D-Street Talk podcast | Sanjay Dongre of UTI MF defines ‘quality’ companies; asset allocation is key

Asset allocation remains to play a key role amid the COVID-19 crisis. It has given long term investors to increase their exposure towards equities if they are underinvested in the equity asset class, and quality companies remain to be the central theme, Sanjay Dongre (EVP & Sr. Fund Manager – Equity) at UTI MF said in a special podcast ‘D-Street Talk’ with Moneycontrol.

Before we go ahead let’s define which companies fall under the category of quality. Well, are all large-cap companies’ quality companies?

Dongre says that quality companies are those which have sustainable free cash flow generation, high return on capital (ROC), and ROCE or return on capital employed.

If the companies are able to generate high free cash flows every year – it means that there will not be any debt on the balance sheet. “The entire cash flow is available for the distribution to shareholders,” explains Dongre.

High return on capital employed (RoCE) means that companies have to reinvest very little cash into the business to maintain the earnings growth going forward. Because if these characteristics discussed above these companies tends to attract very high PE multiple in the market.

The stock market performance of quality companies may vary from various market cycles but we should remember that when someone invests in these companies for let’s say 10-15 years – these companies have generated enormous wealth for investors, said Dongre.

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