Swati Kulkarni, Executive Vice-President — UTI Mutual Fund, one of the senior fund managers in the MF industry, talks to BusinessLine about why she would still like to pick stocks the old-fashioned way, based on a firm’s ability to generate cash flows. Excerpts:

UTI has just launched a new equity fund. But is it not too late to join the rally?

We think this bull rally can continue if corporate earnings support it. We don’t think much price-earnings (PE) expansion can be built in from here on. We did a study of six Indian stock market rallies from 1985. Their durations ranged from 60 weeks (in 1993-94) to 246 weeks (2003 to 2008).

The shortest rallies had an average duration of 72 weeks. Similarly, the six rallies have generated returns of between 115 and 614 per cent. The current rally is just 58 weeks old and has given only a 49 per cent return.

The longest bull run was from 2003 to 2008. What actually happened in this period was that there was a cyclical recovery in the economy and in earnings. The GDP trajectory changed to 8 per cent plus from 4-6 per cent which resulted in a multiyear bull market.

Today, we see most macro indicators, apart from credit growth, picking up. Inflation readings are down and following RBI’s glide path. Anecdotal evidence on the policy front appears positive, too. The new government is energising the bureaucracy, cutting expenditure and taking proactive action on inflation. Policy rates have not been cut yet, but due to good liquidity, corporates are now able to borrow at lower rates.

We cannot say when the capex cycle will pick up. As capacity utilisation improves, the private sector will come up with additional capacity. As Government finances improve, it too will be able to invest. Every $1 fall in crude oil reduces the current account deficit by $1 billion and reduces inflation by 10 basis points. This could provide additional headroom to the Government. This is not to say that global issues will not temporarily affect the markets. They will. But if the economic undertone is strong, there is room for equity allocations to go up.

September quarter earnings from companies have not been great...

There are pockets of good growth while select sectors have seen a slowdown. In FMCG, for instance, rural growth assumptions were high and are being corrected. But in two-wheelers or three-wheelers, the growth is quite healthy. Banks are showing good results but in capital goods, the stress is continuing.

Broadly, we see leaders in different sectors showing improvement. In the small- and mid-cap space, there is a lot of hope around these companies, but earnings are not showing visible improvement. We think the valuation of the small-cap index at 28 times on a trailing 12-month basis, is stretched. In our investment style, we give a lot of weightage to operating cash flows and we think mid- and small-caps aren’t offering that at this juncture.

In the initial part of this rally, UTI MF took a relatively defensive position and didn’t bet much on cyclical stocks. Have you changed that view?

In the initial part of any rally, investors tend to chase high beta stocks. But from June, we have seen these stocks peak out. Some of the QIPs where we applied, we are sitting on 30-40 per cent profits. Some of the cyclical QIPs that others subscribed to, have still not reached those levels. Our focus on cash flows and profitability and our decision to stay away from highly leveraged stocks, has paid off since June. We have been focusing on companies with consumer facing businesses because they will be the first to revive.

Which sectors can benefit from the falling crude oil and industrial metal prices?

The impact of this will not be immediately seen in earnings as companies tend to carry a few months inventory. It will take two quarters or so to play out. In consumer durables, auto ancillaries or paints where the raw material is steel or linked to crude oil, you may see prices falling. We may also see indirect benefits for some companies, like falling diesel prices reducing freight costs and thus, benefiting cement companies. But this trend has to be played on a stock-specific basis.

Why have you chosen to make your Focussed Equity Fund a close-end fund?

There are investors for whom liquidity is not an issue and they can consider a close-end structure. The advantage of a close-end structure that I see as a fund manager is that, as an open-end fund grows, you usually have to dilute your bets. But in a close-end fund, we don’t have such pressures.

We also see that corrections can unnerve investors and they tend to exit. That will not result in a good return experience. Different funds suit different investors and they are free to choose between this fund and our other open-end funds.

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