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Pratibha Dixit

India's Best Fund Managers 2019

Process Stickler
By riding business and earning cycles, Invesco’s Amit Ganatra’s stock bets have paid rich dividend

Shruti Venkatesh

Prudent and analytical are perhaps the best words to describe the decision-making approach of Invesco’s Amit Ganatra. Take for instance how he chose his stream of education. Even at the young age of 16, Ganatra was aware of his modest family background, and the need for him to start earning early. While he had scored well enough to get into the Science stream, he observed that pursuing it meant a huge upfront investment. “Plus, the results — in terms of earning potential — are back ended. Whereas in CA, the upfront investment for it was less and, hence, I completed it along with my B.Com in 2002,” says Ganatra.

It is this same approach that has come in handy for Ganatra in his career. In his role as a fund manager at Invesco Mutual Fund, Ganatra has created an enviable track record and delivered return that outperformed both the benchmark index and its peers by a huge margin. Ganatra’s India Contra Fund has been a consistent outperformer giving 20.56% annualised return, over the past five years. Even Invesco India Tax Plan and Invesco India Growth Opportunities Fund have delivered stellar performance with a return of 17.74% and 16.51% respectively in the same period. He also manages Invesco India Large-cap Fund and Invesco India Financial Services Fund that have grown by 13.88% and 19.48% respectively. 

So, what is his secret sauce? The recipe is simple: he examines the business and earning cycles to take a call on a stock. When the tide is against a company, he believes it’s a perfect opportunity to take a dip. “There are times when companies are at the bottom of their earnings cycle. As a result, the market is very negative about them and, consequently, valuation cycles are at their lowest. Such combinations are fantastic buying opportunities,” he says, adding that if a company is merely facing cyclical problems and not structural, then it’s a perfect time to bag the stock. He adds that for a value strategy to work, you need to see not just price to earnings (P/E), but also the relationship between return on equity (RoE) which is an indicator of the earnings cycle and price to book (P/B) which is an indicator of the valuation cycle.

Consider how he took the call to stick with the consumption story when spending power was hit due to recession. In 2008-09, the government was pushing money into the infra sector, making engineering and construction companies the darling of investors. The market’s interest in fast-moving consumer goods (FMCG) was waning, and Ganatra sensed an opportunity to enter the space. “When we launched Contra, we were told that if we launch Contra today, we will not be able to buy infra. And we said, yes, because the valuation will not permit us,” he says. Sticking to his contrarian stand, he bought FMCG stocks and the gambit paid off. “In 2008-09, buying FMCG was a very non-exciting thing. But then post 2009, FMCG did very well. We therefore got the benefit of not just strong earnings growth but also a strong P/E re-rating,” he recalls. A mix of value bias and head-start over market cycles meant Contra Fund clocked a whopping 20% return post the recession, over a ten-year period. 

Similarly, in 2012-2013, the entire market was chasing FMCG stocks. In the same period, industrial stocks cycle had de-rated meaningfully. “At the bottom of the earning cycle, you had the bottom of cycle valuation as well. Plus a lot of these companies were net cash companies. So we were able to buy companies in this space without facing any balance sheet risk,” says Ganatra. For instance, Ganatra’s portfolio has steered clear of companies such as GVK and GMR, and instead bet on Thermax, Crompton Greaves and Bharat Forge that had a weak P&L but cheap valuations. This strategy paid off extremely well as some of the companies, especially Bharat Forge, went on to become top contributors over the next two years whereas companies that were avoided based on balance sheet risk went on to suffer further price fall.

With BJP’s victory at the centre, people started dumping IT and pharma stocks and were drawn towards consumption and infra stocks. But, in line with the house call, Ganatra was actually buying IT and pharma because those were good companies and available at reasonable valuation. Across funds, managers picked companies such as Infosys, HCL Tech, TCS and Sun Pharma.

“At Contra the whole objective is to be slightly early but when you are early, there is a risk too. You don’t know when you will be proven right. We give every company three years because we know that when they do well, they do extremely well,” he says, with quiet confidence. 

Switching Sides

Interestingly, Ganatra says the stock market wasn’t something that interested him in the early stages of his career. After completing his CA, Ganatra took up an accounting job at Cipla, only to realise it is exactly what he didn’t want to do in life. “While it gave me a good understanding about the corporate world, I realised that only one to two days in the year are exciting. Other days are just routine. I felt that if I continue to do this, very soon I will unlearn whatever I have learnt. And for me it was very important to stick close to a field in which I continuously gain knowledge,” he says. 

As a result, within six months, he switched to Centre for Monitoring Indian Economy (CMIE) as an analyst. “That was my first introduction to research. I was there for only seven months, but during that period I began reading and understanding multiple annual reports,” he says. Post that he joined Fidelity and moved base to Gurgaon for two years, where he was responsible for using databases, preparing earning models and understanding business models of companies. “This was still backend research. I was not taking buy or sell calls. But I was starting to form an opinion on companies based on notes I made,” he explains.

The strong learning curve in research was rewarded in 2005, when Ganatra was finally presented the opportunity of moving from backend to frontend research with DBS Chola Asset Management. And he hasn’t looked back since. From covering infrastructure and metal at DBS Chola to moving to Lotus Mutual Fund in 2007 (acquired by Religare in 2008, which was then fully acquired by Invesco in 2015), Ganatra says the journey has been about constant research and progress in research. “Tridib (Pathak, then CIO of DBS Chola) had told me the day he interviewed me that as an analyst you have to reach a level where the sell side will ask you, what is your view on a company instead of you calling and asking them. If you reach that level of expertise, then you have arrived. You have to identify a way of looking at sectors which nobody else does,” recalls Ganatra. 

He says that, as an analyst at DBS Chola, he used to cover the banking sector. “We were not allowed to look at stock prices. We were asked to only look at how numbers delivered by companies are changing. Don’t get influenced by what the stock market is telling you, because the market might be right or wrong. But numbers don’t lie. That played a very important role in our evolution as fund managers,” he adds.

Pathak and Vetri Subramaniam (at Religare) in fact played a crucial role in Ganatra’s life. While Pathak taught Ganatra how to track the banking sector, Subramaniam helped him realise that he is good at taking a call on value rather than growth. “That is how I started managing the Contra fund,” shares Ganatra. 

Managing Mantra

In his experience of over 15 years, Ganatra has developed a few thumb rules of investing. One is that when the trends are very strong, the entire market gets carried away. So it is important to not only look at the P&L, but also at the balance sheet. Also, in order to develop a long-term approach when it comes to investing in companies, he says it is important to not get influenced by monthly numbers. “When we meet HDFC Bank, we don’t ask them their next quarter EPS. We instead try and understand what they are doing to ensure Paytm does not threaten their business. That way the monthly numbers will not determine our opinion on the companies, as those tend to be cyclical,” he explains. 

Further, a clear categorisation of companies into growth and value bucket makes it easy for him to build his portfolio. Out of the 300 companies tracked by Invesco, only about 112 have been categorised. “We are rejecting more companies than we are accepting. If you are selective continuously, ultimately you create value for investors,” he states. Giving an example of this categorisation, he recalls that they bought ICRA a long time ago when it was trading at 10x P/E multiple and had 10% of the market cap held as cash in its books. “So we categorised it as a diamond, that is, a company which is trading below intrinsic value. Within one to two years, ICRA started getting re-rated and the stock price almost doubled. The moment that happened, we realised that it is no longer trading at fair value. It was also not growing fast. So it didn’t fit into the growth or the value bucket and we were forced to de-categorise it. Thus this entire discipline of categorisation has helped us immensely to do well as fund managers.”

While all funds managed by Ganatra have done well, the Contra Fund has demonstrated exceptional performance. The key to this success, Ganatra believes, is in identifying value — either in terms of absolute cheapness or in relative cheapness. For example, in 2014-15, he bought Manganese Ore India Limited (MOIL), a commodity company which was available at attractive valuation. The company’s cash as a percentage of market cap was as high as 80%. But the commodity cycle was down hence the company was staring at losses. Ganatra took a bold call, figuring that even if the company is liquidated, the loss will be only 20%. Banking on a huge margin of safety, Ganatra went ahead with the bet and MOIL delivered handsome return of 129% between 2015 and 2017.

On the other hand, Ganatra also buys stocks with relative cheapness which is based on a company’s own long-term history. Four years ago, when private banks were not the flavour of the season, he bought into HDFC Bank, which was trading at a 20-25% discount to its own long-term average.

The bank was churning out decent results in-line with its past performance but the valuation was below its long-term average. Sensing an opportunity, Ganatra jumped on to the HDFC Bank bandwagon. In 2014, when Ganatra decided to take a bet on HDFC Bank, it was trading at price-to-book value of 4.35x compared to current value of 5.26x. It means that HDFC Bank was able to keep up investor expectation as the price increased multifold to #2,121 from #665 five years ago.

He however cautions that, when one is trying to chase value, it is like catching a falling knife. You don’t know how deep a cut you are risking. So it is as important to not make mistakes as it is to generate return. For instance, in 2012-13, they had three investment options — industrial companies; public sector banks and infrastructure companies. “But out of these three sets, we avoided the latter two sets completely.” The underlying argument was that the last two sets had balance sheet risk, whereas the first set had only P&L challenges. “Our guiding principle is that in pursuit of value, many times you are forced to take P&L risk. But balance sheet risk is something you should never take because before your call goes right, the company can become insolvent,” he says, adding that the outcome was exactly as expected. Things started improving and all these companies started re-rating meaningfully. Whereas even after four years, the other two sets were lower in terms of stock price.

They also avoid going down the quality curve, at all times. Last year, for example, in Contra fund, they were continuously forced to sell many of the mid-cap companies because the fair value was being breached and mid-caps were continuously re-rating. And they had the option of getting into large-caps or into lower P/E mid-caps. “What we did was we sold mid-caps and we bought large-caps. So we satisfied ourselves with relative cheapness, but we improved the quality of our portfolio because large-caps have higher RoE than mid-caps that we were selling,” he explains. 

A few bets that didn’t turn out as expected for Ganatra include Corporation Bank, BHEL and Idea, despite holding them for a long time. One learning from such bets was that if balance sheet starts deteriorating, cheap can become cheaper. 

Taking Stock

While Ganatra maintains that he is overweight on different sectors at different times, finance, consumer discretionary and industrials always form the backbone of all funds. Currently, his Contra fund, is overweight on banks, NBFCs and technology. HDFC Bank and ICICI Bank are among the top ten holdings. With non-performing assets coming down, Ganatra expects earnings for corporate banks to go up. 

“Industrials will also recover because for many years now, capex cycles have been weak and capacity utilisation has started improving. Thirdly, consumption has consistently been a driver,” says Ganatra, explaining his stock picks. Hence, to play the consumption story, he holds FMCG stocks such as ITC and United Spirits. Along with consumption and finance stocks, Ganatra has also bought Infosys. With depreciation in currency, IT stocks have become attractive buys. Therefore, Infosys occupies the third highest allocation, of 6.01%, in his Contra Fund. His current portfolio is also well poised to take advantage of the possible upswing across various sectors. “Our view is to take a pro-cyclical stance till the time eventual recovery happens,” he adds. At the same time, much like his favourite fund manager Howard Marks, Ganatra, too, is a strong advocate of Power of Consistency and Margin of Safety. And that, coupled with his analytical approach, have augured well for both him and the investors.

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