I am glad that volatility is returning to the market because typically that signals the end of the bottom because until now, it has been pretty smooth slide and that is always scary, says Samit Vartak, Partner and Chief Investment Officer, SageOne Investment Advisors. Excerpts from an interview with ETNOW. It is continues to be a bit of a gloom and doom. We have had slowdown concerns for some time. Nomura is the latest one to jump on that bandwagon talking about short-term despair. Are you also a proponent of the current doom and gloom scenario or do you see some silver lining that we are perhaps missing?Yes, you know the markets go through perceptions and extreme sentiments. In December 17, we were at the other end. Today, probably, we are at the lowest end. This is the lowest sentiment that I have seen since 2008-2009. The economy has slowed down and there are various factors responsible for it but one has to put things in perspective.Investment is for the long run. Things which are happening in the markets. I would say, have multiple positives. So, I imagine the rating agencies are now probably moving more towards realistic ratings. The auditors been penalised or been threatened to be banned from the country and probably are auditing the statements much more realistically — which they should have been doing anyway. And then comes the banking system. Consortiums were created for accessing the system but the beneficiaries were the promoters who were able to play the system well. And these were not even the competent promoters. These changes in the long run will make sure that the competent promoters have a level playing field and those are the ones which would probably excel going forward. After this clean up, whichever companies remain will become much stronger. They could become much bigger multibaggers because a lot of the weaker companies survived by basically leveraging these loose ends. I think they will be losing business, they will be giving away their market share but yes this transition phase is like a detox. It is painful but in the long run, India has great entrepreneurs and probably a lot of competent entrepreneurs were suppressed because they did not want to play the system and probably did not have the ability to play the system. They probably just knew how to run the business best and they did not succeed in this kind of an environment. Going forward as the environment improves, these are the kind of entrepreneurs which will deliver and it is great for the country in the long run. If we are looking at a longer run scenario, first of all, let us talk about the fund flow picture. Over the next few quarters, how are you expecting things to shape up?Markets today are completely driven by flows and unfortunately the buyers have vanished. So even if you have one or two sellers in a stock, the stock gets impacted by 10-20-30% irrespective of what the fundamentals are. There are companies which have come out with great results but are getting impacted just because of the liquidity and that is what happens at the extremes of the market. I am glad that at least the volatility is returning to the market because typically that signals the end of the bottom because until now, it has been pretty smooth slide and that is always scary. The market is pricing in so many negatives. At the time of election, at the time of results, we were pricing in probably a 10% kind of a GDP growth and post this budget, we probably are pricing in you know 4% or below GDP growth. The valuations that I see today are not anywhere close to what we saw in 2009, the worst of the cycle but they are close to what we saw in 2012. So they are pretty attractive especially if you leave out the top 100 stocks and go below that and if you leave out the B2C business — the business to consumer companies. The B2B businesses probably are trading pretty close to what they traded in 2011-2012 and which were extremely attractive valuations. I believe we just need few positive trigger points. There are many investors who are sitting on cash, There are a lot of fund managers sitting on cash. There are lots of money on the sidelines but no one dares to enter this kind of market and catch a falling knife. I think the markets need to hit some sort of stability and that is where we will get the courage to come into the market. A few other points I would like to make is that until July-August of last year, the base was sort of against us. After the IL&FS crisis hit in August-September, the base went low. That is the phase we will enter post August — in September, October, November, the festive season. We would be having a much favourable comparison and I am pretty hopeful the liquidity situation by this time would be much better than what existed last festive season and we could see some positive signs and if that is to happen you know the valuations are so attractive the levels are so low I think that might be a trigger for the markets to probably start going up. Are you looking at any specific names? Or are there various sectors where you expect opportunities to emerge?I am a bottoms-up stock picker. I have been a fan of speciality chemicals for a long time, so I would not speak about that. But do look at the B2B businesses which are more towards the building materials, maybe towards infrastructure or commercial buildings or residential buildings. Those are doing pretty well, especially where the market is not that scattered, where there are only one or two leaders. There are many weaker players who are going out of business. One of the companies that we like is into steel pipes. I have seen that because I live in Pune and travel a lot from Pune to Mumbai. From Pune to Mumbai, there were at least 20 smaller players who have shut shop in the last one-and-a-half year post GST and because of that, the leaders they are still growing at 25-30% top line. This is a sign of what lies ahead of us. There are many smaller players in multiple industries, especially in B2B businesses, which may not be able to survive and they will end up giving away their market share to the leaders. If we focus on those and just ride this volatility out, stop looking at prices and just keep our mental stable, we will be fine. Just make sure you are not into one of these weaker players who probably would not survive this downturn. What about the trajectory of the broader end of the market versus the largecaps from a valuation standpoint? Smallcaps have been lagging the most in the last five years. What according to you is driving the conviction that we could see lesser risk in mid and smallcaps versus the largecaps?In terms of business, there is a misconception that largecaps are the safest in terms of business model. Even they can be disrupted and that is what we are seeing in the auto sector. The largecaps have been equally hit. One has to focus on businesses irrespective of where the market cap lies. It is just that the entire universe, if you leave out the top 100 companies, has been penalised. I was just looking at the median valuations of this range. The top 100 companies median valuation is anywhere from 26 to 27 times. Beyond 250 companies, the decimation starts. Once you go beyond 500 companies, 500 to 1000, their median valuation is in single digit, below 10 and that has happened after six to seven years. You have to find the right leader, irrespective of whether it is a largecap or smallcap or a midcap. Maybe valuation is at single digit PE multiple or low double digit, but there are many leaders. Even the ones I spoke to are trading at 11-12-13 times. If one of these companies were in the top 100, just because of the liquidity that is flowing into the largecaps and just because of the performance of the largecaps, they would probably be trading at double the valuation. It is just the valuation attractiveness that you should look at. Obviously it is not going to be the bottom. It is extremely difficult to pick the bottoms but you got to ride through this volatility. What you have probably given up in the last three, six, seven, eight months, once the market stabilises and the money which is lying on the sideline comes in, you can recover that in a matter of few weeks. Just look at the previous cycles — for example, during the 2009 cycle, March 9 was the lowest for the market, From March 9 to June 15, the smallcap indices and many of these companies more than doubled. A similar thing happened in the 2012-13 cycle. The jumps are pretty volatile and if you are not buying during these low sentiment times, you do not get the opportunity. You will probably feel more painful if you lose 10% more or 15% more but that is how markets work. You got to jump in when people are running away from that space.What is your view on some of these deals being concluded by say DHFL, Zee etc? Could they really change the picture?I believe so. Companies which are able to raise equity, especially in the NBFC space during this time and especially if they are able to do so through high quality investors, should give a lot of confidence to the investors and will probably allay a lot of fears that are in the market. When they put in the equity, they have much better insights into the business because of due diligence. They hire people and they have much better access to the internals of the company as well as the various exposure to risk assets. If they are coming in at these kinds of times, it should definitely give you a lot of confidence. I believe it will definitely lower the volatility. You have got to go through this phase when it is more liquidity driven but once investors start focussing on the fundamentals, people realise that the smartest of investors take a much more informed view about that company.In a market like this, would you stick to the safer bets, the financials, the consumption side or will you look deeper into utilities or infra? Unfortunately most of the investors would be already invested. For someone who is starting to invest, it is a no-brainer. Just start buying and probably build a portfolio in the next three months. But for someone who is already invested and stuck with some companies which have not done well or are not doing well, they are not leaders in any of the segments. They are the inferior players within that industry. I think this is a time to shift to the leaders. I believe that you have to identify the most competent entrepreneur, the business with significant competitive advantage within that industry versus the competition because whether it is the leader or whether it is the second player, in many industries they have been penalised equally. So, this is where you get an opportunity. Do not worry about how much loss you have had because you probably are getting into something where it has also corrected. This is an opportunity you should not miss or wait for the markets to stabilise because you would not probably get the liquidity to get out in any of these stocks. It makes sense even if you are taking an incremental loss of 5-10% more just get out of a weaker company and get into the strongest in that sector. Just lose the anchoring bias, do not worry about your losses. It is a decision which may seem painful today but if you look at it from two-year, three-year perspective, you will see what a great opportunity this was. I would say just look at individual companies and invest in companies where they are leaders by a margin irrespective of whether the sector is growing or not because the majority of the growth will come from market share gains and not just because of the industry growth. Industry growth can sometimes be misleading because it does not mean much. If there are multiple players who are able to come into that industry, that specific player may not be able to take advantage of the industry growth because that growth will be spread across multiple players. But if you got into an industry where the number of players are shrinking, even if the industry is not growing as fast, the leader may be growing at a much faster pace. That is something that you need to keep in mind because otherwise if you stick with the weaker players they probably would never recover.