Indian capital markets ripe for price correction in 2018: Kenneth Andrade, Old Bridge Capital

Kenneth Andrade, Founder & CIO, Old Bridge Capital

Capital markets investor Old Bridge Capital is still bullish on the Indian markets amidst rising concerns on valuations and slowing domestic flows.

The Mumbai-based asset management firm had launched its maiden category III Alternative Investment Funds (AIF), Vantage Equity Fund, in December last year. And, having surpassed its initial target, Old Bridge Capital is now raising an additional Rs 300 crore ($46 million). The firm floated the Vantage Equity Fund late last year with the aim of raising Rs 400 crore, including a greenshoe option of Rs 300 crore.

In an interview with DEALSTREETASIA, Kenneth Andrade, Founder & CIO, Old Bridge Capital, talked about the current mood in the Indian capital markets and the firm’s plans. Edited excerpts:

How do you view the current mood in the capital markets given the bank frauds and attendant negativity that has surfaced?

From a sentiment perspective, this is probably not the best time in the Indian context. This comes at the end of the deleveraging cycle and the loans which cannot be carried forward and are essentially written off. And a culmination of all of that is what you see right now. That’s what it comes from as far as the mood is concerned. However, if you strip out the noise around the banking system, corporate India doesn’t need most of these banks to really grow, because cash flows are already going to be at their all-time high and this environment is all about efficiency, utilisation, getting that operating leverage, getting efficiency in their systems. And all of this is coming with no capital employed, so corporate India doesn’t need any more investments to utilise the next 20-30 per cent capacity.

Is the bull run still continuing?

There are two elements to that. Will profitability continue to grow? It will. If you ask me, if the markets will grow linearly, you’re basically interlinking it to global cycle. What’s happening is that interest rates are going up, when that happens and bond yields move up. There is a compression on the price-earnings multiples on your equity play. The reverse of what’s happening in bonds happens on the equity side. That’s what you see emerging in 2018. This could be in continuation for some time till the bond markets settle. Bond markets are reflective of the global economic cycle and the global economic cycle like this Indian cycle is robust. So, I don’t think we should worry about it in the near term. After a 4-5 year secular uptrend in the market, the market necessarily needs to pause and you’re getting that opportunity here.

From a regulatory point of view, how do you view the impact of the recent regulations on the capital markets? And, has that had any impact on the way foreign investors view India?

It’s a currency trait, India’s higher fiscal deficit, leads to higher borrowing, which leads to currency risk. Plus all the negative environment that is playing out in India is not very good for the economy or the sentiment itself. Foreign investors are cautious, but there are long-term investors that are looking at India from a very long-term perspective because we’ve got the demographics to drive growth. As far as valuations are reasonable, which they never were in the last two-three years, you will have capital that will return. In the near-term, you may have a flight of capital but in the longer term, I don’t see that as much of an issue.

Have the valuations now become more reasonable or are they still quite high?

Give it about 2-3 months and everything will be available nicely priced. Give it one year and earnings will catch up. Basically, 2018 will give you both a time correction and a price correction.

Coming to Old Bridge Capital, what was your rationale for launching an AIF? How does that align with your existing business?

We cater to a set of investors over a certain ticket size. We’ve got two products in the cycle, one is a portfolio management product and the other is the alternative investment fund category. We have a Category 3 AIF, under which we have a long-only product and that is distributed around the country by our distribution partners. It is the first series which we launched in December 2017 and we got 700 investors who essentially invested in the AIF. The regulatory limit on the number of investors in AIF in 1000. Given the volatility in the cycle, we see an opportunity to create a portfolio, which is a little more sustaining into 2019-2020. And, 300 more investors is what we can accommodate in the cycle. That’s how the structure fits in and that’s the capacity that we have.

Are there any particular sectors that you are looking to target or are keen on investing in?

India is all about efficiency and operating leverage, and corporate India is deleveraging very fast. Put these things together and by 2020 you will have a whole lot of services and manufacturing services, reaching record highs and profitability and record lows of financial leverage. That’s where the opportunity lies, lots of manufacturing and services. It’s difficult to specify one particular space because it’s cutting across automobile, engineering, media and other industries. From a strategy standpoint, we’re looking at companies that are optimising their capacities on the ground. The only industry that we don’t have, and probably will not have in this particular three-year cycle is the financial services business. So, if we strip that out, we’ve got a fair amount of allocations to media,  automobiles, farm economy or the companies that address the farm economy. Also, manufacturing, though it looks very generic, but we’ve got a few companies that fall into manufacturing that include chemicals. These account for around 70-75 per cent of our portfolio.

Have you already started deploying the AIF?

The money we collected in December is 80 per cent invested. Already have a stock portfolio of about 20 companies.

Last year, there was a report about the rise in the number of Category 3 AIFs in the market including yours. What makes this space attractive?

It’s just that the operating structure is very similar to a mutual fund structure, except for the number of investors that can be pooled in and the minimum subscription level. It’s a pool structure, operationally it is there, single NAV and the tax compliance is on the vehicle and its not in the hands of the investors. It’s an operational leverage, like I said, is a single NAV for an investor. A portfolio management product is for investors who want separate stock portfolios. Both these categories have seen dramatic growth over the last three-four years.

Given the positive response that you’ve received for this AIF, are you planning to launch a second vehicle anytime soon?

We’ll get this fully invested. Our business model is that we go out and source a little bit of funds, we invest fully and create a pipeline of opportunities before we resource more capital. Our business model doesn’t allow us to take capital at all intervals. We wait for a quarter or two and then we raise capital again because we need for the portfolio to stabilise and check for errors that might have entered in the portfolio in this market. It’s too early to talk about a second vehicle, we also have to see how the market behaves. If we see a nice opportunity then I don’t see why we shouldn’t have another product.

How do you view 2018 for Old Bridge Capital now?

We’ve had a good start, investors and markets have been very generous. We’ve got our timing really well and things have played out in 2017. 2018 will be a year of consolidation for us. If we’ll have a number of product launches? That’s a grey area for us because we have to consolidate our backend also our communication lines with our existing investors and then build it forward.

Also Read:

India: Old Bridge Capital to raise $46m more for AIF Vantage Equity Fund

India: Old Bridge Capital to launch first Category 3 AIF of $62m