'Valuations are a cause for concern'

Vetri Subramaniam of UTI Mutual Fund believes an uptick is underway from an economic growth perspective. But valuations are outside the comfort zone.
By Morningstar |  21-05-18 | 
 

Vetri Subramaniam made a very interesting observation recently. In the last 5-7 years, he noted that from a fund perspective, stock picking has made a bigger difference to the outcomes than sector selection. You would argue that stock selection is always important, and you would not be wrong. But go back to 2003-08—just to take another period—and you would see that it was all about sector selection.

Ravi Samalad of Morningstar met up with Vetri Subramaniam, the group president and head of equity at UTI AMC Ltd to discuss specific sectors and the market at large.

Are you looking at Infotech as a value play or do you see growth coming back in the sector?

When we bought these stocks, the valuations were attractive. One year later, we cannot argue that they are still attractive. But they are still not expensive. Growth certainly seems to be improving. We are happy to own these companies.

Are you avoiding Real Estate?

In UTI Value Opportunities Fund which I co-manage along with Amit Premchandani, we don’t have any exposure to this sector.

UTI Hybrid Equity Fund and UTI Core Equity Fund have an overweight position in Real Estate.

No other fund has a significant exposure to Real Estate.

Way back in 2013, you had mentioned in an interview with the media that the telecom policy in India is the longest-running soap opera. How do you view that space now?

The challenge in Telecom is that the profitability has collapsed. But what is also good is that supply side has responded by all private companies exiting. It is effectively down to a 4-player market now. Given this consolidation, things should improve eventually.

Companies will focus on improving profitability. If the new entrant continues with the current prices, return on capital, or ROC, will look poor. We believe there will be some improvement in profitability going ahead. It may take time.

We are happy to own at least one company (Bharti Airtel) which we think will tide over the current situation.

Energy.

We have been overweight Gas Utilities for more than a year now.

We have also increased our exposure to Power Utilities.

In both the above cases, we think the valuations are attractive when you look at Price to Book ratios. They have all built capacities over the last few years, but the capacities are not fully utilized. If capacity utilization moves up, profitability will improve which will expand the valuations. We like this area from the value point of view.

We have marginal exposure to Oil and Gas.

In your funds which are the new stock additions over the last 12 months?

We have been increasing exposure to Infotech and Gas Utilities.

In Financials, we added Mahindra Finance, Cholamandalam Finance, Equitas Holdings and Federal Bank, which we think can benefit from some normalization of credit cost.

From the IPO space, we participated as anchor investors in Bandhan Bank, SBI Life, Pratap Snacks, Khadim, Mahindra Logistics and Reliance AMC.

Are you concerned about valuations?

The outlook for earnings growth has improved. From an economic growth point of view, there is an uptick underway. In fact, some of the movement in other metrics such as inflation, interest rates, pick up in current account deficit indicate that the economy is picking up steam. The outlook for earnings growth is also looking strong.

The challenge is valuations. Valuations have corrected a bit from where we were in January 2018, but it is still expensive. That remains a cause for concern.

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