DATE 06.10.2021
WEBSITE wealthforumtv.com
LINK http://www.wealthforumtv.com/FundTalkUTI04102021.html#.YZDBIVDhXIV

This theme deserves more focus – especially in this market

Swati Kulkarni

Value is outperforming growth – as is to be expected when a new economic growth cycle takes root. How do you pick value plays and avoid value traps: by focusing on consistent free cash flow generators within the overall value theme. That's where dividend yield funds come in – offering investors a "safer" way to participate in an economic recovery driven market rally. Safety here refers to the quality of businesses and therefore their ability to overcome bouts of market volatility and provide healthy returns over time. Read on as Swati Kulkarni takes us through the fund positioning and strategy of UTI Dividend Yield Fund – a top quartile performer in this fund category that deserves more focus from distributors and investors – especially in this market.

WF: What is the minimum dividend yield criteria for stocks to come into the consideration set for this fund?
Swati: Such companies that have been consistent in generating operating cash flows and are available at higher dividend yield than that of Nifty 50 Index typically form the investible universe for UTI Dividend
Yield Fund. In addition, we focus on expected growth in earnings and on the excess of free cash flow yield over the current dividend yield to draw comfort on the sustenance of dividend and capital appreciation potential.
WF: What is the current dividend yield at a portfolio level?
Swati: The weighted average dividend yield of the Fund is 2.8%.
WF: You have an unusually large (31%+) exposure to tech stocks. What's driving this huge call?
Swati: The benchmark of the Fund, Nifty Dividend Opportunities 50 Index is differentiated vs the large cap indices in terms of sector allocation and stock constituents. Technology sector for e.g. has 27% weight vs 17% in Nifty 50. In that context, we do have an active overweight position of ~4% in Technology sector. IT companies have strong cash flow generation and there is not much capital expenditure that they require so they typically pay back those cash flows to the shareholders, in the form of dividends or buy back of shares. The Fund had invested in the sector 5 years back when the valuations were undemanding for these high-quality stocks; thus, could benefit from earnings growth as well as the valuation re-rating. We continue to remain positive on the sector despite higher valuations as the growth visibility has also improved. The pandemic led to expansion in clients spending on data migration to Cloud, digital transformation, data analytics to stay competitive. The large deal wins reported by Indian IT companies is a testimony of their ability to grab these opportunities basis the skill and cost advantage, although they will have to manage the cost pressures emanating from supply tightness and normalisation of travel and sales expenses in order to maintain margins in tight band.
WF: What's driving near term (6 mth) outperformance of your fund? What are the key stock and sector calls contributing to alpha?
Swati: The Fund has generated alpha vs the benchmark Nifty Dividend Opportunities 50 Index over the near term as well as over 3 and 5 years period (Refer the table below).
Over the last year, our overweight position in IT, Metal, Financials, Cement and underweight position in Consumer, Automobile and Construction led to outperforming the benchmark.
WF: High dividend yielding companies – which are high cash flow companies – are generally mature stable businesses. These are typically not deep cyclicals that you expect will lead a market witnessing a cyclical economic recovery. Why in this context does dividend yield as a theme make sense today?
Swati: Consistent cash flow generation is an outcome of how well the businesses are run in terms of profitability, working capital management, capital allocation and funding structure. While the sun rise sectors that may have to burn cash during the initial growth phase till they scale up (only a few succeed) may not form part of this fund's universe, the cyclical sectors do have characteristics of consistent cash flow generation and dividend yield. For e.g. we can find well managed businesses in the capital-intensive sectors also like Cement, Metal, Oil and Gas, Automobile, Fertilizers. In fact, our Metal sector exposure is a case in point, stocks with high dividend yield saw their cash flows improving with commodity cycle turning up, and the returns followed. So, I do believe that over the cycle, this strategy of investing in high dividend yielding stocks provides a combination of defensives in the form of steadily growing well established quality businesses as well as the cyclical businesses that could benefit from the cyclical recovery. Having said this, it may be possible that in the short term, if there is a rally in certain sectors which do not make sustainable free cash flows e.g. Real Estate, Construction or in stocks with low/ nil dividend yield, the theme may underperform the general indices for such short term.
WF: Should dividend yield as a theme be seen as a subset of the larger value theme? Does dividend yield as a theme outperform when value outperforms growth?
Swati: Yes, the dividend yield theme can be construed as a subset of larger value orientation. However, for value funds high dividend yield investing is not a mandatory condition. Value investing typically look at the intrinsic value of the business. Hence, it may be possible that the ones which do not have high dividend yield may also be part of their investment universe. The value orientation as reflected in high dividend yield helps this theme to participate whenever value style does better.
WF: How are you positioning your portfolio to stay true to label with the dividend yield theme while at the same time participating meaningfully in recovery themed stocks?
Swati: As discussed earlier the Fund has a good mix of high dividend yielding stocks from non-cyclical and cyclical sectors, without tilting heavily on either side. It is overweight in sectors like Oil & Gas, Fertilizer, Logistics, Industrial Manufacturing, Financials, IT, Pharma and underweight in Consumer, Construction, Automobile.

Publication: Wealthforum TV
Date: 06-10-2021

DATE 27.10.2021
WEBSITE Zee Business Online
LINK https://www.zeebiz.com/market-news/news-dalal-street-voice-sachin-trivedi-of-uti-amc-reveals-his-strategy-to-pick-winning-stocks-for-portfolio-169023

Dalal Street Voice: Sachin Trivedi of UTI AMC reveals his strategy to pick winning stocks for portfolio
Sachin Trivedi, SVP, Head of Research & Fund Manager – Equity of UTI AMC, said that he seeks to invest in the companies that have a good growth outlook and trade at below fair value.

Sachin Trivedi, SVP, Head of Research & Fund Manager – Equity of UTI AMC
Sachin Trivedi, SVP, Head of Research & Fund Manager – Equity of UTI AMC, said that he seeks to invest in the companies that have a good growth outlook and trade at below fair value.
Trivedi has 16 years of experience in research and portfolio management. In research, he has specialized in Auto OEM, Utilities, Capital Goods, and Logistics.
In an interview with Zeebiz's Kshitij Anand, Trivedi said that he first evaluates medium to long-term growth prospects of the companies and their sustainable longer-term return ratios. Edited excerpts:
Q) What is your outlook on the current market scenario? We are already at 18000 on the Nifty50 in the run-up to Diwali. It seems like the festive season started on a strong note – but do you think we are slightly overbought and one should tread with caution?
A) You are right, India has been one of the best-performing markets compared to other global peers. The Nifty50 returns have outperformed other major international markets on a 3-month and on a one-year basis.
However, at these levels when we evaluate markets levels on a valuation matrix-like price-to-earnings (trailing or forward) or price-to-book, valuations are not just higher than long-term averages, but they are even higher than one standard deviation.
This suggests that some part of earning recovery is already factored in at current levels. Therefore, I will urge investors to exercise caution and be more selective in sectors and stocks.
Having said this, earnings performance in the Indian market has been below potential for the last couple of years.
The last 10-year CAGR in the Nifty50 has been just ~5 per cent, but last year, it was more than 10 per cent, and the Bloomberg estimates suggest that following two years the CAGR would be more than 20 per cent.
Therefore, investors (medium and long term) should focus on the big picture of improving their earnings trajectory beyond the immediate future.
Investors should stay invested in companies with good management, good cash flow, and high return ratios.
Q) What is your investment philosophy?
A) I seek to invest in the companies that, in my view, have a good growth outlook and are trading at below fair value. I evaluate the medium to long-term growth prospects for the company and its sustainable longer-term return ratios.
I analyze not just near-term performance, but also look at cyclically adjusted performance and value them. I use tools such as reverse DCF to arrive at implied growth versus past track records of the companies.
I use matrices such as P/E, EV /EBITDA, DCF, etc. Also, while investing, I carefully analyze management for its vision, competence, business ethics, and integrity. I pay attention to the companies' past and future capital allocation discipline.
Q) Where are the emerging market opportunities to make money in this market, which is running like a bullet train with no stops in between?
A) At the current juncture, we like names in the automobile space, where not just companies have registered volume decline in the last two to three years, but profit margins have also declined due to cost pressures. We see these factors reversing in the coming years.
We also like to select players in the financial space, where profits were under pressure in the last few years due to high credit costs, and the loan growth had also decelerated.
But the good news is that a few of them have not just made sufficient provisions in the book but they have also raised capital, making the balance sheet ready for the next credit cycle. Over and above this, there are opportunities in select exporters and pharma space.
Q) Performance of UTI Transportation Logistics Fund, view on logistic and auto space in the current scenario?
A) UTI T&L, a sector fund, has close to 83% in Auto and Auto Ancillary stocks and ~15% exposure to logistics companies. Therefore, the performance of this fund is primarily driven performance of Auto and Auto ancillary stocks.
Fund has given ~48.3% return in the last year and ~12.3% in the previous three years (25th Oct 2021). The last three years have been challenging years for the Auto sector due to various factors like slowing income growth, increase in cost (led by changing emission norms and safety standards), hardening of lending norms by financial institutions (post challenges in a couple of financial institutions), supply chain disruption post-covid.
This has resulted in a volume decline of ~29% in two-wheelers, ~20% in PV, and ~56% in M&HCV in FY21 over the FY19 base. Further, the commodity cost pressures have put an additional burden on the profitability of players.
However, these categories' longer-term growth rate is robust (single-digit to even double-digit), and space has also seen healthy ASP growth.
We think that the underlying factors are driving this longer-term growth are intact, and therefore demand should return. The improved volume will also give pricing power and operating leverage to the companies resulting in high earning growth.
Within the logistics space, we have observed that well-organized players are gaining market share. Post-GST implementation, this trend accelerated, and these players have started offering newer services that give them a more extended pathway for growth. Further, improved infrastructure with a suitable tax structure will pave the way for long-term growth in the space.
Q) Which sectors and themes you are over and underweight on for portfolio strategy?
A) We seek to invest in the companies that, in our view, have a good growth outlook. UTI Transportation and Logistics Fund are overweight in Auto Ancillaries, where growth in the auto-ancillary space is primarily driven by strong demand in the domestic market (combination of volume growth, feature addition, and change in regulations) and expanding global reach (exports opportunity) of several Indian suppliers.
High-quality supply at a competitive price with the ability to meet OEM requirements of newer products is helping domestic auto ancillaries gain acceptance with the top-tier OEMs (domestic and global).
The fund is overweight in commercial vehicle OME, where we think strong cyclical demand recovery is due in the next few years.
We have kept an underweight position in traditional lead-acid battery players. We think the penetration of lithium-based electric vehicles will increase, putting the business model of lead-acid batteries at risk as these players generate a large part of the profit pool from replacing batteries in the aftermarket.
We are also underweighting tractor OEM, where the cycle may have peaked last year, and we expect volume growth to remain subdued.
Q) What is the type of asset allocation you recommend to investors, especially seeing a 30% rally in the Sensex and the Nifty50 so far in 2021?
A) Asset allocation for retail investors should be firmed based on the end goal, income/ net worth profile, and age factor. Having firmed, investors should review the same at regular intervals but not frequently.
Equity as an asset class should constantly be forming part of this allocation. Equity as an asset class has generated more returns when compared to other preferred assets like real assets, gold, and fixed income products.
However, given the volatile nature of returns, retail investors' allocation towards equity has been less than in other counties. The way to approach this market is to follow a suitable asset allocation strategy and not trade on a short-term basis.
An investor already following this strategy would have seen appreciation in the equity portfolio, resulting in increased allocation to this asset class.
They should reallocate from equity to the other asset class and bring back distribution to the intended level with an expensive valuation in mind.

Publication: Zee Business Online
Date: 27-10-2021