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Interview: Picking On Growth

I am bullish on software, banking, telecom, engineering and construction

Fund managers come in all shapes, sizes, temperaments and personalities. If Sanjay Dongre, senior fund manager, UTI Mutual Fund had to be described, it would be apt to say that he is a no-frills fund manager of (very) few words. Last year, his UTI Infrastructure Fund topped the list of diversified equity performers (1/145). The other funds he manages are UTI Leadership Equity, UTI Software Fund, UTI Masterplus, UTI MEPUS and UTI Pharma Fund. Together, they all account for Rs 4,067 crore of assets under management.
Over here, we have attempted to get an insight into the thoughts of this 38-year old fund manager and his views on the overall market.

In such a volatile market, are you employing any specific strategy to deal with your portfolio?
The market is extremely volatile and shifting between aggressive and defensive strategies takes time. It is not something that can be done overnight. One can indulge in such moves only if they have a medium to long-term view on the trends of the market. If you have a very high conviction level about the sectors and stocks you are investing in, a volatile market will not matter. If you believe that your stocks will perform well over the medium to long term, there is nothing to be concerned about. Deploying various strategies during a volatile phase will be tantamount to timing the market. And no one can perfect that entry and exit timing. That is why it makes sense to invest only in those stocks that you are convinced about and believe in. When volatility reduces and the market resumes its upward trend, good stocks will bounce back.

What are the factors that you feel will affect the market in the coming days?
High inflation and rising interest rates were the main factors that impacted the market in the recent times. These worries could remain in the coming weeks. I expect inflation to come down to less than 6 per cent by April and probably 5 to 5.5 per cent by May. Once inflation comes under control then one can expect the RBI to pause on the monetary tightening. This will automatically lead to stability in interest rates which will be taken positively by the market.

What's your take on FII inflows?
Well post-May, if inflation is under control, a pause in the monetary tightening and stability on the interest rate front, will be positive factors to draw in FII money. If we manage to clock in the 8 per cent growth, FII money will have to flow in. The second half of this year could see a substantial chunk of FII money coming in.

Do you see a decline in corporate earnings this year?
FY07 Sensex earnings are expected to grow in the 28-32 per cent range. The next year, the Sensex earnings growth could come down to the 20 per cent range. The softer commodity prices will pull down the earnings growth of those particular sectors. Other sectors like telecom, software and engineering are expected to show a good growth. Overall, we could have 20 per cent earnings growth in the Sensex stocks next year.

How would you describe yourself as an investor?
I chase growth. I do not get out of a stock until something goes wrong like I face a redemption request or get a better opportunity. Even if a stock becomes expensive, I don't mind holding on to it if it has growth visibility.

Do you follow any specific strategy like top-down or bottom-up?
Actually, I combine a bit of both. Obviously, one has to look for sectors where the growth potential is high. This itself narrows down the sector list. That does not mean all the other sectors are to be ignored. In fact, there may be some exceptional stocks in those other sectors which have to be considered.

If not a fund manager, what would you be?
If I was not a fund manager, I would have gone back to my previous job. I worked as an engineer at Reliance Petroleum in Hazira. That would have been peaceful - visiting the plant daily and returning home after my shift.

You find fund management stressful?
Yes of course. But I enjoy my job — it involves a lot of pain and gain. When the market is riding high, I enjoy generating returns for my investors. When the market dips, I go through the pain of watching my investors' wealth get eroded.

Normally, equity analysts end up as fund managers. Why did you get into dealing for a while?
Actually I worked for a while as a credit analyst when UTI was solely a development financial institution. Then I worked in the equity research cell as an analyst. But it's true. I also did work as a dealer for sometime before shifting to fund management. The reason for getting into dealing was to get a feel of how the market functions. I stayed there for just a year to increase my exposure and get a broader perspective on the stock market. Executing deals gives a better understanding of the market and how a stock moves.

What is the reason behind the resounding success of UTI Infrastructure Fund?
Sticking to the investment objective of that fund by investing only in stocks directly or indirectly connected to infrastructure. These stocks either form a part of 'basic industries' or the core sectors of our economy. And yes, the stock selection too helped. I did not go for the ultra small-cap companies. The mid-caps that I picked are the ones in which I see a high growth potential. So even though mid-caps as a whole did not perform well last year, a few mid-caps did perform well and fortunately those were the ones I invested in. The growth was excellent in these and the ownership levels were low.

What would be an obstacle to the growth of the infrastructure sector?
Sudden change of government leading to a pause in decision making. If polices and decision making comes to a halt and nothing happens for three to six months at a stretch. This could delay a lot of projects. Interest rates staying high for a long stretch of time.

Which sectors are you bullish on and which ones you are avoiding?
I am bullish on software, banking, telecom, engineering and construction and avoiding all the metals —ferrous and non-ferrous and cement.

Which sector are you taking a contrarian view on?
Auto (four wheelers). I think these stocks have underperformed because there were worries of sustainability of the volume growth. All four-wheeler companies have shown good volume growth . I think in three to six months we will have inflation under control, interest rates will be softer and in that environment, the market will value these stocks at a higher level.

You mentioned that mid-caps did not perform well last year. Do you think they will lead this coming year?
To some extent, the market-cap does not matter. It begins to matter only after someone likes the stock. Only when you are positive about a company does the question arise: Am I in a position to buy a larger quantity of that stock? And that is when the market cap differentiation occurs. So you may want to buy a stock to account for 2 per cent of your portfolio but your holding may account for 10 per cent of that stock's equity holding. This is where the problem occurs. Fundamentally, a company must have a high visibility of earnings growth.

Any sector you like to own but feel is overvalued?
Real estate.

Is that why real estate stocks don't find a place in your portfolio?
Yes. But the issue also is that I do not have a mechanism to track the land bank that these companies claim to have. Though, if I had to consider such stocks, I would take a macro call based on location and economic activity. Let's say we are talking of the IT sector, including BPOs. If some geographical centres are emerging as IT or BPO centres then obviously the number of people who will be employed will translate into residential complexes. The land bank must have the potential to be converted into a saleable proposition.

Why are airline stocks absent in your portfolio?
The growth of airline stocks has not resulted in an earnings growth because of the stiff competition. Till some consolidation takes place, I will not look at this sector.

But you are very bullish on the power sector.
That's true. Look at power generation: Obviously, there is a shortage of electricity in our country. The Eleventh Plan talks about adding almost 60,000-65,000 mw capacity. Consequently, the order book position of power equipment companies will continue to grow.

The amount of investment in transmission segment is currently low. In future, Power Grid is expected to release significant orders for revamping transmission network and addition of capacity. Companies operating in the transmission and distribution segment are going to witness a good growth in their order book positions in the next two to three years.

What would be your advice to investors?
Volatility will come and go. It is part and parcel of the equity market. An equity market has to be volatile to justify the higher return. Investors should invest via a systematic investment plan. This will generate good returns over the medium- to long-term by riding the volatility.