Rahul Rathi, Chairman & Fund Manager, Purnartha PMS, says in their investment strategy, the first driver is volume growth; the second driver is operating margin expansion and the third driver is valuation. They picked up GAIL last year at Rs 110, margins were at 1% compared to historical margins of 13% to 15% and they knew that margin contraction was temporary. Valuations were lower. It was a largecap and they rode its benefit. They are riding the benefit of a similar thought process in Tech Mahindra. It is a bottoms-up strategy and instead of one driver and the environment where interest rates came down, the focus is on three drivers.
How are the markets looking? Where are you picking your spots?
Rahul Rathi: Let us look at the background and then I will tell you how things have changed. Over the last 15 years delivering returns, we have always believed that good companies with large volume growth meant a certain value-addition and asset appreciation could happen to the portfolio. We believed in businesses that had a certain volume growth, which was about 10% and which did not borrow money.
That means they also had pricing power and these companies would create a significant amount of appreciation and we were in an environment where interest rates kept on coming down. Because of that asset appreciation fell in two parts, just because interest rates kept on coming down, valuation started going up and then these businesses continued to grow at a healthy pace.
There was a certain return that was more than the cash