Value investing still works, but stock selection is key: Fund managers

Business Standard BFSI Summit: Mutual fund leaders say investors must look beyond market narratives and assess businesses on their fundamentals and valuations

Value investing remains relevant in Indian markets, but investors need to distinguish between genuinely undervalued stocks and those that have fallen because their business prospects are deteriorating, fund managers said at the Business Standard BFSI Summit in Mumbai on Wednesday.

 

In a session titled 'Have Indian markets moved past Value Investing?', moderated by Business Standard's Praveen Palande, PPFAS Asset Management's chief investment officer for equity and director Rajiv Thakkar said investing should be about comparing a company's intrinsic value with its market price, rather than attaching labels such as value or growth.

 

“When we invested in US tech stocks, we could value them conventionally, figure out what the intrinsic value is, and we felt that the market was not pricing them properly,” Thakkar said.

 

 

He said the distinction between value and growth investing often lies in how much investors rely on future earnings. According to him, growth investors tend to derive a larger share of a company's value from cash flows expected many years ahead, while value investors generally prefer greater visibility on near-term cash flows.

 

Projecting too far into the future can make valuations vulnerable to errors, he said, citing the experience of Indian technology stocks.

 

Thakkar also cautioned investors against overlooking corporate governance in the search for returns. While regulatory changes, greater disclosure requirements and digital transactions have improved governance standards, he said investors could still be too forgiving of promoters with questionable track records. 

 

Patience, conviction and research

 

Prashant Jain, founder and chief investment officer of 3P Investment Managers, said staying with an investment through a prolonged period of underperformance requires a deep understanding of the underlying business and the reasons behind the market's assessment of it.

 

“Investing is more about EQ than IQ,” Jain said, adding that such conviction must be backed by sound research and a proper understanding of the business.

 

Jain also discussed his decision to exit Indian technology stocks in November 1999, when valuations were high. He said he believed the sector's growth rates at the time were unsustainable.

 

He stressed, however, that he does not see the sector losing its relevance. Despite the deflationary pressures that artificial intelligence could create, Indian technology companies continue to report positive dollar revenue growth, he said.

 

AI and the search for value

 

Lakshmi Iyer, group president for investments and MD & CEO of Bajaj Alternate Investment Fund Managers, said value investing could be applied across asset classes, including fixed income.

 

For a fund manager, the decision is about where the next incremental return is likely to come from, she said. That could mean allocating more money to bonds or equities, depending on the market cycle and the relative attractiveness of the available opportunities.

 

Turning to AI, Iyer said India's investment landscape in this space differed from that of the US, where a large share of spending has gone into foundational infrastructure and the development of large language models. India's activity, she said, was more concentrated on applications.

 

She did not consider India's AI opportunity to be in bubble territory, arguing that domestic companies had not relied on the kind of large-scale borrowing seen in some overseas AI investments and were generally funding capital expenditure through cash flows.

 

For listed Indian technology companies, however, she expects investors to become more selective. “Everything that is at a discount need not necessarily offer value,” she said, adding that investors must determine whether the correction reflects a temporary setback or a lasting deterioration in the business.

 

Largecaps offer relative value

 

Thakkar said largecap stocks were trading at lower valuations on average than midcap and smallcap stocks. Citing index-level price-to-earnings ratios, he put the Nifty 100 at around 18-19 times earnings, the Nifty Midcap 150 at 24-25 times and the Nifty Smallcap 250 at 31-32 times. He also pointed to the flow of domestic money into midcap and smallcap mutual fund categories even as largecap funds had seen outflows in some months. Investors, he said, appeared to have become overly concentrated in smaller stocks.

 

The top 100 companies account for an estimated 65-70 per cent of the profits generated by India's top 500 listed companies, Thakkar said. This concentration of earnings makes it important for investors not to overlook larger businesses simply because their stocks have underperformed.

 

Jain agreed that the market could see mean reversion, with the relative performance of different segments changing over time. However, he cautioned against treating all small- and mid-cap companies alike.

 

“There is value, there is sustainability, there is growth in large-caps, and they should not be ignored,” he said. Smaller companies can also offer stock-picking opportunities, but investors need to be selective and conduct focused research, he added.

 

Iyer advocated a balanced approach rather than an outright shift away from either segment. Investors should look beyond index movements and market narratives to identify companies with sound fundamentals and reasonable valuations, she said.