Daily Voice: FY26 earnings growth could still stay in double digits despite assuming some downgrades in coming months, says UTI AMC's Karthikraj Lakshmanan

In Markets, we keep moving from event to event. While most don’t alter the longer-term growth path, some do, and it is very difficult to say beforehand which ones will play out and eventually have an impact, positive or negative. In this context, for equities, which is a Long-term asset class with a horizon of 5+ years, it is better to look at the potential of the companies and the overall market to deliver earnings growth over a longer period and the starting valuations, which determine an investor’s returns through the investment journey.

We focus on the earnings growth and valuations rather than the level that the benchmark indices will reach in a certain period. We saw markets correct significantly from September 2024 highs with Mid & Small cap indices correcting as much as 20 percent & 25 percent, and large caps around ~15 percent till February 2025. Post that we have seen recovery, and we are closer to ~ 10 percent away from the previous high for the broader markets, though average individual stock level correction is much higher, around ~30 percent, from their last year's high levels.

Valuations are more palatable now than they were 6 months before due to the time and the absolute correction. Earnings growth expectations are still at the 12-13 percent level, going by the consensus for the Nifty 50 for the year ending March 2026. Even if we assume some downgrades happen in the coming months, the growth could still stay in double digits, which is positive. The system liquidity improvement in the last few months through RBI action will help the transmission of the 2 rate cuts of a total half percent seen so far, which is positive for the economy’s growth.

Our Macros are largely positive in terms of the Current account deficit, Fiscal deficit, Government debt, corporate balance sheet, Bank NPAs, economic growth, and Inflation. Monsoons are expected to be normal, and tax relief for the middle class may help spending/savings. All of this may help improve the high-frequency data to positive from the current mixed levels. The key issue to watch out for is the Tariff situation and eventual impact on global growth. While India’s direct impact may be limited, the indirect impact caused by any growth slowdown due to tariff-related uncertainty needs to be watched for.

Do you believe the FII inflows are likely to remain sustainable over the coming weeks?

Flows always tend to be volatile and unpredictable. Hence, it is futile to base the thesis of investment on flows as if there is continued strong flows whether from Domestic or foreign, we could see the supply in terms of IPO, QIP and stake sale by promoters coming back. India still is expected to have one of the highest growths across large markets and would be relatively more resilient should there be global growth slowdown due to higher exposure to the domestic economy than exports.

The major issue for foreign investors has been valuations. As discussed earlier, valuations have improved to some extent, especially in large caps and to some degree in small & mid caps. Any further correction may add to the attractiveness of Indian equities for long-term investors.

Which sectors are likely to see upgrades in earnings estimates, even though downgrades are expected to outnumber upgrades?

Irrespective of upgrades and downgrades, what the valuations are factoring in the price may be a better way to analyse.

From the UTI Large Cap Fund perspective, sectors of preference include:
I) Private Banks and Insurance - Private banks where valuations are reasonable, asset quality is healthy, and these banks continue to gain market share and grow in double digits. Insurance companies, too, have healthy Mid-teen growth and stable profitability
II) IT - Post the recent sharp correction, valuations in the sector have come closer to long-term average, and the tariff-related uncertainty seems to have been factored in. Over the long term, the sector could continue to grow faster than the Global IT services industry, gaining market share.
III) We are positive on Consumer durables and Retail, where the Long-term growth potential continues to be higher in double digits.
IV) We are positive on the Telecom sector due to industry consolidation leading to better pricing and improved profitability.

Do you believe oil prices may remain on the lower side, which is generally beneficial for oil-importing countries?

Crude oil is a global commodity, the price of which may be negatively impacted should the global growth slow down, all other factors remaining the same. But in a dynamic world with a lot of geopolitical developments, it is a difficult call. As of now, considering the supply is comfortable and there are risks to global growth on the downside, oil prices have corrected to year lows in the last month, which is positive for a large importer like India. If prices are around current levels or even slightly higher, it should be beneficial for our economy.

What is your view on the auto and housing finance sectors?

The auto sector has had volume and margin recovery to peak levels as of FY25, which is reflected in the stock prices as well. Room for further margin improvement seems limited. Volume for FY26 seems to be muted. Hence, would be cautious on the near-term growth outlook, though the long-term penetration opportunity, as the per capita incomes keep rising, still holds.

Housing Finance is a highly competitive segment with thin spreads/margins. Overall housing loan growth in the industry has been slowing down. Would expect that to improve with easing liquidity and rate cuts. However, profitability could be impacted in near term as the rate cuts are passed on.

What is your strategy behind the launch of UTI Multi Cap Fund?

UTI Multi Cap Fund NFO is on from April 29 to May 13, 2025. Our Multicap fund would have a blend strategy of both growth and value, besides investing across market caps and sectors. We call it the blend of 3S, i.e. is size (market cap), style (growth and value), and sectors. The idea is to construct a completely bottom-up, well-diversified portfolio from the large universe of companies that we actively cover using our proprietary process of Score-Alpha model.

Multicap as a category is required to have a minimum allocation of 25% each across Small, Mid, and Large market caps, thereby having a higher allocation towards mid & small caps relative to other Market-cap agnostic funds, thus providing the investors a more balanced exposure to all three market cap sizes. We believe Multicap is a core category providing a diversified exposure to investors.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.