Advice from UTI AMC fund manager Ankit Agarwal on how to avoid investment pitfalls

Before joining UTI in 2019, Ankit Agarwal was also associated with Lehman Brothers, Barclays Wealth and with Centrum Broking Ltd in the capacity of Senior Vice President.

Stock markets are infamously synonymous with gambling, at least with a majority of the older generation. This myopic view stems from the constant opinions/reminders of our older relatives who have burnt their fingers in the markets.

Fortunately, the current finance savvy generation realizes the importance of stock markets as a great tool for wealth creation in the long term. But we need to analyze some of the important aspects that are often overlooked in the wealth creation process, more so to avoid the mistakes that our elders/seniors made.

Here is the expertise of Ankit Agarwal.

Ankit Agarwal is one of the fund managers at UTI Asset Management Company (AMC). In this position, he manages the UTI Mid Cap Fund. While he has been associated with UTI AMC since 2019, he has been a part of the industry for over a decade.

In his blog on the UTI AMC’s website, the fund manager gave some meaningful insights into how some undesirable practices undertaken by a company can spell disaster for the investors.

Check out: Equity MFs that outperformed markets during volatile times

So, what are the aspects/red flags that investors should look for?

Some of the similarities found between companies that have destroyed shareholders' wealth in the past are poor governance, misallocation of capital, poor management, etc. So, investors need to look at the following aspects for their due diligence process.
 

• Promoters of the company- While all companies are made of the same factors such as people, capital, infrastructure, etc., promoters are the ones who can make or break the company. While looking at the promoters, investors should look at their integrity, capability to run a business, and long-term promoter's vision.

• Cashflow analysis- In this analysis, the key metric used by the fund manager is the EBITDA to CFO ratio. As per his analysis, when the EBITDA to CFO conversion starts deteriorating, the performance of companies also takes a plunge.

• Related party transactions and unlisted entities- If a company is doing a lot of business with related entities, of which many are unlisted, there could be a possibility that the firm is accounting for costs elsewhere.

• Using a common-size P&L for comparison with other companies in the sector - A sharp divergence between the company under review compared to its peers should be questioned.

• Use of fraud detection tools such as the Beinish m-score.

Apart from these, investors should also look at promoter salaries, CFO salaries, board composition, attrition in the board, outside interest of promoters, past track record of governance, any defaults in the past on payments especially to financial companies etc. These are the areas in which investors can spot the potential red flags.