Amit Premchandani, Senior Vice President & Fund Manager – Equity at UTI Mutual Fund feels valuations are expensive with respect to history, but they have to be looked at 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 a much higher pace than previous 4 years for Nifty,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Amit Premchandani has over 13 years of experience. He joined UTI AMC in 2009 as a Senior Research Analyst and has covered banks, NBFCs, telecom and cement in his research role. In addition, he took up portfolio responsibilities in June 2014.
Edited Excerpts:-
Q: Looking at the consistent rally to new record high levels, the market seems unstoppable. Do you think it is the time to turn cautious? Can the Sensex hit 60,000 milestone by end of 2021?
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 are concerned at close to 27-28x PE while if we look at forward earning it is trading at 21x PE, which is at premium to long term averages. Even on price to book value metrics both Nifty as well as Midcap 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.
FY21 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 around 15 percent EPS growth for Nifty. Consensus earnings growth expectation for FY22 are higher than 30 percent largely driven by cyclical sectors like metals and banks, 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.
Q: What are those sectors where value investing principle of Warren Buffett can be applied now and why?
We follow the principle of intrinsic value for managing the Value Opportunity fund. Mr Warren Buffet defines it as : Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. In simple words, Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life. This principle can be applied in the long term across sectors however valuation may deviate from intrinsic value for the short term which throws opportunities to generate alpha.
Q: Banking and Financial Service indices gained 16-17 percent in 2021 so far. Is it the right time to enter into these sectors and should one stick to largecaps only?
Banking and financial services is a space were we find value emerging specially in banks as they are also likely beneficiary of cyclical uptick in domestic economy post second wave, asset quality outcomes in both waves have been milder than feared for most private banks, capital levels at private banks are close to all-time peak providing enough fire power to grow, credit growth is likely revive as nominal GDP starts growing.
This sector has seen consolidation in favour of large bank and select NBFCs, with strong liability franchise, adequate capitalization and decent underwriting outcomes. Disruption from the fintech space is an emerging worry.
Q: Do you think Mr Market is a great teacher for traders and investors? What are the great lessons you learned from Mr Market in your journey in the equity market?
Market has been the greatest teacher for me. Key lessons that I have learnt as an investors is remain humble and respect the market, reversion to mean and respect for cycles are other key learning from markets over last decade.
Q: Considering the stellar rally in the equity market, do you think it is the time to reduce exposure to equity in a portfolio or rebalance the portfolio?
Valuation 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.
Investors should focus on asset allocation, allocation to equity should be realigned to reflect individual risk appetite.
Q: What are investment mantras one should follow before doing stock selection for a portfolio?
Key pointers from our approach to value investing as a philosophy:
a) Avoid companies with cheap multiple but doubtful terminal value
b) Accept some premium for companies with high return on capital employed (ROCE) over low ROCE companies
c) Focus on free cash flow (FCF) yields as compared to price-to-earnings (PE) for relative valuations
d) Multiple should be viewed in conjunction with governance or debt issues
e) Ability of the company to manage working capital and ensuring high conversion of EBITDA to Operating cash flows (OCF)
f) Evaluate abilities of new age companies to scale with low incremental capital after achieving positive unit economics
g) Take cognisance of embedded option value in companies which have invested in related ventures
Q: Do you think expected Fed tapering will have less impact on the domestic market going forward given the forex reserve India?
India is in a better macro situation now as compared to the 2013 taper tantrum. FY21 was an year with current account surplus of close to 1 percent as compared to close to 5 percent current account deficit in FY2013, our forex reserves are at the highest levels ever with import cover of around 17-18 months, inflation gap with the developed world has narrowed and headline inflation has moved in the 5-6 percent range over last 1 year largely driven by supply side factors.
However the sheer scale of monetary and fiscal stimulus during the pandemic has been unprecedented, hence any reversal of monetary policy by Fed will impact flows to emerging markets including India, it will be a headwind to capital raising exercise of corporate sector, asset prices as well as too the nascent recovery, impact on currency will be limited.
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