‘Quality stocks may not give extraordinary gains’

Being called a ‘star’ fund manager is something that Swati Kulkarni, Executive VP and Fund Manager, UTI MF, one of the most seasoned managers in the Indian MF industry, actively dislikes. But her learnings over three market cycles and her conservative approach to stock picking have helped many UTI schemes ace peers amid market volatility. Swati shares her views on India Inc’s prospects and the strategy of India’s oldest equity fund, UTI Mastershare.

Given the volatility in the equity markets, how has UTI Mastershare managed to sustain yearly dividend payouts for so many years?

Yes, for the last 29 years of its existence, the fund has paid a dividend every year.

We book profits regularly on such stocks where we believe the future capital appreciation potential is limited, considering the estimated earnings growth and valuation. In bear markets, besides using the accumulated realised gains of earlier years, the fund books profit on certain stocks where the cost is lower than the market price. We book profit in such stocks, where we believe they may underperform in the near term.

Don’t dividend payouts result in some opportunity cost to investors as the sums paid out cannot compound at high rates?

Yes, the dividend payments received by the investors, if not reinvested at least at the rate that the fund has delivered, result in an opportunity loss. In the short term, though, when the market is in correction mode, the dividend received may appear to be an opportunity gain, but given the historical long-term returns on the fund, the growth option or dividend reinvestment option may be preferable to the investors who do not have cash flow needs from the fund.

The compounding effect works well in creating wealth in equity funds.

What is your take on earnings growth from corporate India, which has been disappointing even this quarter?

Earnings growth has remained muted in the first half of FY16 owing to asset quality issues in banks, slowing rural consumption for companies, slow economic recovery and falling commodity prices.

The current expectations of earnings pick-up from the third quarter of FY16 hinge on a recovery in consumption on account of lower inflation and interest rates. We also think there will be fresh momentum in budgeted capital spends from the government, besides a favourable base in the second half of FY15.

Companies are likely to show gross margin expansion on account of falling raw material costs which, taken with operating leverage benefits and interest cost savings, will lead to higher earnings growth.

How much of the bad big picture is on account of the commodity price falls? If we remove the energy/commodity companies, is the picture much better?

Yes, global cyclical sectors like energy, and metals, and domestic cyclicals like cement and a few auto stocks have shown disappointing earnings growth. These have also dragged the broader earnings growth for index companies.

Adjusted for these stocks, the earnings growth would be higher. As we see it, media, pharma, private sector banks, capital goods, consumer and technology have been posting higher earnings growth.

There is a big divide between fund managers. Some are betting on low-priced cyclicals, hoping for a recovery, while others are heavily overweight on quality stocks despite high PEs. Where do you stand?

Well, the strategy depends on the investment mandate. If the mandate is to follow value investing, then the fund manager will pick up stocks that are attractively valued even if the near-term growth is not that compelling. It is true that quality today is expensive and may not provide extraordinary returns from these levels in the short term.

But in a scenario of gradual economic recovery, since these stocks have steady earnings growth and have strong cash flows, it can be argued that they will still be good long-term investment bets.

What have been the opportunities unlocked for investors from reforms so far?

The steps taken so far, such as focus on capital allocation in the areas of defence, railways and roads, empowering States by increasing their revenue share, efforts to improve governance, auctioning of mining resources, efforts to strengthen discoms and using direct benefit transfer to arrest fiscal subsidy leakage will strengthen the fiscal situation. This improves the Government’s ability to spend and accelerate the investment side of the economy. The data on projects under implementation and new projects announced has started showing improvement. The multiplier effect of this capital spending will lead the consumption growth over the medium term. For a pick-up in private capex, de-leveraging has to happen and also the existing capacity utilisation has to go beyond 80 per cent. Thus, opportunities have begun to unlock in select pockets, such as execution improvement for capital goods and construction and volume growth in commercial vehicles. There are expectations that order flow will gain momentum from the second half in power transmission, roads, ports, irrigation and railways.

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