Tata Equity PE: Buy. Cherry-picks stocks with growth potential

High growth expectations have seen stocks move up sharply in the market rally of the last one year. But corporate earnings are yet to recover firmly from the slowdown in the economy.

This has resulted in valuations zooming in many stocks. Tata Equity PE is a good pick in such a market situation.

The fund has a mandate to invest at least 70 per cent of its portfolio in shares whose trailing PE (price to earnings) multiple is less than the Sensex.

The fund can thus help zero-in on stocks with lower valuations and with a strong potential for growth.

Considering that the fund looks for stocks with valuations lower than the Sensex, the bellwether is the benchmark for the fund. But since the fund roves across the entire market for stocks with such lower valuations, comparison with multi-cap funds may be more appropriate.

The fund has bettered the category average of multi-cap funds by 2-11 percentage points over longer time periods.

True to its multi-cap colours, the fund held 20-45 per cent in mid and small-cap stocks in the last few years, based on the market situation.

While it made the best of the up move by holding 40-45 per cent in these stocks in the last one year, it took to the safety of large-caps in the volatile/falling markets of 2013 and 2011.

The portfolio PE now stands at 15.4 times, compared with the Sensex’s trailing PE of 20 times.

Banks and software generally remain top sector choices. However, the fund pares or adds to holdings in different sectors and also the stocks in those sectors to suit its valuation leanings.

For instance, from showing preference to auto ancillaries in the beginning of the 2014 rally, the fund has gradually cut down exposure in this space as valuations soared.

It is, instead, playing the cyclical revival theme through select auto stocks. Here too, lower valued Mahindra and Mahindra and Tata Motors DVR are the choices in comparison to Maruti Suzuki or Ashok Leyland, whose trailing PEs have zoomed.

Similarly, in the IT space, HCL Technologies has been preferred over the more richly valued TCS or Infosys.

KPIT Technologies and Mphasis, mid-tier IT companies with good prospects and reasonable valuations, find a place in the latest portfolio over MindTree, which the fund exited by December 2014.

Preference for lower PE stocks doesn’t mean the fund is losing out on re-rated stocks which still sport good growth potential.

The fund can freely invest up to 30 per cent of its portfolio in such stocks.

The recent addition of Cera Sanitary Ware and JK Cements, for instance, is proof of this.

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