“Our approach to manage money is driven by a focus on generating alpha. We are not really looking at index levels. We focus on valuations instead. Enough stock-specific opportunities are available in this market across sectors, while the overall market may look expensive on a headline basis,” says Amit Premchandani, Senior VP & Fund Manager for Equity at UTI Mutual Fund.
Explaining how the trailing P/E is getting distorted by the impact of lockdown, he says P/E estimates for FY22 look more reasonable. “Nifty’s price-to-book value is now above the long-term average, but is still within the fair value zone at 2.9 times. Midcap valuation is at a marginal premium to that of largecaps against the discount over large part of 2019. We are aware Nifty’s return on equity is currently at a multi-year low, but that reflects the impact of immediate earnings, which should improve as we see incremental normalcy and cyclical recovery in the economy,” he says.
As the fund manager of UTI Value Opportunities Fund, Premchandani has been buying stocks that are cash-rich and available at reasonable valuations. “The focus is on survivors of the current downturn, as they will be the first ones to bounce back when the economy recovers,” he said in an interview with ETMarkets.com.
Premchandani says over the past one year, he has increased exposure to auto stocks, as valuations became comfortable and personal mobility saw a comeback. In the last 12 months, the fund has generated 18.5 per cent return CAGR, beating Nifty500 by around 5 per cent.
For now, Premchandani finds the valuations attractive in financial stocks. “We have recently added exposure to this space after a fund raise by the sectoral leaders. However, opacity of asset quality is still a risk in this sector.”
His second sectoral bet is a play on the gradual improvement in housing demand. “Interest rates are at multi-decade lows, while real estate prices have seen time correction over the past decade. This has increased affordability, which may lead to demand revival in residential real estate. Hence, we have added exposure to the broader construction space,” he said.
Sharing his methodology on how to spot value bets, Premchandani said he follows the principle of finding the intrinsic value of a stock, rather than going by the traditional definition of determining valuation based on multiples. “We think intrinsic value of a company is the present value of cash flows generated over its remaining lifespan. With Covid cash flows of many companies impacted, the impact is limited in most cases to few quarters. So the impact on overall value would be limited,” he said.
Other factors to identify stocks are margin of safety, capital allocations, free cash flow profile, conversion of Ebitda to operating cash flows, risk of erosion of terminal value and governance framework. “In terms of multiple, we look at price-to-book, EV/Ebtda, Price/sales, as they are much more stable compared with P/E, where one single quarter’s earnings can distort the picture,” Premchandani said.
While scouting for PSU stocks, is it impossible to ignore debt-free PSUs with large asset bases? “We lay emphasis on return and cash profile of a company rather than asset value to assess the margin of safety. We have invested in PSU names, which have strong franchises, sound profitability and a long runway for growth,” he says.