"We have increased our exposure to the information technology space in 2023 as valuations have meaningfully corrected over the last couple of years through time correction and absolute stock price correction," Karthikraj Lakshmanan, senior vice-president and fund manager for equities at UTI AMC, says in an interview to Moneycontrol.
Lakshmanan feels valuations in tech stocks look attractive on free cashflow basis when compared with other sectors.
The chartered accountant with 17 years of experience in the equity markets and as in fund management, says UTI AMC is overweight on private banks. "Private banks is one space where longer term growth can be faster than the banking industry and banking industry itself could grow faster than the nominal GDP. Valuations continue to be reasonable, though the leverage has come down and asset quality is at its best for the entire industry," he says. Excerpts from the conversation...
Considering the BSE Sensex above 72,000 and Nifty 50 inching towards 22,000, do you think the market is pricing in expected strong growth in earnings, based on favourable macros, interest rate cuts and the possibility of continuation in government policies? Do you see a 15 percent return by the turn of one more year?
We look at valuations versus long-term average (price to earnings, price to book versus the index’s own history) and the macro situation as market mood tends to be volatile from time-to-time fluctuating between greed and fear. As valuations eventually tend to mean revert, averages help us understand which side of the emotion is working currently even if we don’t know when it will reverse.
As you highlighted, macros for India seem very good even from a 5-10 year perspective as we could be among the fastest growing in the top 10 economies due to our population demographics, favourable macro-environment, and huge scope for increase in per capita income levels.
There has been a sharp rally, especially in mid and small caps in 2023. Valuations have inched up for this category and hence risk reward is little less favourable from an immediate term perspective. The largecap category however is still not very expensive and closer to longer-term average.
We don’t have a specific outlook and target for equities from a one-year perspective but the market returns eventually from a longer-term perspective are anchored to earnings growth and a good part is we see a double-digit earnings growth in the last few years and it is expected to continue in that trajectory next year as well.
Is it the time to bet on consumption and specialty chemicals? Do you find margin of safety in these sectors considering others trading around high valuations?
Consumption sector valuations have been expensive for long as they have sustainability of earnings and strong cashflow generation potential. Within that, while staples growth is lower, the durables and retail segment could continue to grow at a faster pace helped by increasing per capita income and shift from unorganised to organised. Hence, we are more positive and overweight on the latter and underweight in staples.
Chemicals as an industry has grown very well in last decade. the sector has seen a rough year in CY23 due to Inventory de-stocking and Chinese competition leading to correction in stock price and valuations. While the opportunity is still large, business being capital intensive and global in nature, we would look at companies with good execution track record and superior return ratios.
Are you bullish on IT space for 2024, though the environment is still slow for growth?
We have increased our exposure to information technology in 2023 as valuations have meaningfully corrected in last couple of years through time correction and absolute stock price correction. Valuations look attractive on free cashflow basis when compared with many other sectors. Companies in the sector have demonstrated good corporate governance, high cash flow generation and have been distributing the same to shareholders through buybacks and dividends.
While last few quarters growth has been muted for the sector, deal momentum has been good and long-term Digital transformation journey of clients provides growth visibility.
Also read: Demand uptick, easing inflation in developed markets to provide silver lining for exports in 2024
Which are the two sectors on your radar for 2024 and why, as a fund house?
We have discussed about consumer and IT sectors. Besides, we are overweight on private banks and auto. Private banks is one space where longer term growth can be faster than the banking industry and the banking industry itself could grow faster than the nominal GDP. Valuations continue to be reasonable, though leverage has come down and asset quality is at its best for the entire industry. Most of the large banks are well-capitalised and may not require raising fresh capital from the market for next few years. This space could be a structural steady growth opportunity.
We have been overweight on auto for the last couple of years as the sector was emerging out of a cyclical headwind, impacted by multiple issues from Covid, input inflation, increase in insurance and regulatory costs. The sector has done well and valuations have moved up on the back of improving volume growth and margin improvement in current year helped by softer commodity price.
The long-term penetration-led growth opportunity is intact but with a cyclical sector like auto, one needs to be cognizant of the stage of cycle we are in currently, the impact of EV adoption and the valuations in that light.
Do you think the broader markets are still not looking expensive even after consistent run up for third quarter?
The markets have done well since the March 2023 lows. Within that, mid (50 percent) and small (60 percent) caps have seen sharp appreciation while large caps (30 percent) have still been more measured. Based on the long-term averages, the largecap space still doesn’t look very expensive while Mid & Small caps as a category are in the expensive zone where one needs to be cautious.
Equities as an asset class is Long term in nature and investors need to have 5 plus years of investment horizon. For investors with such a time horizon, the continuation of higher earnings growth is important along with starting valuations, so one needs to keep assessing that is intact.
Do you see the highest-ever FII flow in a year, in 2024?
FII flows could be dependent on global markets, their emerging market views, India’s relative valuations compared to other markets and so on. It is almost impossible to predict the flows, whether domestic or Foreign. Having said that, in the last two-three years, the continuous domestic inflows have cushioned against lumpy FII outflows.
The SIP amount over last five years, has steadily been inching up and is currently north of $2 billion per month comprising of very small ticket amounts providing a good steady source of inflows for MF industry and it seems this may continue as more segments of the population start to take exposure to equities. But one still needs to be cautious as there could be lumpsum outflows even in DII for multiple reasons resulting in volatility in overall domestic flows.
It is good that our dependence on FII flows has reduced in last few years as FII flows can be often top down led and be sharp in a small span of time impacting markets significantly on either side.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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