Daily Voice | Earnings growth expectations for FY24 should be revised down, says UTI AMC fund manager

Amit Premchandani of UTI AMC

At the start of FY23, the Street expected a 15% earnings growth, but the final outcome was only around 7-8%. In this context, Amit Premchandani from UTI AMC is concerned that the Street's expectation of 20%-plus earnings growth for FY24 may need to be revised downwards.

"The market is a function of earnings growth and multiples. Although multiples have corrected, earnings expectations have not," he said in an interview with Moneycontrol. "I believe the market will remain volatile over the next few months, given the global macro factors and the earnings cycle in India."

Edited excerpts:

Do you believe valuations have corrected to a point where FII inflows will now sustain?

The bulk of the rate tightening cycle in developed markets is behind us and India has absorbed a large part of FII selling without too much price erosion. So on an incremental basis, we don't think FII outflow will be as strong as we have seen over the last one year. But, it is difficult to hazard a guess whether it will be a positive number this year since dynamics are constantly changing.

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In this market outlook, what are the aggressive sector calls you are taking based on valuation?

Healthcare

We are positive about the healthcare sector given that healthcare expenditure to GDP for a country like India is still pretty low. We are one of the largest manufacturers and exporters of medicine. Growth in the domestic pharma sector has been hovering around 8-10 percent on a steady basis.

Moreover, most of the domestic pharma companies are cash-generating with very limited debt and are available at reasonable valuation. Unfortunately, in India, there's an increasing prevalence of chronic diseases due to lifestyle choices and that provides a very long runway of growth for the Indian pharma sector.

Autos

From a cyclical point of view, we are positive about the auto sector. The replacement cycle started playing out in 2022 and we have started seeing double-digit growth in some of the two-wheeler companies. The margin profile of these companies will also improve as volume growth comes back after two years of COVID-impacted base. Plus, most auto companies have no debt issues.

Also read: Slowing housing sales to bring in second leg of US bank decline, says Ashika Global’s Amit Jain

Metals

Given that metal prices have corrected significantly, EBITDA margins have sharply gone down and hence the valuations have also corrected within the sector. Over the last three years, Indian metal companies have cleaned up their balance sheet and reduced leverage. So, they are very much capable to ride out the slowdown.

Banks have kickstarted Q4 earnings season on a positive note. Do you prefer private banks or PSU banks?

We have a large exposure to private sector banks because we believe they will continue gaining market share and their growth rate will be significantly higher than the entire BFSI sector. Most private sector banks are well capitalized and are sitting at CET-1 ratio at decade high. They have provided well for bad loans and also have significant continuing provisions. RoA (return on assets) profiles are at all-time high and margins are surprisingly surprising positively over the last two quarters.

We are focused on banks that are able to generate a good return on equity on a sustainable basis and historically, private banks have been able to do so. In FY24, net interest margins might contract slightly, coming in lower than FY23 exit margins but they will still be higher than 5-year average.

Which sector are you underweight on?

We are underweight on the consumer staples side. If you look at the valuations, the market is implying growth which is much higher than what they have delivered over the last decade. We are not comfortable with that. Moreover, the penetration story in the staples sector has already played out.

Also read: Why this CIO is bullish on FMCG stocks and sees no spark in tech

From that angle, we are more positive on a discretionary space. Although valuations are not significantly cheaper, but the underperformance over the last one year provides some opportunity.

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