Ajay Tyagi is the Head of Equity at UTI AMC
UTI AMC remains bullish on sectors that are linked to domestic consumption and are driven by a rising trend in per capita income, Ajay Tyagi, Head – Equity and Fund Manager at UTI AMC, says in an interview with Moneycontrol.
The sectors where the AMC is bullish from a longer-term perspective are consumer staples, consumer discretionary and consumer durables, he adds.
With more than two decades of experience across equity research, offshore funds as well as domestic onshore funds, Tyagi feels markets are trading at about 10-15 percent higher than the long-term averages in terms of one-year forward valuations and that can be a reason enough to come close to the June lows.
Do you think there is a possibility of a further cut in growth forecast to below 7 percent for FY23?
While the domestic demand still seems to be resilient there could be an impact on account of slowing global growth. A hard landing in the US in the coming quarters can lead to some slowdown in our exports, thereby softening our GDP growth.
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What could be the RBI’s terminal rate, given elevated inflation and the aggressive approach adopted by the Federal Reserve towards further rate hikes?
As of now, it appears that RBI may be looking at 6.5 percent as the terminal rate. However, we need to be watchful about the actions of the Federal Reserve and its impact on the rupee as that will have implications on RBI’s policy action. So while we work with 6.5 percent as the base case right now, there can be an upside risk to this.
Do you see any factors that can bring the equity markets to June lows in the coming months?
The single biggest factor can be valuations itself. Markets are trading at about 10-15 percent higher than the long-term averages in terms of one-year forward valuations and that can be a reason enough to come close to the June lows. Global geopolitics and a general risk-off environment can also have an impact on all emerging markets including India.
Is it the right time to add exposure to IT stocks given the significant underperformance this year?
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When we make investments into stocks, we are more influenced by the prospects of that business over the next few years in terms of growth in profits and cashflows and their sustainability. Given the importance of technology today, IT budgets of clients are becoming less discretionary in nature as they are no more about cost cutting alone but are an integral part of the business strategy itself. Further, the IT sector has many companies that are one of the best in terms of corporate governance, steady cashflow generation and strong balance sheets. Lastly, valuations have turned attractive again after the sharp correction in the last few quarters.
Do you think the auto space has seen run up far ahead of fundamentals and hence looking overbought?
The auto sector has been an underperformer over the last five years due to multiple factors – demand slowdown, pandemic, chip shortages, etc. Being a cyclical sector, autos witness a few years of weak demand followed by years of strong demand. One must remember that the auto sector witnessed one of the worst down cycles ever in the last few years and consequently the upcycle is also expected to remain strong. Therefore from a medium-term perspective, the pent-up demand can lead to strong growth for the sector for a few years and hence valuations should not be looked at in the context of just the next one year.
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Do you expect the September FY23 quarter earnings season to be good or mixed? And why?
Looks like the quarterly earnings would be mixed. While the sales growth of companies may remain strong but the broad-based inflation would lead to margin compression resulting in profit growth remaining muted. However, consumer behaviour across sectors will be the key thing to watch out for.
What are the opportunities to focus on, and what are the sectors to avoid now?
We remain bullish on sectors that are linked to domestic consumption and are driven by a rising trend in per capita income. The sectors where we are bullish from a longer-term perspective are consumer staples, consumer discretionary and consumer durables. Healthcare, which includes domestic oriented pharma companies as well as healthcare service providers, will also be beneficiaries of rising income levels. Retail-focused banks, predominantly from the private sector, will be financing a lot of the consumption boom in India and would also be beneficiaries as a consequence. Since global growth will remain muted for a couple of years, one should be watchful about the export-oriented sectors as well as sectors that are linked to the global economic cycle like the metals and energy sector. Since liquidity is expected to remain tight for the foreseeable future, businesses that are poor in terms of cash generation and are dependent on external sources of funding should also be avoided.
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