MUMBAI: Swati Kulkarni, executive vice-president and fund manager at UTI AMC Ltd, manages one of India’s oldest funds, Mastershare, and also a Dividend Yield Fund.
We spoke to her on equities in general and how to look at dividend yield stocks in a portfolio at a time when growth is dwindling though some stocks continue to maintain dividend payout.
What is your outlook on the markets given the current situation?
There is a silver lining; the interest rate situation is going to be benign. Inflation is fairly under control. Due to global growth slowdown, the central banks are going to be dovish and supportive. Therefore, we can make a case of an extended period of low-interest rates. Vulnerability remains only with oil; that is if, with the growth slowdown, oil also remains benign. If we are able to channelise investments, capacity utilisation will go up and we will have a cyclical turnaround in auto and discretionary consumption. I am hopeful of this over the medium term. Earnings have not been as per expectations; hence I feel markets would continue to be range-bound.
When share prices fall, dividend yield story is something that is explored. Tell us how to look at this?
Companies should have a consistent free cash flow generation. So, in addition to the dividend, we look at free cash flows. We also look at the opportunity to grow profits. Only when there is earnings growth, the quantum of the dividend would go up. For the general public, dividend yield gives some return visibility.
A single stock may not meet all the parameters. We have to have these three buckets. Certain stocks have high dividend yield. For some stocks where free cash flow is higher, earnings growth is there. In last one year, certain sectors continue to be high dividend yield because their cash flow generation has been pretty robust and growth decent. One such sector is IT, though their margins are under pressure as they are investing in their businesses. We have also seen it to stocks in financials where normalisation of profits is likely to happen. Dividend yields had dropped, but there is definitely scope for profits normalisation as credit costs go down.
From a portfolio perspective, if 20-30 per cent of my portfolio is giving a dividend yield of more than 5 per cent, let’s say it makes sense. But if you are looking at it in isolation, that may not be the correct strategy.
Does the correction in valuations give any comfort to pick up stocks?
In consumer stocks, the valuations have remained expensive for now almost two years. Investors are still holding on because growth is not strongly visible somewhere else. These valuations would correct. If growth isn’t there, there will be a shift to companies that are growing at a similar rate but with valuation comfort.
Any other segments?
From a bottom-up perspective, some of the mid-cap names have started to become attractive. Pharmaceuticals, for example. There are concerns on profitability and competition, but I do see valuations have come off despite earnings revision. Also, in auto, especially two-wheelers, there is good amount of valuation correction. The third sector is metals, it is a not-so-much-liked sector, if you look at the price to book. At depressed commodity price also, the metrics have started to look attractive. I am not saying that they will turnaround tomorrow, but one has to be looking at these sectors to find opportunities.
Your advice for those who continue to invest in equity MFs, SIPs etc?
Stay focused on asset allocation, and don’t get carried away by the noise around equities. Worldwide, investors look at past the returns, invest only when they are attractive. It is important that one looks at financial goals. One has to have an understanding of their financial requirements, assets, lifestyle, and then retirement needs in terms of lifestyle and expenses.