Difficult to take calls on investments affected by policy matters: Swati Kulkarni

Interview with Executive VP and fund manager, UTI Mutual Fund

This year, many market participants expect the Indian benchmark indices to repeat last year's rally. Swati Kulkarni, executive vice-president and fund manager at UTI Mutual Fund, however, says she is not in that camp. When others had downgraded the Infosys stock, Kulkarni was one of the only fund managers to take a 'Buy' call on the counter. In an interview with Chandan Kishore Kant she says a pick-up in the investment cycle is crucial, adding any further movement on the indices has to be linked with growth in earnings. Edited excerpts:

How would the stock markets fare this year?
Valuations are about 14 times FY14 earnings. From now, earnings growth should help. For sustainable earnings growth, a pick-up in the investment cycle is crucial. Environment and land clearances are key issues and policy certainty is vital for companies to commit investments. Administrative reforms are equally important to fuel growth in infrastructure. Till supply-side issues are addressed, we might have to reconcile to a lower growth trajectory of six to seven per cent. From this perspective, we understand the markets would be sideways. The economic indicators are probably bottoming out and there would be a favourable base effect, limiting the downside.

Aren't you taking a conservative approach, at a time when most market participants expect another 15-20 per cent rally this year?
Sensex movements have to be linked to earnings growth. Barring the liquidity-related impact, the return would be in line with the expected earnings growth of 12-14 per cent next year. The quality of stocks is important, though it is possible highly leveraged companies might give returns. But considering the current economic environment, the risks are quite high, too.

While taking an investment call, does the lack of clarity in policy making trouble you?
It is difficult to take calls on investments that are affected by policy matters. A classic case is that of oil public sector undertakings (PSUs). There were expectations of a pass-through of oil price rises and given the attractive valuation of these PSUs, there was an opportunity for returns to be made. But till the recent announcement on diesel pricing, nothing much happened. It is still unclear how the subsidy reduction would be shared. Another concern is if project execution doesn't pick up and the economy remains in this phase, asset quality issues may resurface in the form of higher slippages.

Your ‘Buy’ call on Infosys in December helped your schemes. What made you buy into Infosys at a time when your peers were busy cutting exposure to the counter?
Among the leading stocks in the IT (information technology) sector, the valuation gap had widened---while one was 18 times, another stood at 12 times. Part of the valuation gap was justifiable, owing to lower growth expectations. Nonetheless, we thought value was emerging in the second player. Fortunately, the quarterly results were better than expectations.

Since Infosys outperformed expectations, what’s your view on the IT sector?
Growth in the US has been better in the last quarter. Comments from leading companies indicate budgets for discretionary spends, which would start flowing as the confidence improves. Given the high current account deficit and the dependency on foreign flows, we think the currency, too, would be supportive for the sector.

Is consumption an over-played story?
It is a well-played story. It was difficult to imagine PE expansion, but investors were willing to give premium for stability of earnings. Stocks in the sector remain richly-valued. In the context of uncertainty over a pick-up in the investment cycle, one cannot be drastically underweight on the sector.

Stocks of public sector banks continue to remain laggards, compared to their counterparts in the private sector.
Asset quality concerns brought down several PSU banks to attractive levels of 0.6-0.7 times the book price. There was money to be made from these attractive levels. After a 30-40 per cent run by PSU banks, they are now available at one time the book value, their average valuation level. If economic growth picks up, there may be further potential. In the private sector, asset quality concerns are relatively lower and growth expectations are superior compared to PSUs. So, we are inclined to hold PSU banks for attractive valuations and private banks for growth.

What's wrong with the capital goods sector? At the beginning of the December quarter, things were quite hopeful. However, the sector (stocks) is again under pressure.
Order inflows are still a problem. And, execution of projects is also quite sluggish. We have exposure to stocks that either have order book visibility or benefit from power shortages but have an underweight position at the sector level.

What about cement companies?
The outlook depends on the growth in demand. Supply addition is expected to be gradual and, therefore, we think the sector's profitability might remain strong. From a three-year perspective, we are positive on the sector.

Aren't metals attractive?
Valuations reflect the risk. It's a globally-driven sector, with China accounting for about 30 per cent of the demand. In ferrous metals, there can be a risk of China turning net exporter, if it slows investments, adversely affecting prices. In non-ferrous metals, delayed expansions are affecting overall volume growth. We will be cautious on metals.

How would telecom stocks fare?
The declining competitive intensity and the resultant pricing power would be the positive. However, we need to be watchful of the capital investment required for spectrum renewal. Overall, the sector looks attractive.