'Financial services, telecom and metals look attractive'

With over two decades at UTI AMC, V Srivatsa has developed a clear investment identity. "I've always been a value person," reveals the Executive Vice President and Fund Manager-Equity, who manages assets worth approximately Rs 14,500 crore across four schemes, including the four-star rated aggressive hybrid fund and large & mid-cap fund.

Since joining UTI in 2002, Srivatsa has refined his approach to focus on relative value, which balances value and quality considerations. His philosophy centres on finding quality companies trading at the lower end of their valuation cycles rather than simply chasing the cheapest stocks in the market.

In this conversation, Srivatsa discusses which sectors he prefers right now, his disciplined approach to valuation and the outperformance of UTI Large & Mid Cap Fund. Below is the edited transcript of our discussion.

You started your career in auditing before moving into equity research. What sparked your interest in the stock market?

After completing my CA, I worked in the audit department of a leading cement company. However, I had been passionate about equities since my graduation days in the mid-90s. I used to follow the market and invest my pocket money in stocks. I wanted to do an MBA and pursued it.

While doing my MBA, UTI Mutual Fund came to campus and recruited me in a way that proved to be my dream job. So, it was a fortunate event that happened, and thereafter, my career clicked. Even in audits, I always used to take time to read annual reports and analyse companies.

How would you describe your investment philosophy? What kind of stocks or market trends excite you the most?

I've always been a value person. However, I have been exposed to growth and value-oriented sectors, but I realised deep down that I'm more of a value guy, and I've been consciously running that in my funds. In 2017, when there was a reorganisation at UTI, we decided that the funds would be mapped as per the style. Since I had a DNA of value, I was given UTI Large & Mid Cap and UTI Aggressive Hybrid funds to manage using the value approach. Within the value style, I adhere to a concept known as 'relative value', which considers value and quality in equal measure.

One of the biggest lessons I learned from my early days is that anything cheap is not valuable. Several stocks offer a 5 per cent dividend yield and have a P/E of around 5-6 times, but if you look at their CAGR returns for 10 or 15 years, they barely meet the market returns. Most of the time, you would find these stocks underperforming the market. So one realisation was that anything that is cheap is not valuable because today it's a very well-penetrated market. I think many investors are looking at all stocks, and if they have given a stock a miss with a 5 per cent dividend yield or it is trading below its book value, you can assume that there is something wrong with that stock.

I believe that even good-quality companies go through their valuation cycle. Stocks like HDFC Bank, Infosys and Sun Pharma have undergone a huge valuation cycle. In the past 10 years, Infosys has traded at a P/E of 30 and 15 times. HDFC Bank used to trade at four times the price to book; today, it's probably at 2.5 times. So, I search for such opportunities when they are trading at the lower end of their valuation cycle. I look for an intersection of value and quality, but at the same time, I have a predominant value focus.

Another point is that since I manage the UTI Large & Mid Cap Fund, which has a mid-cap allocation of 35 per cent and a small cap of around 10-12 per cent, my focus is on growth because it's possible to get growth ideas in small caps. For mid caps, I follow a blend of both approaches, looking at relative valuation and identifying bottom-up ideas where the market underappreciates growth.

With the recent pullback in Indian equities, do you think the worst is behind us, or are we in for more volatility?

If I look at the liquidity part, there's been tremendous pressure from the FIIs (foreign institutional investors) in the past six months, and they have been selling. Because of the global volatility, the uncertainty after the US elections and the impact of the tariffs, the money is moving from emerging markets to safer havens like the US Treasury or gold.

In the last two to three weeks, we have seen a reversal, as there might be a realisation that the US economy might become weak if the tariffs are implemented. That has led to moving money from the US, benefiting emerging markets and India.

Examining the fundamentals, we find that they largely drive the markets. At least in the large-cap space, a significant part of the correction is done. Today, if I look at the overall large-cap index, it's trading at 16.5 or 17 times one year's forward earnings. Even if I look at the basket of the top 150 stocks, I would easily get opportunities to invest because valuations are at the lower end. The challenge is specifically with mid-cap stocks, where valuations are higher. In small caps, the headline valuations are high, but one also needs to remember that from a fund manager's perspective, small caps have a universe of 200 stocks. So, in those 200 stocks - maybe in the top 70 stocks - the valuations might be high, but there are other 100-odd stocks whose valuations are low or even attractive in the current scenario.

Overall, I think investors should monitor earnings growth for the following year. We are still forecasting double-digit growth as per the consensus for next year. But I believe one needs to wait and watch out until the first quarter of the following fiscal, especially the impact of tariffs if they were to be announced, and see how the earnings will react. However, based on the parameters I am currently observing, I do not anticipate a significant decline in earnings. However, I believe the environment is highly volatile. So, hypothetically, if the US imposes a hefty tariff on certain sectors, it would also impact earnings.

Following a phase of middle-of-the-pack performance, the UTI Large & Mid Cap Fund has been shining since 2021, outperforming its benchmark and peers. What do you attribute this success to?

One of our key areas of focus is valuation as a discipline. For example, there have been no recent investments in sectors such as Capital Goods due to the high valuations. But way back in 2021, we were overweight because I felt that there was a capex recovery happening that the markets were not pricing in. So, at every point, we evaluate sectors, see which are in the value zone and follow a discipline.

This approach can be considered anti-momentum because we bought large and mid-sized private sector banks last year despite the lack of favourable momentum. People said there were merger- or succession-related issues, so the stock might not perform. But we still proceeded because we believed that there was sufficient value. We believe in medium-term patience and stock accumulation where value exists.

The second aspect that has proven beneficial is exiting the market at the right time. We had a significant overweight position in Auto from the start of the Covid-19 pandemic until approximately a year ago, and it played out well in the last year. Once the valuations peaked, we reduced the overweight positions and brought them below market weight. However, we have increased the weight over the past three months. Our focus is on undervalued stocks and sectors, specifically emphasising quality, which has benefited us.

The other factor is our strict discipline in the small-cap segment. The small-cap portfolio consists of stocks that are not very widely held. In fact, we are the first institution to enter some of these stocks. Thanks to our strong in-house research, we do considerable due diligence. Engaging with the company and looking at the softer aspects is a massive exercise. I think small caps have played an enormous role in the outperformance during the last four to five years. We also identified beneficial cyclicals like Metal and Cement at their bottoms and increased our investments when they went through the cycle's lowest phase.

In summary, it's crucial to concentrate on valuation, maintain discipline, remain steadfast and be vigilant about exiting when valuations peak.

After the recent market correction, which sectors or themes look attractive at current valuations, and where do you still see risks?

I strongly prefer Financial Services, Telecom, Metals and Services. These still look attractive, and I have no reason to change my view.

The asset class in which I am significantly underweight is Capital Goods, as the capex cycle has become relatively weaker compared to six to seven months ago. Valuations have corrected, but the implied growth for the sector is still very high, which makes me cautious. A sharp price decline will be needed to take a constructive view or gain exposure in the sector.

I went underweight in the Automobile sector six or seven months ago, but with the recent correction, I'm now looking to go overweight, bringing me closer to market value. The other sector where I'm underweight because of the high valuation is Consumer Services, which are essentially retail and consumer durables. However, I could increase some weights in FMCG because even though the absolute valuations are higher, they are becoming more reasonable within the longer-term history.

Also read: 'Markets are getting close to a bottom or have bottomed out'