Market valuations are expensive with respect to history

Investors should focus on asset allocation, allocation to equity should be realigned to reflect individual risk appetite. They should avoid timing the market and focus on giving time in the markets for their investment to bear results. Large part of the equity allocation should go into diversified funds in various market cap categories, sector fund allocations should be limited as it involves carrying asymmetric risks. Valuations are clearly expensive with respect to history. But they have to be looked in consonance with the earning trajectory and global interest rates environment, says Amit Premchandani, SVP & Fund Manager (Equity), UTI AMC, in an exclusive interview with Bizz Buzz

Market have been surprised by earning resilience in FY21 as despite sharp GDP decline. Earning have grown at much higher pace than previous 4 years for NIFTY. Monetary policy has been benign globally which has been a tailwind, central banks are ignoring the recent sharp spike in inflation while providing a backstop as long as growth remains below trend

Pharma remains the largest overweight position, valuation are still reasonable specially if we compare it with other consumer sector plays. Domestic growth has been driven by pricing actions while volume growth is expected to revive in FY22, overseas markets are likely to see launch of new products by many players which will drive revenue growth as well as monetisation of R&D investments

Market is at its peak and recording high. Do you see this trend continuing?

Our approach to manage money is driven by focus to generate alpha, we are not really looking at market levels, but we do focus on valuation levels. Market is expensive as far as trailing valuation is concerned at close to 27x PE, while if we look at forward earning it is trading at 20-21x PE, which is at premium to long-term averages. Even on price-to-Book value metrics both Nifty as well as mid-cap indices are trading at multiple which are above 1 standard deviation to long-term averages. While return on equity of the Nifty, which was at multi-year low few quarters back have started to inch up which should further improve as we see incremental normalcy and cyclical recovery in the economy.

Last year has seen the resilience of the Indian corporate sector which has managed margins quiet well through cost rationalization. This has driven upgrades in earnings estimates even after the second wave, as FY21 numbers broadly surprised positively with 15 per cent EPS growth for NIFTY. As long as earning continue to surprise positively risk of sharp correction is limited, however the ask rates for earnings have gone up sharply which is a significant risk for the market.

What should be the retail investors' course of action when it comes to investing in equity mutual funds?

Investors should focus on asset allocation, allocation to equity should be realigned to reflect individual risk appetite. They should avoid timing the market and focus on giving time in the markets for their investment to bear results.

Large part of the equity allocation should go into diversified funds in various market cap categories, sector fund allocations should be limited as it involves carrying asymmetric risks.

Do you think valuations of Indian markets are ballooning now?

Valuations are clearly expensive with respect to history, but they have to be looked in consonance with the earning trajectory and global interest rates environment. Market have been surprised by earning resilience in FY21 as despite sharp GDP decline earning have grown at much higher pace than previous 4 years for Nifty. Monetary policy has been benign globally which has been a tailwind, central banks are ignoring the recent sharp spike in inflation while providing a backstop as long as growth remains below trend.

Which are the sectors you are bullish on? Are there any sectors that investor must avoid for the near future?

We have been adding exposure to companies which are cash rich and available at reasonable valuations. Pharma remains the largest overweight position, valuation are still reasonable specially if we compare it with other consumer sector plays. Domestic growth has been driven by pricing actions while volume growth is expected to revive in FY22, overseas markets are likely to see launch of new products by many players which will drive revenue growth as well as monetisation of R&D investments.

Financials is another space which has valuation comfort and is also likely beneficiary of cyclical uptick in domestic economy post second wave, asset quality is still a risk in the sector. Sector has seen consolidation in favour of large bank and select NBFCs, with strong liability franchise, adequate capitalization and decent underwriting outcomes.

Interest rate are at multi decade low while real estate prices have seen time correction over last decade, this has increased affordability which may lead to demand of residential real estate reviving; hence we have added exposure to the broader construction space.

UTI Value Opportunities Fund comes under one of the best performing funds. What are the major contributions for this consistency?

Our approach to value investing as a philosophy is well captured in the 2 blog I had written on 'What is Value'. Key pointer from the blogs of our guard rails for the funds are:

l Avoid companies with cheap multiple, but doubtful terminal value

l Accept some premium for companies with high ROCE over low ROCE

l Focus on FCF yields as compared to PE for relative valuations

l Multiple should be viewed in conjunction with governance or debt issues

l Ability of the company to manage working capital and ensuring high conversion of EBITDA to OCF

l Abilities of new age companies to scale with low incremental capital post positive unit economics

l Embedded option value in companies which have invested in related ventures

We believe this nuanced way to look at value from an intrinsic value approach has served us well.

Since you also handle UTI Banking and Financial Services Fund, what are your views for private banks and PSUs?

As far as BFSI fund is concerned our views are as follows:

r Corporate credit cycle has peaked

r Slippages run rates in corporate expected to fall sharply

r Corporate Credit cost normalisation in the P&L likely

r NCLT resolution process more streamlined

r Credit growth muted, expected to pick up

r Largely driven by retail, which in turn seeing greater penetration of unsecured loans and demand for mortgages.

r Corporate credit will pick up from low base driven by working capital demand

r Private banks and select NBFC likely to gain market share while PSBs may remain under pressure

r Retail deposit franchise value should go up and lending models will be driven by ability to source stable funding.

r Growth runway for insurance and asset management is long, capital requirement is low, profitability of large players is robust.

r Disintermediation of saving as well as lending will continue

Portfolio allocation remain tilted to private banks and non-lending business like Insurance.