Quality Stocks Are Available At Attractive Valuations, Says Marcellus' Pramod Gubbi
India has emerged as an attractive alternate for investments in risk assets, according to Gubbi
With a rise in foreign institutional investors in emerging markets and expected rate cuts towards the end of the year, investment manager Pramod Gubbi expects fund flow to sustain longer.
India seems to be the most preferred choice for investments in risk assets because the country has emerged as an attractive alternative to other South Asian countries, according to Gubbi, founder, Marcellus Investment Management Pvt.
This shift in preference is due to a myriad of geopolitical tensions and China's repute after the pandemic, he told BQ Prime's Niraj Shah.
As long as we find opportunities in the quality universe below intrinsic value, we will continue to be buyers in the market.Pramod Gubbi
Quality Versus Value
"Quality stocks", which Gubbi identified as "high return on capital stocks", have underperformed significantly in the last 18 months. This has made them, in terms of both relative and absolute valuations, attractive at the moment, he said.
Much of the foreign inflow has been perceived as quality stocks recently. The high possibility of reversal in this trend could tone down the valuation attractiveness of these stocks and make the rally unsustainable, according to him.
"If value is all about the gap between intrinsic value and the stock price, the rally concludes if this gap closes, as there is no underlying growth in intrinsic value. Whereas, quality continues to deliver because even if the valuation gap gets covered, intrinsic value will grow," Gubbi said.
This is why FIIs are buying more quality stocks, according to him.
Clean management, sensible capital allocation and sustainable competitive advantages are three primary parameters to buy a stock.Pramod Gubbi
Banks And Other Themes
Credit deposit ratios have been under pressure, alongside recovery in credit growth in the last six quarters, he noted.
This acts as a tailwind for both public and private sector banks, as it allows banks to earn margins without taking undue asset quality risks, Gubbi said.
When it comes to non-banking financial companies, one key factor to look at is "liability franchise", he said.
Private sectors banks that held up strong asset quality in the past 18 months have been the biggest sources of dislocation, in terms of value and price correction.
Apart from banks, pharma, consumer discretionary and information technology are other themes one should look at, Gubbi suggested.