Infrastructure is a capital-intensive space, requires high upfront investments, cashflows aren't particularly strong and returns are back-ended and usually mediocre. Hence, one must be very careful while choosing stocks as poor execution may make the balance sheet fragile and erode valuations, suggests Ajay Tyagi, Equity Head and Fund Manager at UTI AMC.
In an interview to Moneycontrol, he shares that the quarterly earnings season has so far been as per expectations. The big positive has been around margins improving across multiple sectors. Commodity prices, freight costs and energy prices declining through the last couple of quarters has helped companies recoup their margins, says the market veteran with 23 years of experience in the equity research, offshore as well as onshore funds.
Excerpts from the interaction:
Are you worried over the IT space?
The IT sector is going through a soft patch because of a slowing global economy and an uncertain environment. Although clients of IT companies have been delaying various projects, the silver lining is that new deal flows continue to remain strong. Despite the recessionary fears, global IT advisory firms like Gartner, ISG and Forester are broadly holding on to their growth guidance for the current year and are forecasting a pick-up in growth next year.
Our own view is that we are witnessing a cyclical blip in a long-term structurally strong technology cycle. And Indian IT companies are well placed to ride on this secular growth and continue increasing their market shares like they have done in the last few decades.
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In fact, like previously, all new technology innovations have led to increased client spending and have benefitted IT companies. The latest innovation, regenerative artificial intelligence, will also lead to more projects and deal wins for IT companies in the fullness of time.
Do you still prefer to invest and stay invested in domestic market-oriented companies or you have started focusing on exports?
At the core of our portfolio, we have an orientation towards domestic opportunities. This appeals to us as we are able to find businesses across multiple industries which are riding on India's strong economic growth, increasing disposable income, ever growing middle class and customers getting more and more aspirational. This is just the perfect setting for a consumption boom to have a long growth runway. The fact that India's demographics are favourable and will remain so for a few more decades make the hypothesis sustainable as well.
However, we are constantly evaluating export-oriented opportunities as well and a portion of our portfolio is invested in such businesses. For instance, the China-plus strategy that many global companies are adopting to diversify their supply chains is opening up some exciting opportunities in a few sectors. If get convinced about the sustainability of such opportunities, we would be keen to push the peddle.
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Your take on infrastructure space...
Infrastructure has been a high-growth space for more than two decades as successive governments have realised the importance of this sector to support India's strong economic growth. Of course, we have had a few weak years along the way but the big picture across multiple areas like roads, ports, new energy and airports remain strong.
Having said that, this is a sector which is capital intensive, requires high upfront investments, cashflows aren't particularly strong and returns are back-ended and usually mediocre. One must be very careful during the stock selection phase as poor execution can lead to balance sheets becoming fragile and value getting eroded very quickly.
How do you see the overall quarterly earnings so far?
The quarterly earnings season has been as per expectations. The big positive has been around margins improving across multiple sectors. Commodity prices, freight costs and energy prices declining through the last couple of quarters have helped companies recoup their margins.
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However, some pockets of weakness, especially in rural India, has also been evident. With the monsoon tracking well so far, we feel rural spends should be able to make a comeback.
The Fed rate revision is on the cards. Do you think the Federal Reserve will hold the rates for long?
The Federal Reserve will be data dependent from here on, like they have been saying for the last few months. They want to observe the cumulative impact of 500 bps of rate hike on the economy before deciding the next course of action. Therefore, not only data points like core consumer inflation, consumer spending, producer inflation, jobless claims, unemployment data and wage inflation will be monitored closely but the health of the corporate sector in general and the banking sector in particular will also have to be on the radar.
Our view is that we may have one or maybe two more hikes after which there will be a pause. Whether the rates are then held on for a shorter or a longer time will depend on the severity of recession. A sharp recession will lead to faster cuts in rates and a mild recession, or a soft landing, could mean holding the rates for longer.
What's your strategy behind the launch of UTI Balanced Advantage Fund?
Investors’ decisions are guided more by their emotions than valuations, which result in sub-optimal returns due to behaviour gap.
UTI Balanced Advantage Fund is an asset allocation solution that will manage assets between equity and fixed income dynamically with changes in market valuation. The asset allocation will be determined by the proprietary model, which is based on four valuation and fundamental factors. Three of the factors that model uses are linked to equity valuation – PE, PB and dividend yield and the fourth factor, yield gap, give inter-asset comparison by comparing equity earning yield and 10-year GSEC yield.
This way, the fund eliminates the need for investors to time the market and help them to overcome behavior gap caused by emotional biases and generates risk-adjusted returns across the market cycles.
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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