In an interaction with Shweta Papriwal, Editor-in-Chief, indiainfoline.com, Mr. Sachin Trivedi, Equity Fund Manager and Head of Research at UTI Asset Management Company Ltd said: “We believe that the factors underlying long-term growth are intact, and therefore demand is expected to rebound in the medium to long term. This will not only give companies a good pull on volumes, but will also give them pricing power and operating leverage, which will translate into high profit growth. “
The valuation of the equity market has reached historic highs. What is your opinion on this?
Wider markets and many of the companies in them are trading in a valuation area above one standard deviation, and many companies are already anticipating a good recovery in earnings over the next two years. Therefore, I will urge investors to be cautious and be more selective in sectors and stocks. Having said that, the earnings performance in the Indian market has been below potential for the past two years. In recent years, earnings performance has been affected by factors such as the clean-up of the bank balance sheet, the liquidity shortage in the NBFC and the related impact of other sectors, demonetization and finally the adjustments related to the GST.
The benefit of some of these actions should be visible over the next two years. Investors (medium to long term) should focus on the bigger picture that improves the trajectory of corporate earnings beyond the immediate future. Investors should remain invested in companies with good management, good cash flow and high return ratios.
What asset allocation do you recommend for retail investors given the current market situation?
Asset allocation for retail investors should be firmed up based on end goal, income / net worth profile and age factor. After firming up, investors should review the same thing at regular intervals but not frequently. Equities as an asset class should be part of this allocation at all times. Stocks as an asset class have generated more returns than other preferred assets such as real assets, gold, and fixed income products. However, given the volatile nature of returns, retail investor allocation to equities has been lower than in many countries.
The way to approach this market is to follow a good asset allocation strategy and not to trade in the short term.
An investor who already followed this strategy would have seen an appreciation of the equity portfolio, leading to an increased allocation to this asset class. As noted, since valuations have entered an expensive zone, these investors can reduce the allocation to equities and bring the allocation back to initially desired levels.
How do you balance risk and returns to balance market volatility during different market cycles?
Since the fund’s mandate is to outperform the respective benchmark, which contains 100% equities, we do not take any equity calls. For us, it is the investor who made the allocation decision by investing in the device. We follow a stock selection approach in which we invest in companies with a good profile of earnings growth over a medium to long term period, with return ratios above the cost of capital and managed by competent management. Over a long period of time, this strategy has withstood various risks and generated alpha for our investors.
What trends are you watching closely?
For the markets to perform, the bulk of the heavy lifting will have to be done by growing earnings and we should not expect further revaluation from many sides. And therefore, the resumption / normalization of economic activity after confinements is essential. Another important factor to watch will be that global central banks favor growth over inflation by keeping interest rates low and pumping money into the economy. A sudden reversal of this policy can shake the market multiple and the recovery of profits. From a sector / business perspective, we like businesses that take advantage of formalization and gain market share. Other trends to watch will be how quickly companies adapt to the emerging challenges of new age businesses, whether in the automotive space (electric vehicle) or the banking space where new platforms are emerging on the market. payment and loan solutions.
What risks do you foresee with the 3rd wave of corona virus on the way?
In the second wave experience, markets have been resilient, and investors’ attention throughout has been on the potential for earnings growth. Yes, the third wave as big as the second wave will bring short term challenges. We’ve seen supply chain disruptions before, which has impacted production planning for many industries. Additionally, the collection efficiency of Banks and NBFCs was affected in Wave 2, which also increased credit costs for the player in space. And service sectors like hospitality, aviation, retail, education, etc. had to bear the brunt of the blockages. It’s hard to say if the markets have already factored in this impact if Wave Three were to hit us, but companies with a strong business case and healthy balance sheet should come out and come out more robust going forward.
In your opinion, what are the themes to anticipate in the automotive sector?
In the automotive space, gradually, investors are not only analyzing the operating matrix of companies, but they are also monitoring companies’ adoption of electrical technology. At this point, it is important to realize that the cost of owning ICE motor vehicles will continue to rise due to various emissions regulations. Additionally, the existing government tax structure on ICE motor vehicles and fuel increases the cost of ownership.
On the other hand, governments around the world are promoting clean fuel technology. This situation forced companies to intensify their investments as their profitability was severely tested by various factors. And therefore, we need to research what companies are investing in, their product launches, and the acceptability of new products at the consumer level. My feeling is that given the vehicle owner’s usage pattern, the infrastructure available in the country, and the cost structure of manufacturing electric vehicles, adoption will be faster in the scooter space than in others. vehicle categories.
How has the UTI Logistics and Transport Fund performed so far this year? What do you think of the growth of the automobile?
UTI T&L, which is a sector fund, has almost 83% exposure in Auto and Auto Ancillary stocks and around 15% in logistics companies. Therefore, the performance of this fund is mainly driven by the performance of ancillary automotive and automotive stocks. The fund has given 42.45% of return in the last year and 9.29% of return in the last three years (as of September 22, 2021). The past three years have been difficult for the automotive industry due to various factors such as slowing revenue growth, rising costs (led by changing emission and safety standards), tightening lending standards by financial institutions (after challenges in a few institutions), disruption of the post covid supply chain. This resulted in a volume drop of around 29% in two-wheelers, around 20% in PV and around 56% in M & HCV in FY21 compared to the base FY19. New pressures on commodity costs have put an additional burden on the profitability of players.
However, the long-term growth rate in these categories is strong, single-digit to double-digit, and the space has seen healthy ASP growth as well. We believe that the underlying factors of this longer term growth are intact, and therefore demand should rebound in the medium to long term. This will not only give companies a good pull on volumes, but will also give them pricing power and operating leverage, which will translate into high profit growth.