance Capital 5.03 829.35 919.00 0.63 Shriram Trans 5.00 230.10 287.00 0.63 ICICI Bank 4.98 684.57 713.75 0.63 Total investments 85.10 10.74 Cash 14.90 1.88 Net worth 12.62 Returns (%) 26.16 ANAND AGARWAL Fund Manager, Reliance Money Top Holdings % of assets Cost (Rs) Price Current price (Rs) Value (Rs lakh) Opto Circuits 8.79 159.20 161.70 1.29 Colgate 7.44 560.36 547.20 1.09 ITC 6.78 184.4 199.70 1.00 Infosys 6.02 1725.00 1771.10 0.89 TCS 5.17 368.25 380.85 0.76 Total investments 69.02 10.16 Cash 30.98 4.56 Net worth 14.72 Returns (%) 47.19