UTI's Vetri is betting on banks as a play on next growth cycle
Stock markets haven't been kind to the bulls, the Nifty50 from its peak of 18,600 has lost more than 1000 points and for the first time in November, the Indian markets are underperforming global markets.
To discuss the market dynamics and gain an understanding as to whether the underperformance is simply a passing blip, CNBC-TV18 caught up with market veteran Vetri Subramaniam, Group President & Head-Equity at UTI Asset Management Company Limited.
He said, "Banks have significantly lagged the market in recent times and were the worst hit in the early part of the pandemic. It is an area where we think there is actually significant value now. So from a value perspective, the financials, lenders are a part of the market that we like but we are selective."
"Our sense is that it has been a story of a bunch of financial institutions effectively, continuously gaining market share by outgrowing credit growth by a margin of one-and-a-half or even 3:1 in their growth numbers. That sort of consolidation will continue," he mentioned.
'These banks have been proactive this time around in terms of provisioning. They have raised capital preemptively and they are very well placed for the next growth upcycle," Subramaniam said.
Maybe the market is a little bit concerned when it looks at the fact that credit growth for the entire banking sector as the data comes out from RBI is just about 7 percent year-on-year, but if you are thinking about the economy growing over the next three to five years, then it is wrong to anchor to that 7 percent, he noted.
"I am happy that people are in a sense not so pleased with the 7 percent credit growth because it gives us a good opportunity to build positions there for the eventual credit growth that we think will come through. Also, because of the consolidation that has taken place, we think these companies will actually be able to gain both market share and profitability through the next upcycle," he said.
With regard to the market, he believes that valuations are challenging and hence, investors need to moderate their return expectations.
"The most crucial thing to keep in mind is that the returns of the past one year or even over the last 18 months, are not indicative of the kind of returns the asset class can generate over the next three to five years period. So don't hold what's happened over the last year as the benchmark for what can happen in the future," Subramaniam specified.
When asked if there were any dangers to the rally in terms of a very precipitous fall, he said, "There are two ways to think about this. One is that eventually, valuations by themselves are a reason for markets
to correct but the actual tipping point, which then causes the market to correct, could come from anywhere."
He added, "It may not necessarily be precipitous. The market is working off excessive valuations in more than one way- one is the sharp drop in prices, and therefore in valuations; the other is that the market runs up ahead of the earnings numbers and then stock prices stop reacting to the earnings growth and therefore effectively they deflate in terms of valuations by going nowhere, over a period of time. So we don't really know, which of those to actually play out."
In terms of the tipping points, which could cause that to happen, he said that a lot of those risks are reasonably well known.
"Some of the challenges that our economy as well as the global economy will have to face are well known, which is essentially, the normalisation of both fiscal policy as well as monetary policy, though the mix could be different across economies. That is now reasonably well understood. It is the events which lie outside, let us say, the middle of the range, which are really the big concerns and if you were to think about that, one concern would be what if the Fed, as well as all the central banks across the world, are behind the curve? So that is a tail risk at one extreme," he said.
He further added, "The tail risk to worry about at the other extreme is really that given the events that have happened in China, the slowdown in growth over there, is it possible that the world's second economy actually delivers very weak growth performance and as a result, pulls down the entire growth outlook. Those to my mind, are the two extreme tail risks with very different sort of messages, but those could be the surprises that upset the market."
On new-age stocks like Zomato and Nykaa, Subramaniam said, "There are two ways of looking at them, one is the most common one, which is that all of this is a bubble and as soon as they start to normalise, all the hot air will come out of it. However, when you look at numbers like 1000 PE or 10-11 times the price to sales or 20 times price to sales, what we are missing is that eventually, these are the companies with significantly strong growth prospects and a very long growth runway."
"So, without getting into any individual names, we have to be careful. Therefore, just extrapolating the valuation number and using that as a reason, some of these companies could surprise us in terms of their growth. But I do admit the bar is high. It is not the valuation that troubles but the fact that when I look at the value of the business, if you are ascribing 20 billion 30 billion to the value of the company today, then the kind of ask rate it will have to generate over the next few years is very high. And history has taught us over time that only few companies will manage that," he said.
"Even if there are 20 of these consumer tech businesses out there, and all of them are getting the benefit of these valuations, it would not surprise me if 10 years from today, we discover that out of that basket of names, only one or two actually deserve them but that is something that we will discover over time. As of now, we are trying to understand how these business models actually evolve," Subramaniam mentioned.
He further said that they have bid on some of these names like Nykaa, Zomato, Policybazaar, and in all of those they were among the anchors.
On IPOs, he said, "We are dealing with a flood of IPOs and it is not easy for your team to crunch through 24 companies, go through the DRHPs. So, we have been very selective in terms of the IPOs that we chose to participate in. But these exposures as of now are below 1 percent of the portfolio exposure."
Publication: CNBC TV18
Continue SIPs or stagger investments over 6 months: Swati Kulkarni
“IT, automobile, banking, telecom and pharmaceuticals are likely to do relatively better," says UTI MF fund manager.
Indian equity indices have scaled fresh highs almost every month for the past year after recovering from the body blow dealt by the emergence of the Covid-19 crisis in March 2020. But, there are investors, who are in two minds about when the rally could end. A veteran of one of India's largest asset management houses talks to ETMarkets.com about how to go about investing in such a turbulent environment. "So, rather than living with the illusion of timing the investments, it is better to have a disciplined approach with well planned asset allocations to reach desired financial goals. Investment through SIPs should continue. For any lump sum investment, a staggered approach over 6 months could be considered," Swati Kulkarni, EVP & Fund Manager – Equity of UTI Mutual Fund, said in an interview to ETMarkets.com.
Edited excerpts: Notwithstanding minor corrections, the bull run in equity markets seems to have surpassed all expectations. Do you think the current valuations are stretched? How much of an upside are you expecting in benchmark indices?
Current valuations, P/E as well as P/B are beyond 1 standard deviation above the last 10-year average for various indices across market capitalisation. For the near term, the current consensus earnings growth estimates seem to be well priced in. The long-term chart of Nifty 50 index movement shows that all the previous peaks have surpassed, despite intermittent corrections, reflecting the fact that the market follows long-term earnings growth of its constituents. As long-term investors, we see many positive factors that will fuel this earnings growth but in the short term, since the valuations are not supportive, the market may correct, should there be risk elevation.
However, equity investing is for the long haul. The low interest rate and thus low cost of capital boosts equity valuation. Businesses are valued in perpetuity by discounting the expected future cash flows. Our focus has been to invest for the long term in businesses that generate consistent cash flows and have well managed capital structure with returns better than the cost of capital. We are not equipped to guess the benchmark indices movement.
How does an investor navigate the prevailing volatility in the market? How does one 'time' investments in such a market?
Investors could rebalance their asset allocation to the desired level to align with their respective risk tolerance. For example, if 60% was the desired equity allocation and with higher gains over last year, actual equity allocation has moved to 70%, that may be reduced back to 60%. For those who invest in direct equity, it is important to evaluate whether the profits for the company were out of a short term opportunity or could sustain in the long term; is the capital structure too stretched with high leverage? Is cash conversion poor or if there is any risk of disruption/ technology obsolescence.
Investing at 'the bottom' of the market is theoretical or by chance. We often tend to ignore the risk of inadequately investing in equity assets and missing on the up move. So, rather than living in the illusion of timing the investments, having a disciplined approach with well-planned asset allocation to reach desired financial goals is important at all points of time. To my mind, investment through SIPs should continue. For any lump sum investment, a staggered approach over 6 months could be considered.
In its October 2021 Bulletin, the RBI noted a rapid jump in net inflows from small towns and cities in mutual funds, particularly cities beyond the top 110 ones. Are we seeing a broad-based shift in investment patterns?
The MF awareness has improved considerably over the past few years thanks to the efforts of MFs and AMFI. Buoyant equity markets also helped in attracting new investors. With a well spread branch network and trusted brand, UTIMF has inflows from all over the country.
What is the best pick at the current moment between smallcaps, midcaps and largecap stocks?
As discussed earlier, valuations are above the historic range across market capitalization. SIP for regular and STP for lumpsum investment could be the approach. Largecap could be a better option over mid or smallcaps from the perspective of the near-term volatility. Having said that, one should build a well-planned allocation, suiting the individual risk profile and return potential across the market capitalization.
How has UTI Mastershare Fund performed so far in 2021? Between UTI Mastershare unit scheme, the MNC Fund and the Dividend Yield Fund -- what would you recommend?
Year to Date, UTI Mastershare has outperformed the benchmark S&P BSE 100 by 1.6% and is ranked among the top 40% amongst the peers. As regards the recommendation, let me state upfront that I have SIPs running in all three for the past many years. One could understand the equity allocation with core and satellite approach, core allocation being higher and held longer than the satellite allocation. UTI Mastershare, being a Large Cap Fund investing in leading companies with durable competitive advantages, could be considered as a core holding.
UTI Dividend Yield Fund and UTI MNC fund have different investment mandates and thus have little overlap in the portfolios. Both funds could be considered satellite portion with allocation of 15-20%.
Has the market discounted the growth recovery expectation in the earnings and the economy? Does this pose a risk for investors with short-term horizons?
Earnings in the base year were depressed due to lack of normalcy in operation. The consumer spending behaviour, pick up in infrastructure spend, in private capex and in global economy at the macro level and company specific factors at the micro level like operating leverage, interest cost and other cost controls, provision write back etc. could support earnings growth over the medium term, although the current expectations seem to have been largely priced in. High valuations render little support to the markets if there is any elevation in the risk -- be it in the form of earnings disappointment, hard liquidity
unwinding, sustained commodity inflation etc. Investors should always have a long term investment horizon to make the most from the equity asset class.
Is the market prepared for normalisation of monetary policy and higher interest rates both domestically and globally?
Institutional market participants would know that with normalcy returning, the ample liquidity support provided to deal with the pandemic will start to unwind. Hence it is not an unknown variable. The central banks have been communicating their thought process to the market through the minutes of the policy meetings. However, if the pace of it surprises the market or the inflationary pressure is expected to stay elevated for longer, there will be a movement of flows out of EM which will make markets very volatile.
Which are the sectors that are likely to do well in the near to medium term and what are the biggest risk factors that investors should watch out for?
I believe IT, automobile, banking, telecom and pharmaceuticals are likely to do relatively better. The sustained commodity price rises leading to raw material cost inflation adversely affecting profitability, sticky inflation leading to hardening interest rates, harsh unwinding of liquidity amidst the patchy growth recovery, Covid resurgence are a few variables that could trigger risk off trade.
Publication: ET Online
Publication: Business Standard