Sachin Trivedi, Equity Fund Manager & Head of Research, UTI Asset Management Co. Ltd

Broader markets and many companies forming part of the same are trading at a valuation zone above one standard deviation, and many of the companies are already factoring in good earning recovery in the next one to two years.

Oct 01, 2021 11:10 IST India Infoline News Service

In an interaction with Shweta Papriwal, Editor, indiainfoline.com, Mr. Sachin Trivedi, Equity Fund Manager & Head of Research at UTI Asset Management Company Ltd said “We think that the underlying factors driving this longer-term growth are intact, and therefore demand should bounce back in medium to long term. This will give companies not only healthy volume traction but also give them pricing power and operating leverage, resulting in high earning growth.”

The valuation of the equity market has seen historical highs. What are your views on this?


Broader markets and many companies forming part of the same are trading at a valuation zone above one standard deviation, and many of the companies are already factoring in good earning recovery in the next one to two years. Therefore, I will urge investors to exercise caution and be more selective in sectors and stocks. Having said this, earnings performance in the Indian market has been below potential for the last couple of years. In the last few years, earnings performance was affected by factors like clean up in banking balance sheet, liquidity crunch in NBFC’s and related impact of other sectors, demonetization, and finally GST related adjustments.

The benefit of some of these actions should be visible over the next couple of years. Investors (medium and long term) should focus on the big picture which is improving earning trajectory of companies beyond the immediate future. Investors should stay invested in companies with good management, good cash flow, and high return ratios.

What asset allocation do you recommend to retail investors considering the current market condition?

Asset allocation for retail investors should be firmed based on the end goal, income/ net worth profile, and age factor. Having firmed, investors should review the same at regular intervals but not frequently. Equity as an asset class should constantly be forming part of this allocation. Equity as an asset class has generated more returns when compared to other preferred assets like real assets, gold, and fixed income products. However, given the volatile nature of returns, retail investors' allocation towards equity has been less than in many counties.

The way to approach this market is to follow a good asset allocation strategy and not trade on a short-term basis.

An investor already following this strategy would have seen appreciation in the equity portfolio, resulting in increased allocation to this asset class. As discussed, since valuations have gone into an expensive zone, these investors can reduce allocation to equity and bring allocation back to the originally desired levels.

How are you balancing the risk and returns to balance out market volatility during different market cycles?

Since the fund mandate is to outperform the respective benchmark, which has 100% equity, we do not take equity calls. For us, it is the investor who has taken the allocation decision while investing in the scheme. We follow a stock selection approach where we invest in companies with good earnings growth profile over a medium to longer term period, have return ratios higher than the cost of capital, and are run by capable management. Over a long term period, this strategy has withstood various risks and generated alpha for our investors.

What are the trends that you are closely watching?

For the markets to perform, the bulk of the heavy lifting will have to be done by earnings growth and we should not expect further rerating on multiple side. And therefore, resumption/normalization of economic activity after the lockdowns is essential. Another important factor to watch out will be globally central banks prefer for growth over inflation by keeping low interest rates and infusing money into the economy. Abrupt reversal in this policy may dent the market multiple and earning recovery. From a sector/companies perspective, we like companies which are benefiting from formalization and gaining market share. Other trends to watch will be how fast the companies are adapting to the emerging challenges from new age companies, be it in auto space (electric vehicle) or banking space where new platforms are emerging on payment and lending solutions.

What risks do you foresee with the 3rd wave of corona virus on the way?

Going by the experience of the second wave, markets have been resilient, and all along, investor focus has been on earnings growth potential. Yes, the third wave as large as the second wave will bring near term challenges. We have already seen supply chain disruption, which has impacted production planning for many sectors. Plus, in collection efficiency of banks and NBFCs were affected in the second wave, which has also increased credit costs for the player in the space. And service sectors like hotels, aviation, retail, education, etc. had to bear the brunt of lockdowns. Hard to say if markets have already factored in this impact if the third wave were to hit us, but companies with a strong business case and healthy balance sheet should sail through and emerge more robust in the future.

According to you, what are the themes to look forward in the auto sector?

In the Auto space, incrementally, investors are not just analyzing companies operating matrix, but they are also watching for companies' adoption of electric technology. At this juncture, it is important to realize that ownership cost for ICE based engine vehicles will keep going up due to various regulations related to emission. Plus, existing government tax structure on ICE based vehicles and fuel are pushing the cost of ownership higher.

On the other hand, governments around the world are promoting clean fuel technology. This situation has forced companies to step up investment when their profitability was under stress due to various factors. And therefore, we should look for what companies are investing in, their product launches, and consumer level acceptability of new products. My sense is that given the usage pattern of the vehicle owner, available infrastructure in the country, and cost structure of manufacturing electric vehicles, adoption will be faster in scooter space than in other vehicle categories.

How has the UTI logistics and transport fund performed so far this year? What are your views on the growth of auto?

UTI T&L, which is a sector fund, has close to 83% exposure in Auto and Auto Ancillary stocks and ~15% exposure to logistics companies. Therefore, the performance of this fund is primarily driven performance of Auto and Auto ancillary stocks. Fund has given 42.45% return in the last year and 9.29% return in the last three years (as on 22Sep 2021). The last three years have been challenging years for the Auto sector due to various factors like slowing income growth, increase in cost (led by changing emission norms and safety standards), hardening of lending norms by financial institutions (post challenges in a couple of financial institutions), supply chain disruption post covid. This has resulted in a volume decline of ~29% in two wheelers, ~20% in PV, and ~56% in M&HCV in FY21 over the FY19 base. Further commodity cost pressures have put an additional burden on the profitability of players.

However, the longer term growth rate in these categories is strong, single digit to even double digit, and space has also seen healthy ASP growth. We think that the underlying factors driving this longer term growth are intact, and therefore demand should bounce back in medium to long term. This will give companies not only healthy volume traction but also give them pricing power and operating leverage, resulting in high earning growth. 

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