Pharma, traditional retail 2 contra bets for ICICI Prudential MF's Mittul Kalawadia

Time of India

3 days ago

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ICICI Prudential's hybrid Equity and Debt Fund is leaning into contrarian plays like pharma and traditional retail, betting on sectoral tailwinds and capital discipline amid macro uncertainty. Mittul Kalawadia , Senior Fund Manager, says the strategy is to rotate across market caps , manage allocations dynamically, and focus on overlooked pockets where fundamentals are intact but sentiment has soured.Edited excerpts from a chat with Mittul Kalawadia, Senior Fund Manager, ICICI Prudential AMC:Our approach involves dynamically managing equity-debt allocation and rotating across market caps based on relative attractiveness. Over the past year, we reduced exposure to mid- and small-caps, and added them selectively when markets corrected. Today, the approach is largely stock-specific as there is no strong directional call on increasing mid and smallcap names.We follow a bottom-up, contrarian approach, seeking opportunities in sectors going through downcycles or ones which are overlooked by the market. For instance, we see merit in companies with strong balance sheets and cash flows, especially amidst macro volatility.Pharma is a good example. There is concern that US regulatory pressure will hurt Indian exporters, but many of them are not earning outsized returns. If price controls are imposed, companies will likely exit low-margin products. Supply will fall, prices will recover, and stronger players will benefit. Similarly, in quick commerce, capital is drying up. We expect traditional players to regain ground once aggressive discounting fades. These are both contrarian plays we like.At the peak last year, equity allocation dropped to about 65% as markets kept rising. When markets corrected early this year, we increased equity allocation to 72–75%. The allocation to equity is dynamically managed based on market movements and valuations.We believe the offering is best suited for long-term investors who are looking for equity-like returns but with lower volatility. Historically, hybrid funds benefit from market volatility—allowing us to buy low and sell high. Our fund, launched in 1998, has outperformed Nifty 50 TRI over the long term, thanks to this flexibility. Investors who do not require short-term liquidity, particularly younger savers, can consider this as a core holding.It depends on the market. If valuations are attractive, we prefer letting redemptions reduce the debt portion to allow equity exposure to rise naturally. Otherwise, we may sell both. But we usually maintain enough cash to manage redemptions without disruption.Since the fund qualifies for equity taxation, we maintain at least 65% in equity. The upper limit is 80%. Post-COVID, we did touch that ceiling once. Last year, during market highs, we dropped close to the lower end—around 66.5%.PSUs tend to be high-beta and get painted with a broad brush during volatile markets. Select segments like power can do well depending on the cycle, but overall, we are more stock-specific now. In 2022, we had high PSU exposure in our equity-debt and dividend yield funds, but we have trimmed the exposure since then. Though valuations have normalized, the blanket cheap PSU story does not hold anymore.Unlikely, unless there is a significant bull market.Post-2020, we shifted away from opting for high yields due to their volatility. We now focus on moderate-yielding stocks with growth visibility. Sectors like IT, telecom (post-consolidation), and select pharma names fit that bill. This approach is a blend of value and growth. The goal is to deliver sustainable yields with more consistent investor experience.It is not just dividend yield, we also look at cash flow yields. For instance, telecom three years ago was attractive as cash flows were poised to improve. Similarly, in IT, even 2–3% dividend yield coupled with steady growth can result in a 4–5% yield over time.Yield becomes a valuation tool in case of high-cash-flow businesses. For example, if a company is likely to return 80–90% of its market cap as dividends over a decade, it is a great investment. We used this approach in metals in 2020. When cash flow yields were 20–25%, we invested. As steel prices peaked in 2021–22, we exited as we believed the yields were no longer sustainable, even though yields were still 6–8% at that time.It varies. Some stocks stay longer, while others are more tactical. Since we focus on relative attractiveness, we churn more than in a typical buy-and-hold strategy. The sizing and scaling also change based on valuations.Yes. We started including REITs in the past two years, when equities looked expensive. REITs are largely yield plays with some capital appreciation, say 2-5% potential upside depending on the asset.We have reduced OMC exposure in our portfolio. While they looked attractive when crude was cheap, current concerns include policy uncertainty and large capex plans, which could depress ROEs in the foreseeable future. Unless crude stabilizes in a narrow range, it is hard to build conviction.In hybrid funds, we use internal models to guide cash deployment. In funds like the dividend yield one, we rarely take big cash calls, staying within a 0–10% range. Hybrid funds are where we tactically manage cash, based on market conditions.We are closer to 70–73% equity now, which is at the higher end of our band. If macro indicators or rates change, our in-house allocation model aids in deciding on the allocation pattern. For instance, if rates fall sharply, equities become relatively more attractive even at the same valuation.