Funds

Indian Equities – Investing in the Future of the Indian Economy

In a competitive market like India, an active approach can be beneficial to gain exposure to good quality companies. We recommend the UTI India Dynamic Equity Fund to leverage India’s growth story through companies with strong competitive moats.

iFAST Research Team
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Published on 01 Apr 2022

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India is the world's sixth-largest economy by nominal GDP (2020) and one of the fastest-growing emerging economies. We expect strong growth ahead, driven by the combination of favourable demographics, growing consumption expenditure, and technology adoption.
We recommend the UTI India Dynamic Equity Fund tap on India’s growth story. The Fund follows a bottom-up approach that focuses on high quality and high growth companies with strong competitive advantage.
We favour the fund due to its robust stock selection methodology and strong stock-picking record. The fund has been a very strong performer against many of the other popular India equity strategies as well as its benchmark index over the last five years

India’s growth story – Stellar growth since the turn of the century

India is the world's sixth-largest economy by nominal GDP (2020). As one of the fastest-growing emerging economies, India has demonstrated exponential growth since the turn of the century as its GDP per capita increased more than six-fold. Despite the successful growth story, the nation targets to expand rapidly over the next decade, with the goal of being a USD$ 5 trillion economy by FY26.

India's growth story is shaped by several factors. In recent years, it was fuelled by strong demand for domestic goods and services bolstered by a high level of industrial activity. Before that, India’s growth was driven by the agricultural sector, which has moderated over the years due to significant improvements in the nation’s industrial and service outputs.

To put things in context, the Indian economy’s GDP has more than tripled from USD$ 300 Billion (1990) to USD$ 1 Trillion (2007) and then doubled post-GFC to USD$ 2 Trillion (2015). Economists are now expecting India’s share of Global GDP (in purchasing power parity terms) to rise from 38% (2010) to 63% (2030), closely matching China (Chart 1).

Chart 1: Top 10 Global economies and India’s contribution to global growth

India’s growth story – Robust growth to resume

Looking ahead, we see compelling reasons for the continuation of India’s exponential growth. First, we believe India's population holds the key to long-term growth. We expect to see strong ‘demographic dividends’ arising from the maturing of India’s population age structure, which can bring forth rising income, employment, and a change in spending patterns. This is supported by a very favourable working population ratio, with around 64% of its total population falling within the working-age segment (15-59 years old).

Second, we expect a robust resurgence in consumption that will likely be fuelled by the rise of India’s middle-income class. As of current, the middle-class population in India is almost 400 million strong and is expected to reach over 800 million people by 2030. The middle class in India accounts for more than 70% of all spending, and this value is expected to cross 80% by 2030.

Last but not least, the adoption of technology and digitalization has enabled an economic transformation in India. An increasing number of businesses and households have incorporated the use of technology in their day-to-day operation, particularly over the last few years. In our view, this is a budding trend that will flourish in the years ahead. The impact is likely twofold, firstly, as a boost to productivity and consequently output and, secondly, as a magnet for foreign direct investment (FDI). India’s FDI rose to USD$ 57 billion in 2020, recording positive growth of 13% boosted by investments in the digital sector, even as global FDI plunged that year.

UTI India Dynamic Equity Fund - Our recommended fund

For investors looking to capitalize on the rosy prospects of India’s growth story, we recommend the UTI India Dynamic Equity Fund. This fund invests primarily in growth-oriented Indian stocks which are listed on the Bombay Stock Exchange and the National Stock Exchange in India. The fund manager seeks to invest in companies that would benefit from key structural growth drivers in India.

All of the fund’s investment/research team is based in India. As an equity strategy investing in less efficient markets, this may be a competitive advantage over its non-India-based fund peers, since the analysts/portfolio managers would likely have a better understanding of the services and products of the companies under their coverage.

Investment strategy of UTI India Dynamic Equity Fund

The UTI India Dynamic Equity Fund follows a bottom-up approach that focuses on the microeconomics of the portfolio's businesses. It primarily seeks out high quality and high growth companies with strong competitive advantage. The fund follows a four-stage portfolio construction process (Chart 2):

Stage One: Defining the Universe - The initial stock screening takes into consideration 94% of the NIFTY 500 index which represents the top 500 companies.

Stage Two: Filtering high quality Companies - These companies are then filtered to seek out firms that have a consistently high Return on Capital Employed (RoCE) and operating cash flows to identify businesses that possess a competitive moat and are of high quality.

Stage Three: Filtering High Growth Companies - This pool of companies is then analysed in comparison with their industry peers based on metrics such as the growth in Sales, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), and Profit After Tax (PAT). This helps the fund find companies that are not only high growth but possess earnings power.

Stage Four: Valuation Check and Portfolio Inclusion - Once these companies are identified, their valuations are screened based on the Free Cash Flow yield (P/FCF) and Earnings Yield (P/E). This final stage reduces the number of companies down to 50 – 60, which are then included in the portfolio with a low churn rate.

As of February 2022, the fund has overweight positions in the Financials, Information Technology, and Consumer Discretionary space. These sectors account for almost 60% of the total exposure of which Financials has the largest weight of around 26% (Chart 3).

Chart 2: Portfolio Construction Process

Chart 3: Industry breakdown of the UTI India Dynamic Equity Fund

Why we like the fund

A compelling reason why we favour the fund is its investment strategy. The fund has a very detailed stock selection methodology which works particularly well for the Indian equity market. In a market like India where many industries are dominated by a small handful of large players, it can be challenging to identify high quality companies or companies that possess sustainable growth. Thus, a robust methodology to screen for growth and quality is important in identifying rising opportunities.

Moreover, being an all-cap fund, it has the flexibility to invest across market capitalizations and industries. The strategy allows heavier positioning in industries where it has high conviction such as Consumer Discretionary, Health Care, and Industrials, deviating from the benchmark allocation. The fund tends to steer away from industries that are very capital intensive or are less profitable such as Communication Services, Energy, and Utilities (Table 1).

Besides the investment strategy, the fund possesses stellar long-term performance. The UTI India Dynamic Equity Fund has been a very strong performer against many of the other popular India equity strategies as well as its benchmark index over the last five years (Chart 4). The fund also exhibits a higher equity beta (as compared to similar strategies) given its sizeable mid to small-cap exposure, which gives the fund an edge during a bull market. This explains the diverging outperformance seen in this fund during the 2020 economic recovery.

Overall, for investors looking tap on India’s growth story, we recommend the UTI India Dynamic Equity USD. Looking ahead, we believe this fund should prove resilient in the current volatile equity backdrop given its exposure to high-quality companies that consistently invest their capital effectively and deepen their competitive moats.

Table 1: Sector breakdown and exposure vs benchmark

Sector Breakdown and Exposure vs Benchmark
Sector Name	UTI India Dynamic Equity	MSCI India Index (Benchmark)
Financials	25.7%	24.2%
Information Technology	19.5%	18.4%
Consumer Discretionary	13.7%	8.4%
Health Care	12.7%	4.8%
Industrials	8.8%	4.7%
Materials	7.9%	10.2%
Consumer Staples	7.7%	8.4%
Cash	3.0%	0.0%
Communication Services	0.9%	3.1%
Energy	0.0%	11.8%
Utilities	0.0%	5.3%
Real Estate	0.0%	0.6%

Number of Holdings	56	107

Source: UTI International, iFAST Compilations
Data as of 28 February 2022

Chart 4: Performance of India focused equity funds

The Research Team is part of iFAST Financial Pte Ltd.

Declaration

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the above mentioned securities.

All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.

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iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.

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