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Finding value in growth

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UTI Mutual Fund's says that both growth and value should exist for any stock to perform in the long term.
 
Gautami Desai of is a fund manager who does not differentiate between growth and value stocks. She looks for stocks that will create value for shareholders in the long term. She says, "Growth does not necessarily translate into profits."
 
She explains this by giving an example. "Telecom and airlines are both growth sectors. But in case of telecom, costs are under control and in case of airlines the opposite is true and hence, growth will not result in profits." She also believes that stocks never perform only on the basis of valuations.
 
Justifying this Desai says, "PSU banks are now quoting at low valuations, however they lack growth drivers, especially in a rising interest rate environment, if the credit growth slows down and the investment portfolio suffers, profitability will be hit."
 
Performance of a stock in the long term will therefore depend on both growth and value. "You should have growth which will create value," she says. Along with this, Desai looks for a strong balance sheet and cash flows, track record and management quality while picking a stock.
 
What's hot, what's not
 
Desai is positive on IT product companies, city gas distribution companies, pure garment manufacturers, select private sector banks and small engineering companies which are operating in a niche environment, have a strong balance sheet and a record of consistent performance.
 
She says, "These are growth stocks available at reasonable valuations." Giving an example of the stocks available in these sectors she says, "There are certain small engineering companies such as Shanthi Gears, which have been good performers, but the market has only spotted it now. I expect it to keep growing at a reasonable rate and provide returns equal to the profit growth rate. She adds, "I feel that one should concentrate on core profit growth rather than trying to value the invisibles."
 
Desai is currently bearish on media and PSU bank stocks. Explaining the reason for this stance on media she says, "Corporate governance has always been a problem in this sector; there is continuous underperformance in terms of numbers."
 
On PSU bank stocks she says, "In a rising interest rate scenario they will have to book some more losses on the treasury side. Further, there is no margin expansion and I also expect slowdown in credit growth."
 
Top picks
 
Talking about some of her best picks, Desai says, "Godrej Consumer Products is one of the core holdings in my portfolio."
 
She bought it in September 2005 at about Rs 420 and the stock is currently trading at around Rs 670. She will continue to hold it as it falls within her stock parameters.
 
She says, "With growth in urban income, this stock can be expected to reap the benefits. Also, it has a good management, and track record, strong cash flows, high growth and dividend payout, good returns ratios and has created considerable shareholder value."
 
According to Desai, a large cash surplus with a conservative debt equity ratio will provide this stock the financial muscle for acquisitions. Suzlon was also one of her best picks. She bought it in November 2005 at Rs 800 and exited it at Rs 1,350 in April 2006.
 
She says, "The balance sheet is in harmomy with the business model and the mind of the management. I exited it purely on valuations."
 
Journey to success
 
This 32-year old fund manager, who is a rank-holder MBA graduate from NMIMS, started her career in 1998 when she joined UTI Mutual Fund as a manager in the credit rating cell. She analysed companies across sectors like engineering, construction, cement and rated their debt instruments.
 
After working in this cell for three years she moved to fund management. She was an assistant fund manager for four years and finally in September 2005 became a fund manager.
 
Currently, she is managing six funds""UTI Master Growth, UTI Index Select Fund, UTI Service Sector Fund, UTI PSU Fund, UTI Petro Fund and UTI Banking Sector Fund. UTI is the only fund house to run a petro fund. 
 
DESAI'S PERFORMANCE
  1 month 3 months 1 year
Scheme Performance (%) as on June 21, 2006
UTI-Index Select Equity Fund -4.05 -8.95 6.86
S & P CNX - Nifty -5.12 -10.39 3.56
UTI-Master Growth 1993 -4.03 -11.56 4.87
S & P CNX - Nifty -5.12 -10.39 3.56
UTI-Banking Sector Fund -10.99 -18.15 -17.01
S & P CNX Bank -12.60 -20.95 -18.31
UTI-GSF-Petro -8.46 -10.54 -4.63
Petro Index   -7.38 -10.74 -7.14
UTI- PSU Fund -8.86 -18.87 -12.46
BSE PSU Index -9.14 -18.92 -10.64
UTI-GSF-Service -6.53 -16.80 -7.70
IISL Service -4.82 -15.58 -7.29
Source: UTI Mutual Fund
 
Desai says, "When this sector gets deregulated its beta will come down and hence the stocks in this sector will start getting better valuations. Anybody having a two to three year horizon can invest in this fund. With more and more private players entering this sector, the government will soon have to deregulate it."
 
She is also happy with the performance of the and the UTI Master Growth Fund.
 
According to her, both are in the first quartile in the quarter ending June 16, 2006 (Source: valueresearchonline.com). Desai strongly feels that there are no short-cuts to success. She says, "Success is directly proportional to the amount of hard work you put in and my experience reinforces this belief."
 
When she is not managing her portfolio of funds, she likes to read and spend time with her son, Agastya. A book that she admires is Built to Last by James Collins.
 
"This book talks about the successful habits of visionary companies. It tells you what these companies do, how they are different from others and why they are successful. This book has also helped me a great deal in my job," she says.
 
Bullish on India
 
Desai advises investors to put their faith in mutual funds if they are not capable of doing a thorough study of individual scrips and sectors. "There is no easy money. Don't risk your hard earned money by investing on tips," she says.
 
Commenting on the Indian economy and its impact on the markets she says, "You should believe in the India story. The stock market is a reflection of the underlying fundamentals of companies. Corporates are growing at about 20 per cent and this will reflect in their stock price."
 
Also, she asks investors to stop worrying about the Fed rate. She says, "A 0.5 per cent rise in the Fed rate is not going to decide the fate of the Indian stock markets."

 

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