Swati Kulkarni, EVP and fund manager at UTI Asset Management, manages UTI Dividend Yield, UTI MNC Fund and UTI Opportunities Fund. In an interview with Rajesh Abraham, she says the coincidence of a drop in global risk aversion and supportive valuations triggered the ongoing rally in the Indian market. Excerpts:

Are you surprised with the sudden rise in Indian stocks in 2012? What are the main reasons for this rally?

Following the correction of about 26 per cent in 2011, the valuations for the Indian market were supportive. However, you are not sure when the realisation will sink in (that the valuations are looking attractive) for investors. The supportive valuations for Indian stocks have coincided with global risk aversion coming down. This triggered the rally.

Do you think the markets are running ahead of the valuations now?

Till date, India has been a good performer. Not just stocks, the Indian currency also performed well with gains of 7-8 per cent this year. As far as valuations are concerned, we do not think Indian stock valuations are that bad, looking at trailing price-to-earnings multiple. At one year trailing price-to-earnings multiple, we are at present trading below the average of 16 times earnings. The Indian markets have traded at an earnings multiple of 19 times and even 20 times.

So, I would not say the Indian markets have run ahead of fundamentals. In terms of forward earnings multiple, it has gone up from 11-11.5 times to 13.5 times after the rally. Going forward, I think there has to be an earnings upgrade down the lane to support

stock prices.

Are you suggesting that you expect the present runup in stock prices to continue?

It would be unfair to assume that stock prices move in one direction. It can take a pause or can even come down in the short term. But, we believe in the in the long-term India story. We are bullish on a three-year horizon.

What has been the trend from mutual fund investors during this rally?

It has been a mixed trend. As far as UTI Mutual Fund is concerned, we have seen steady inflows. While SIP (systematic investment plan) investments continued, we also received lumpsum investments from investors. Yes, there has also been some amount of profit booking from those who invested at the bottom levels. From this, we cannot notice any clear trend.

What has been UTI Mutual Fund’s strategy in terms of cash deployment?

We have deployed cash during the past one month or so. The average cash levels may have come down from 10 per cent levels to 6-7 per cent.

It is seems the investor expectations are building up on several domestic events over the coming weeks, including a bold budget on March 16 and rate cut exercise by the Reserve Bank of India (RBI). What is your view?

We also cannot overlook unfolding of global events too. The EU summit (where heads of state and government are expected to gather in Brussels) on March 1 (to agree on a ‘fiscal compact’ aimed at tightening budgetary discipline between the 17 euro zone nations) is an important event. As far as the Union budget is concerned, one should not forget that finance minister has an unenviable task. On the one hand, he has to deal with high fiscal deficit and on the other, he has to address slowing growth. These two will have a major influence on the finance minister while preparing this year’s budget.

You manage an MNC fund. How has been the performance of this fund? What are the prospects of the listed MNC players?

As far as MNCs are concerned, there is a strong brand strength and very good balance sheets. They are less leveraged and they have the power to support their brand. The MNCs have long-term potential because they can support the consumption theme. However, any positive turn in the investment cycle may not benefit the MNCs because there are very few MNCs in construction and infrastructure sectors. Last year, our MNC fund returned 16.5 per cent, compared with the benchmark’s 11 per cent. (The broader Sensex was down 26 per cent). We have also beaten similar funds from other mutual fund houses.

How has been the performance of your dividend yield fund?

This fund is suitable for investors with a three-year perspective. We invest in companies with a sustainable cash flow. During a sharp rally like what we are witnessing now, the dividend

yield fund may look a laggard, but this fund is for investors looking for capital appreciation in the long-term with less risk. Funds that perform now are those aggressive funds that bet on the beaten down stocks of last year, where the risk is on the higher side.

Given the way interest rates are expected to move over the coming months, following the softening of inflation and RBI’s indication stance, do you think this is a right time to play interest-rate sensitive sectors?

Shift towards interest-rate sensitive sectors such as banks, I would say, has already happened – from 17-18 per cent weightage in November-December period to about 24-25 per cent at present. We have been buying banking stocks early this year. Depending on the comfort of balance sheets, we may also look at betting on auto, housing finance and other allied sectors.

rajeshabraham@mydigitalfc.com