Daily Voice: Do not expect sharp rebound to record highs immediately, but positive momentum is building in market, says Tata MF's Meeta Shetty

The pharma sector has seen a significant revival, particularly in the US generic market, and this has helped boost growth and profitability over the past two to three years. The sector has been an outperformer and has shown steady earnings growth. While it is trading at about a 50-55 percent premium to the Nifty, this is still below the 80 percent premium it had in 2015, so it is relatively more reasonably valued now. The earnings performance has held up well, and while growth may moderate slightly, the sector remains an attractive long-term play. The current valuation is reflective of that stability.

Do you expect the IT sector to provide significant returns in 2025?

We do not typically comment on specific returns. What we do look at are the earnings growth and valuations of the sector. As of now, valuations in the IT sector are nearing the highs that we saw during the COVID period, which suggests there is not much room for further expansion in the multiple. However, we do expect solid earnings growth over the next two to three years, and that should drive returns, even if valuations do not see much further increase. The sector’s growth is expected to come more from earnings rather than from multiple expansion.

Are you cautious about the equity markets, and do you expect a sharp rebound starting next calendar year, leading to new record highs?

At this point, the equity markets are showing strong flows, especially after the recent 10 percent drawdown, which has created attractive entry points for investors. There is definitely optimism in the market, and while we do not expect a sharp rebound to record highs immediately, we do see positive momentum building. The key to that recovery will be earnings, and we expect to see a clearer picture in Q4FY25. The market is likely to rebound gradually, and a sustainable recovery will depend more on earnings growth rather than a sharp market correction. In the longer term, our focus remains on earnings rather than short-term market movements.

Are you a buyer of consumer discretionary and staples in the current market correction?

Yes, we see strong potential in both consumer discretionary and consumer staples, especially from a three- to five-year investment horizon. Urban consumption has been weak recently, but we are now beginning to see a recovery in rural consumption as well. The revival of rural demand and the potential for urban recovery in the medium term make the consumer sector an attractive space. With current market corrections, we are selectively looking at these sectors as they have long-term growth potential, and we believe they are well positioned to capitalize on the consumption recovery.

Do you expect a significant cut in earnings estimates for FY25 after weak Q2 results and a likely muted Q3? What is your outlook on FY26 earnings estimates?

While we did see weak Q2 results, we believe a partial recovery is likely in Q3, and a more substantial recovery should materialize in Q4FY25. The weak performance in Q2 was due to a variety of factors, but I do not anticipate a drastic cut to earnings estimates for FY25. We are looking more at medium-term earnings growth rather than just short-term fluctuations. The outlook for FY26 is more promising, as we should see clearer signs of recovery in several sectors, including consumption, infrastructure, and industrials. Overall, while there may be some moderation in the near term, FY26 earnings should reflect a more growth trajectory.

What is your outlook on the industrial sector? Are you underweight in space?

The industrial and engineering sector is a mixed bag at the moment. Some parts of the sector, particularly the capital goods space, are trading at expensive valuations, which makes it harder to take a bullish stance across the entire sector. However, we are finding attractive opportunities in sub-segments like roads and power transmission, which look reasonably priced and could benefit from government spending and infrastructure growth. Our approach is selective, and we are positioning our funds to have a neutral to slightly overweight stance on this space, but we are picking stocks that show strong fundamentals and are better positioned to outperform the market in the long term.

What is your strategy behind the Innovation Fund launch? Is it a big theme to play for the coming years?

Yes, we certainly believe innovation is a powerful theme with immense potential for the coming years, and we are excited to bring it to our investors. The strategy behind the Tata India Innovation Fund centers on identifying companies that are driving transformative or incremental changes through innovation. Our approach targets two types of innovation: breakthrough innovation, which often comes from smaller, tech-driven companies with deep R&D, and incremental innovation, which brings gradual yet impactful improvements to existing products or services, like advancements in the driving experience or the transition from thermal to renewable power.

These dual aspects of innovation—both the big shifts and the ongoing, evolutionary improvements—are reshaping industries and creating opportunities that could drive long-term growth. We expect that over the next 10-20 years, these changes will be central to economic progress and profitability across sectors. With this fund, our objective is to capture these opportunities by constructing a portfolio of stocks that align with these innovation-driven themes, ultimately aiming for sustainable alpha generation. This approach allows us to tap into the structural growth potential of companies leading the way in innovation, making it a compelling theme for the years ahead.

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