What conversations have you been having with your HNI clients at the PMS in the last few months?
In my capacity as the CEO of the company, we primarily deal with client relations beyond the operations of the companies and last year was a very interesting year as far as deployment and getting allocations from clients was concerned. As you are aware, it was a very tough year that started with Covid and made clients question whether it was the right time to invest or not. We pointed out that volatility is a part and parcel of markets. If the horizon of investments is extended considering the times, we believe that the risk component can be discounted and the broader markets can go up over 25% in one month.
We saw clients coming in bits and parts and last year was the best year for us in terms of raising money. We raised close to Rs 300 crore across our clientele.. We typically deal with large family offices and HNIs. I believe that there are still a lot of people on the sidelines but so far it has been conversations around deployment, sticking to the asset allocation and staying put in markets.
PMSs are all about stock picking in the broader markets. What are your observations about the real economy?
SageOne as a house thrives on stock picking. We believe in quality businesses and that is what we pick. Broader markets do play a role but for us as bottom-up stock pickers, we do not pay too much heed to that. Net-net, we want to stay put in businesses which have survived economic cycles and market cycles and showcased resilience and at the same time have a bright outlook in terms of earning performances and are able to maintain them.. We continue to identify such exciting businesses which are long-term structural stories. Covid obviously led to a broader market rally.
Post Covid, we saw pent up demand and everything under the sun moved up. But now, one would need to separate the men from the boys because the benefits of pent-up demand and lower input costs are done with. In the coming quarters, companies will struggle in terms of rising input costs. We have to see how many of them are able to pass on the benefit and how many are able to even show volume growth beyond the pent up demand is crucial.
At least the Sage One portfolio companies across the mid and small cap and microcap continue to show encouraging trends. The concalls which have been announced, the quarterly numbers that have been announced for the companies so far have been pretty convincing. Most of them are in line or beyond expectations. We believe that businesses which benefit from the domestic market as well as businesses which benefit from exports will continue to maintain the market share and margins. In the coming three to four years, our expectations of the earnings doubling for the portfolio companies should fructify.
You are following themes like agri chem, specialty chemical, select pharma and building materials. Out of that agri chemical and specialty chemical stocks have quadrupled, some of them in the last two years. What kind of themes are you playing in your pharma portfolio and building materials?
As a house, we do not follow a top-down approach. It is not the sector which is the starting point. We follow a bottoms-up approach. So the companies which fit our criteria of superior earnings growth have been largely the companies from the chemical space. When I say chemicals, it is not the generic chemicals, it is the specialty chemicals and also the agro chemicals. On this front, we believe that the businesses will continue to show a strong momentum. They have benefited from the underlying domestic manufacturing boom in India.
At the same time, there are a lot of benefits from import substitution and also export opportunities owing to the China plus one strategy. Within pharma, one has to be differentiated. It is not generic pharma. In the larger pharma companies, growth is a challenge. We look for pharma companies which are benefiting either out of any specialty intermediates that they are making, the APIs they are manufacturing or at the same time benefiting from CRAMs opportunity. Companies which are able to supply specialty APIs intermediates to larger pharma companies and at the same time are big on exports and are largely mid and small cap companies which have a huge headroom for growth. They are growing at 20% to 30% and we believe they can grow at that rate in the years ahead as well.
You have consciously stayed away from metals, a big cyclical and even autos, which is another cyclical. What is your thinking behind this call?
Samit, who is our CIO, in his latest memo has beautifully analysed how cement as a cycle pans out over multiple market cycles and the final conclusion has been that this sector has a lot to do with the timing. Timing in and timing out both are important because this sector is affected by not just domestic factors, there are global factors and there are a lot of moving parts which are beyond at least SageOne’s wisdom. Therefore being away from such sectors is important. As I mentioned before, the structural long-term trends are more important and underlying businesses need to depict that. We really do not want to put our neck out and try to time a sector where the drawdowns can be massive.
When it comes to managing money for clients, it is very important to stay focussed on sectors you understand most. And that is the reason we have stayed away from cyclicals. Auto as a sector was under our focus and we have invested in auto and auto ancillary companies in the past. But Covid has taught us that auto is a space which is affected a lot by how the economy revives because eventually that is consumption. And beyond that, the EV threat is a big risk for a lot of auto companies. When Covid hit, we realised that this sector has a lot of dependency from the economic revival.
Staying in a sector where you are dependent on how the economy performs over the period is something we wanted to move away from. We had enough companies in our radar where the growth was independent of how economies perform and I certainly believe that is where the construct of the portfolio is today. We would say that the safety net for us is the businesses which are not that coupled with the economic revival. At the same time, that is where the earnings growth is being depicted in the past. We believe that earnings growth will be depicted or exhibited more in the coming future.
I want to understand the strategies in the two portfolios which you are running. What kind of one or two-year forward earnings growth picture are you making now after you have run your numbers? Does it give you visibility of 20 to 30% or 20-25% kind of earnings growth for your portfolio companies on an aggregate?
SageOne has two portfolios; the mid and small cap one which we call as SCP and the small and micro cap which we call as SSP. The philosophy is the same, which is that in the mid and small cap, we look for larger market cap companies and the focus is on a larger set of companies in terms of market cap. There, our endeavour is to at least see companies doubling their earnings in the next three to four years which largely is between 20-25% earnings compounding. Historically, that portfolio has grown in terms of earnings 30% CAGR over the last nine years since we started managing the money.
Standing today we are confident that the earnings growth for the mid and small cap portfolio should be in the range of 20-25% over the next three to four years and the small and micro cap certainly should be able to grow faster than the SCP portfolio companies. There the endeavour is to grow our earnings and at least the companies should be able to double their earnings in the next three to less than three years. So at a portfolio level, the conviction and the comfort are there that both the portfolios will be able to meet their earnings growth target.
What are your thoughts on the unlock play — the leisure sector, aviation companies, travel booking platforms, resorts and hotels?
We as a house largely look for confirmation and we do not try to pre-empt. The sector has some great companies but as you know the businesses have been disrupted because of Covid. We are keeping a close eye and we are watchful of how the events pan out but standing today taking a call that whether the earnings will come in the next quarter or two will be premature. We do not have any companies or businesses where they are deeply impacted by Covid.
