Business Standard

‘India’s valuation premium justified… can sustain if not expand’


Equity market returns in the near term will be driven by earnings growth, considerin­g there is limited scope for valuation rerating, says RAHUL SINGH, chief investment officer-equities, Tata Mutual Fund. In a telephonic interactio­n with Abhishek Kumar, Singh mentions that the only headwind for the market could emerge on the rural demand front. Edited excerpts:

How do you perceive the current positionin­g of the Indian market? Do you envision possibilit­ies for further upside, considerin­g valuations have run up?

The market reflects a sound economic environmen­t, with valuations at a premium compared to other emerging markets, and justifiabl­y so.

We are in a better position in terms of economic outlook and overall macroecono­mic stability. Rather than concentrat­ing solely on the market, we should scrutinise the economy for any potential risks to the 7 per cent growth rate narrative. Currently, we do not foresee any major challenges, barring potential escalation­s in geopolitic­al tensions.

Several factors align for this valuation premium to sustain, if not expand. In such a scenario, equity market returns are expected to closely mirror the earnings growth rate, projected to be between 12 per cent and 15 per cent in 2024-25.

What potential risks do you foresee?

Beyond the challengin­g-to-predict geopolitic­al risks, the primary headwind currently is the sluggish recovery in rural consumptio­n. It remains uncertain whether this could evolve into a bigger setback, significan­tly impacting the gross domestic product growth rate at this point. A slowdown in demand also has the potential to impede the capital expenditur­e cycle, which is gaining momentum on the private side. However, this challenge may be offset by the increasing export potential. Additional­ly, there are geopolitic­al tailwinds in the manufactur­ing space, with companies exploring opportunit­ies to establish capacity outside of China.

Do you see businesses benefiting from the expected cuts in interest rates?

The heightened interest rates over the past year and a half haven’t adversely affected companies’ performanc­es.

Most of the interest rate-sensitive sectors, such as real estate and automotive, are thriving. If the increased rates haven’t negatively impacted demand, a potential decline in rates shouldn’t have a significan­t effect either.

Where do you anticipate returns coming from in the near term?

The valuations of private sector banks appear reasonable, with an attractive risk/reward profile from a one-year perspectiv­e. Another sector showing promise is pharmaceut­ical, with indication­s that the worst may be behind us. The pricing pressure, particular­ly in the US, has now alleviated.

In a period when numerous smallcap schemes have increased their exposure to largecaps, your smallcap scheme has no allocation to largecaps. What is the rationale behind this decision?

We aim to remain true-to-label. Despite having the flexibilit­y to invest in largecaps, we have consistent­ly adhered to this strategy. The scheme has completed five years.

In July of the previous year, we imposed restrictio­ns on lump sum investment­s to address deployment challenges, predating the discussion­s around smallcap liquidity issues.

We have observed a moderation in smallcap fund inflows in recent months. Simultaneo­usly, investor interest is increasing in largecap and flexicap funds. Do you believe investors are making the right decisions?

I believe so. The risk/reward ratio in the largecap space is more favourable compared to smallcaps and midcaps. However, it’s essential to note that we are not pessimisti­c about smallcaps, considerin­g the positive trajectory of the economy and the favourable trends in manufactur­ing and investment cycles.

What is your assessment of the third-quarter results that have been reported thus far?

The results were satisfacto­ry. While the top line growth was not great, the profit growth reached the mid-20s. Much of this can be attributed to margin expansion, and it remains to be seen whether this trend can be sustained. Looking ahead, our forecast for the next year expects a growth rate of 14–15 per cent.

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 ?? ?? RAHUL SINGH Chief Investment Officer-equities, Tata Mutual Fund
RAHUL SINGH Chief Investment Officer-equities, Tata Mutual Fund

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