I follow 3 ’Q’ approach: Quality of business, management & balance sheet, says Ashish Chugh

I follow a bottom-up approach, and for me, quality of business, quality of the management, and quality of balance sheet are important, Ashish Chugh, director of Hidden Gems Advisory, said in an interview to Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) With Nifty having corrected from 12,103 to 10,850, we have seen a correction in indices. What should the investors do?

A) Well, the fall in the Nifty50 is not the true reflection of the state of the markets. If you see the prices of small and midcap stocks, they may be trading at Nifty levels of 8,000. Many smallcaps have witnessed a steep fall in their prices—50-80 percent in many cases.

The fall in many small & midcaps is not purely on account of fundamentals of the company, but more on account of demand, and supply for the stock.

In a bear market like what we have witnessed in the last few months, there is generally an absence of aggressive buyers. In such a scenario, even a small amount of selling can damage the stock price significantly.

It is time for investors to think and act with a cool head rather than panic on seeing stocks fall. The singular focus should be on the business in which one is invested in, as well as the investment thesis and whether that thesis has changed with the fall in stock price.

Believe me, when the things change for the better, the up move will be equally strong and the predominant factor which will cause that will be FOMO (Fear of Missing Out).

Q) The economy is seeing a big slowdown and markets, too, have corrected. What do you think the government can do to get the economy back on track?

A) Well, I am not an economist but I do understand investment and psychology. I will, therefore, explain from that perspective.

Consumerism and growth of an economy happens when there is a sense of confidence and security. Decline in net worth (stocks, real estate), fewer jobs and a general slowdown in the economy leads to postponement of discretionary spending (cars etc) and the effect is spiral.

The imposition of tax on long-term capital gains last year, the imposition of buyback tax, tax on foreign portfolio investors and the super-rich have proved to be counter-productive and have added to the woes.

When the BJP swept elections, we had the perfect set up for a strong growth. The government has a full majority which enables them to undertake bold reforms.

Inflation is at historic lows, and the crude price is down to about $60-65, but the messaging in the budget negated all the positives which were there.

But, I think the government has good intentions and is passionate about the country and its growth. It is quite capable of taking corrective actions and this can lead to the revival of growth.

Some positive announcements from the government to shore up the grim mood can certainly pep up the markets.

Q) Your views on investing in small and medium enterprises (SMEs)?

A) I think most of the SME companies which came out with IPOs in the last two years were of either poor quality or overpriced. I am not comfortable investing in them. Also, most of these companies do not have any moats or entry barriers to business, there may be a few exceptions though.

Many companies in small and microcap space listed on the main board on NSE and BSE are much better quality companies and available at much better valuations. To me, that provides business as well as valuation comfort.

Q) Where do you see pockets of opportunity for investment and what companies are you eyeing?

A) The valuation of most companies have corrected significantly over the last one year and now the valuation comfort is there. Even though there is a slowdown in the economy, the valuations of companies are factoring in most of the known concerns.

For me, quality of business, quality of the management, and quality of balance sheet are important. The long-term growth potential of the business is important.

My buying approach is a bottom-up and there are stocks across sectors which are looking very attractive. However, given the uncertainties in global markets, a staggered approach to buying may be much better.

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