ChampionsNews: The development of the emerging markets has been much slower in the last couple of years than expected. Still, India has been announced the fifth strongest world economy by the British research institute CEBR recently. What makes India so interesting for an investment?
Mehta-Thomas: The stars are aligned for India as we have a large young population with a growing middle class. The issue always was that we were burdened by corruption and socialist economic policies. This generation of young Indians however wants more in the form of development and this has translated into consumer led growth in India. We have also seen the arrival of a few incentives such as the Goods and Services tax (GST) which will for the first time create a single market for the country. A bankruptcy code has also been introduced recently which will help lenders acquire stressed assets and lead to the development of a bond market. These are some policy changes which will make a massive difference for Indian capital markets and be a game changer for the country going forward.
ChampionsNews: One of the main arguments for a continuous growth in India is the developing middle class of the country. What are the key factors for the catch-up effect of the middle class? How will the middle class develop in India in the upcoming twelve months?
Mehta-Thomas: One of the main reasons India has suffered in the past is that the potential of the middle class hasn't been fully utilised. Today we are seeing a change in that as development led economic policies has helped job creation which in turn has led to a more aspirational middle class that wants for more be it a house, car or a vacation. The availability of financial credit over the past 15 years has helped the middle class realise their aspirations.
We don’t focus so much on screening for statistical value parametersSiddharth Mehta-Thomas ,
fund advisor ACATIS Investment
ChampionsNews: The focus on the portfolio of the ACATIS India Value Equities (DE000A141SG1 ) is on value stocks. How do you filter the fitting stocks for your portfolio? How many stocks are under regular observation for your portfolio?
Mehta-Thomas: We don’t focus so much on screening for statistical value parameters. There are plenty of value stocks in terms of low price earning’s ratio or price to book value companies in the market and most of these are value traps. What we look for are good businesses run by honest and capable management that are temporarily distressed or have been ignored by the market and as a result are mispriced. We have at least a 100 stocks under observation but do not like to have more than 20-25 in our portfolio at any given time as we conduct deep due diligence before purchase.
ChampionsNews: What kind of industries and sectors do you prefer for your portfolio? Which stocks have been mainly in favour by you recently?
Mehta-Thomas: We like the credit sector, particularly retail lenders that have a rural focus such as Shriram Transport Finance. We believe that lending has tremendous opportunity in India as credit penetration is extremely low. Shriram Transport Finance was out of favour for five years and the valuation multiples had compressed significantly. However the company's excellent management team and deep rural franchise convinced us that growth will return when the market turns.
On a contrarian note we like the IT sector which was once the darling of the market but is now out of favour thanks to a slower growth rate. Infosys, one of our largest holdings in the portfolio, saw its price to earnings multiple compressed from 30x to just under 14x. Its balance sheet was flush with cash and free cash flow generation was excellent. At that price it was a no brainer and we have been rewarded with a buyback as well as good share price appreciation.
ChampionsNews: Looking at the different share classes of the fund, what is the reason for the so very different performance of the B share class of the fund in comparison to the A share class?
Mehta-Thomas: The B Class came at a later date and was meant for institutional share holders, it did not get the benefit of the first few months of the fund which was excellent both on an absolute and relative basis.
Author: Siddharth Mehta-Thomas and Timo Lüllau
Date of issue: 2/20/2018
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