“SIP is a better way for wealth creation”
Taking stock of the current market scenario, Amit Premchandani, Senior Vice President and Fund Manager (Equity) at UTI AMC highlights the volatility that has rattled the equation and suggests a strategy for investors to stay afloat
Can you share your investment philosophy and the key principles that guide your approach as the Senior Vice President and Fund Manager at UTI AMC?
UTI follows a ‘Score Alpha’ framework, which has two important guiding principles: consistency in operating cash flows and return on capital employed. We use these principles to bring stability and consistency to our approach. I manage the value and dividend yield strategy, which operates with the underlying themes of intrinsic value and growth in dividends, respectively. In the UTI Value Opportunity Fund, we follow a barbell approach at the stock level.
On the one hand, we invest in stocks that are cyclically challenged with decent balance sheets and focus on the contra approach during temporary disruptions in company performance on account of cyclical movements. This helps us to buy when expectations are low. On the other hand, we also invest in growth stocks with valuation reflecting reasonable implied growth. Valuations largely drive the sectoral allocations. In UTI Dividend Yield Fund, we invest in looking at the dividend yield, including buyback, as one of the most important factors in stock selection.
We focus on growth in dividends rather than only high yields. Dividend-paying companies have relatively low capex requirements for growth while they also generate cash, which reduces the possibility of companies facing stress due to leverage. The theme ensures that the portfolio primarily comprises companies with clean balance sheets in terms of leverage as well as a decent cash flow profile. The underlying principle of fund management in both funds is that quality and value are not mutually exclusive.
What is your assessment of the Indian equity market at the start of 2025, and what can investors expect going forward?
The earnings growth has been very strong for the period FY21-24, with it being a period of positive earnings revisions, which drove market returns and valuations. FY25 has seen a pause, and now there has been a reversal in this trend, with earnings downgrades from the expectations at the start of the year. Capex as a theme was predominant till a few months back, with order flow driving the valuation. We think we are amid a cyclical slowdown in capex as seen by government expenditure data. On the other hand, most companies are operating at peak margins, which are being valued at peak multiples. We see a risk here. Investors should reduce return expectations to be in line with earnings growth.
In a recent interview, you mentioned that valuations remain in the above-average zone for Large-Caps, while Mid-Caps and Small-Caps are in the expensive zone. Could you elaborate on the factors contributing to this assessment?
Historically, we have seen mid-caps providing better risk-adjusted returns over large-caps, while small-caps have had relatively lower risk-adjusted returns. The valuation premium of mid-caps over large-caps has now expanded to more than one standard deviation. The median valuation in mid-caps is higher than the 2007-08 cycle. Significant flows in mid-cap and small-cap funds have contributed to liquidity chasing a select pool of companies. If we look at the P/BV multiple valuation premium over the large-cap segment or its history, it is even higher for the mid-caps.
As we are amid the earnings season, what are your expectations for corporate earnings in Q3FY25? Are there any sectors where you see significant upward or downward revisions?
FY24 earning growth was largely driven by margin expansion, with a gap between revenue and margins expanding materially. We expect revenue growth to drive earnings going forward. The PAT growth in H1FY25 of domestic consumption-oriented companies is in the mid-single digit, while exports, capital markets and industrials have done better. I expect revenue growth in consumption to improve in CY2025, while capex may see a pullback.
Can you share insights into the performance of the UTI Value Opportunity Fund and UTI Dividend Yield Fund under your management in the past year?
The quality of both portfolios is better than its peers, which has helped us in managing the volatility. For us, quality is reflected through operating cash flows and the ROCE profile of the portfolio. Our overweight exposure in healthcare and IT has contributed positively, while our timely decrease in exposure to automotive after a significant run-up has helped preserve the alpha.
Could you share some advice for new investors looking to invest in mutual funds in the current market environment?
In the long term, equity market returns are linked to underlying earnings’ growth. Still, in the short term, the market could trade at expensive or relatively cheap valuations depending on the underlying macroeconomic environment and the greed and fear among the investors. The equity markets tend to revert to mean valuation, and SIP is a relatively better approach for long-term wealth creation. On top of that, investors may increase allocation to equity during market corrections. More than 30 years of data analysis suggest that investment in equities at lower valuations has yielded comparatively better forward returns.
Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.